INTRODUCTION
901. Which of the following is one of the three central problems that every economic system must solve?
a) How far should people be allowed to go in protecting their own property?
b) How are society’s scarce resources to be allocated?
c) How fair is it for some individuals to live in poverty while others are surrounded by luxury?
d) How involved should government be in regulating the activities of big business?
903. Macroeconomics is
a) the study of individual choice and how that choice is influenced by economic forces.
b) an analysis of economic reality that proceeds from the parts to the whole.
c) the study of the pricing policies of firms and the purchasing decisions of households.
d) the study of the overall economy and aggregate economic relationships.
904. Which of the following is a macroeconomic concern?
a) How profits are maximized by a firm.
b) The causes of unemployment in the United States.
c) The effects of agricultural price supports on the income of farmers.
d) Wage rates of electricians in Kansas City.
905. A production possibility curve usually has a negative slope because
a) there is an opportunity cost to any decision.
b) you get more of one benefit only if you get more of another benefit.
c) there is a direct relationship between obtaining the benefits of various choices.
d) obtaining the benefit of a decision is costless.
908. Households are on the:
a) supply side of factor markets and the demand side of goods markets.
b) demand side of both factor markets and goods markets.
c) demand side of factor markets and the supply side of goods markets.
d) supply side of both factor markets and goods markets.
18. Households in the aggregate use the largest share of their total
income to:
A) save.
B) consume.
C) do none of these.
D) pay taxes.
ROLE OF GOVERNMENT
227. A tax imposed on polluters is:
A) neutral
B) progressive
C) imposed according to the ability-to-pay principle
D) regressive
E) a way to reduce negative externalities
228. The “free-rider problem” refers to the fact that:
A) the benefits associated with public goods cannot be denied to those
who are unwilling to pay for them.
B) government subsidizes the fares of many municipal mass-transit
systems.
C) government arbitrarily attaches excise taxes to a select list of
goods and services.
D) some people receive income from welfare programs to which they are
not entitled.
909. The specific roles of the government include all of the following except:
a) providing for and protecting private property rights. c) providing private goods that consumers demand.
b) promoting workable, effective competition. d) correcting for positive and negative externalities.
911. A progressive tax is a tax rate that
a) does not depend on income.
b) falls as income increases.
c) remains constant as income increases.
d) increases as income increases.
238. “Public goods” refers to:
A) goods which cannot be financed and produced through the price
system.
B) goods which are produced using minimal amounts of society’s scarce
resources.
C) any goods or services which society wants produced.
D) goods whose production presumes large monopolistic corporations as
opposed to small competitive firms.
249. The most important characteristic of a public good is that it:
A) is useful for the public, without creating positive externalities
B) may be enjoyed by all, even those who do not pay for it
C) is useful for the public, without creating pollution or negative
externalities
D) is so expensive that only the federal government can afford it; it
is beyond the means of state and local governments
E) is so expensive that most people cannot afford it without help from
the governme
221. A market externality refers to:
A) the impact of legal and institutional forces upon market behavior.
B) none of the other answers shown is correct.
C) any noneconomic force, e.g. political disruption of the flow of Arab
oil, which has market effects.
D) any unanticipated change in market price or output.
E) economic costs or benefits which affect others not directly involved
in the market transaction.
3. If the exclusion principle does not apply to product X:
A) the production of X will probably have to be financed through
taxation.
B) the price system will tend to overallocate resources to the
production of X.
C) no externalities will be associated with the production of
consumption of X.
D) then X will be produced in optimal amounts by private firms.
6. Pollution:
A) is not an economic problem because it does not involve the use of
scarce resources.
B) is not an economic problem because it is external to the market
system.
C) is an example of a spillover or external cost.
D) should be corrected by the subsidization of offending firms.
E) is an example of private costs.
8. The “free-rider problem” refers to the fact that:
A) the benefits associated with public goods cannot be denied to those
who are unwilling to pay for them.
B) government arbitrarily attaches excise taxes to a select list of
goods and services.
C) some people receive income from welfare programs to which they are
not entitled.
D) government subsidizes the fares of many municipal mass-transit
systems.
10. Which of the following is most likely to be accompanied by external
or spillover benefits?
A) being immunized for measles
B) the construction of a nuclear power plant
C) eating dinner at an expensive French restaurant
D) studying in the library
11. Which of the following statements is correct?
A) Public goods are bought voluntarily out of private incomes and yield
widespread spillover benefits.
B) Public goods yield widespread spillover benefits and are purchased
by government with tax revenues.
C) Private goods yield direct benefits to the purchaser and are
financed by government.
D) Public goods are bought voluntarily out of private incomes and yield
no significant spillover benefits.
13. “Double taxation” means that:
A) payroll taxes which finance social security are levied upon both
workers and employers.
B) the part of corporate earnings paid as dividends is taxed as
corporate profits and also as income to stockholders.
C) corporate tax rates are twice as high as those on the incomes of
unincorporated businesses.
D) taxes levied on wholesale products also apply at the retail level.
UNEMPLOYMENT & INFLATION AND THE BUSINESS CYCLE
4. Which of the following would NOT be appropriate if government were
attempting to restrain a dramatic rise in the general price level?
A) a decrease in government spending
B) an increase in tax rates
C) an increase in transfer payments to households
D) a decrease in subsidies to businesses
914. When an economy comes out of a trough, economists call the period:
a) a recession. b) an inflation. c) a stagflation. d) recovery.
920. Inflation is the upward movement in prices as measured by the:
a) numerical change in the price index from one year to the next.
b) percentage difference between the price level and the base year price index.
c) percentage change in the price index from one year to the next.
d) difference between the price level and the price index.
21. Inflation is said to exist whenever:
a) the unemployment rate is low. c) the economy is contracting.
b) the general price level is rising. d) some prices are rising while others are falling.
924. If the rate of inflation exceeds the rate of increase of a person’s nominal income, that person’s:
a) real income declines. c) purchasing power increases.
b) market basket will expand. d) nominal income declines.
925. Borrowers benefit during periods of unexpected inflation because:
a) the money they pay lenders is worth more than the money they originally borrowed.
b) the purchasing power of the dollars borrowed is greater than the purchasing power of the dollars repaid to lenders.
c) inflation out paces wage growth.
d) nominal interest rates fall.
5. In a full-employment economy resources can be reallocated from
private to public employment by:
A) reducing taxes and reducing government expenditures.
B) reducing taxes and increasing government expenditures.
C) increasing taxes and increasing government expenditures.
D) increasing taxes and reducing government expenditures.
42. Suppose there are 5 million unemployed workers seeking jobs. After
a period of time, 1 million of them become discouraged over their
job prospects and cease to look for work. As a result of this, the
official unemployment rate would:
A) increase in the short run but eventually decline.
B) be unchanged.
C) increase.
D) decline.
44. The unemployment rate is the:
A) number of employed workers MINUS the number of unemployed workers.
B) ratio of unemployed to employed workers.
C) percentage of the total population which is out of work.
D) percentage of the labor force which is out of work.
45. Suppose you are unemployed because you voluntarily quit your present
job with a plan to join the circus. You would be considered:
A) frictionally unemployed.
B) cyclically unemployed.
C) secularly unemployed.
D) employed.
E) nuts.
47. The official unemployment rate is:
A) the percentage of the total labor force which is unemployed.
B) the ratio of unemployed to employed workers.
C) the percentage of the total population which is not working.
D) those people over 16 years of age who are not currently seeking
employment.
50. Real income can be determined by:
A) dividing the price level by nominal income.
B) deflating nominal income for inflation.
C) inflating nominal income for inflation.
D) dividing the annual rate of inflation into the number “70.”
E) adding the rate of inflation to the rate of increase in nominal
income.
117. Cost-push inflation occurs when the aggregate:
A) supply curve shifts leftward.
B) supply curve shifts rightward.
C) demand curve shifts leftward.
D) demand curve shifts rightward.
205. Suppose you are unemployed because you voluntarily quit your present
job with a plan to join the circus. You would be considered:
A) frictionally unemployed.
B) cyclically unemployed.
C) employed.
D) nuts.
E) secularly unemployed.
208. Suppose that the economy is at full employment, with little or no
inflation. Now suppose that there is an increase in taxes. The most
likely result will be
A) less output and less unemployment
B) an increase in the money stock
C) a more rapid increase in real output
D) inflation
E) less output and more unemployment
212. Someone who is retiring now is most likely to lose in the event of:
A) unexpected deflation
B) none of the above; inflation affects only those who are still working
C) expected inflation
D) expected deflation
E) unexpected inflation
219. The unemployment rate is
A) the percentage of the population unemployed
B) the percentage of the population that has voluntarily quit, or decided not to work
C) the percentage of the population that has been laid off or fired
D) the percentage of the labor force unemployed
E) the percentage of the labor force that has been laid off or fired
232. The official unemployment rate is:
A) the ratio of unemployed to employed workers.
B) the percentage of the total population which is not working.
C) the percentage of the total labor force which is unemployed.
D) those people over 16 years of age who are not currently seeking employment.
240. The United States’ economy is generally considered to be at “full
employment” when:
A) 90 percent of the total population is employed.
B) between 5 and 6 percent of the labor force is unemployed.
C) 10 to 20 percent of the labor force is unemployed.
D) 90 percent of the labor force is employed.
E) 100 percent of the labor force is employed.
243. After the expansion phase of the business cycle, which comes next?
A) upswing
B) peak
C) trough
D) depression
E) recession
MONEY AND THE BANKING SYSTEM
213. The money supply is “backed”:
A) dollar-for-dollar with gold bullion.
B) by the government’s ability to control the supply of money and
therefore to keep its value relatively stable.
C) dollar-for-dollar with gold and silver.
D) by government bonds.
222. The opportunity cost of holding money:
A) varies inversely with the interest rate.
B) is zero because nothing is more desirable than money.
C) varies directly with the interest rate.
D) is zero because money is not an economic resource.
E) varies inversely with the level of economic activity.
223. The multiple by which the commercial banking system can increase the
supply of money on the basis of each dollar of excess reserves is
equal to:
A) 1 minus the legal reserve ratio.
B) the reciprocal of the income velocity of money.
C) 1/MPS.
D) 1/legal reserve ratio.
E) 1/banks excess reserves
224. Which of the following is the best example of a “near money”?
A) checking deposits
B) a dollar “in hand” vs. a dollar in the bank
C) short-term government securities
D) real estate
E) travelers checks
226. The reserves of a commercial bank consist of:
A) the bank’s net worth.
B) deposits at the Federal Reserve bank and vault cash.
C) the sum of its loans to the public.
D) government bonds which the bank holds.
E) the amount of money market funds it holds.
230. In the United States the money supply (M1) is comprised of:
A) paper currency, coins, gold certificates, and time deposits.
B) coins, paper currency, and monopoly money held by everyone.
C) coins, paper currency, and checkable deposits held by the public.
D) coins, paper currency, checkable deposits, and credit balances held
by commercial banks.
E) currency, checkable deposits, and Series E bonds.
237. A commercial bank’s excess reserves are:
A) required reserves minus total reserves
B) holdings of currency minus required reserves
C) total reserves minus checking deposit liabilities
D) reserve deposits minus checking deposit liabilities
E) total reserves minus required reserves
201. Money functions as:
A) a medium of exchange.
B) a standard of value.
C) a store of value.
D) all of the above.
E) B and C only
202. The major component of the money supply (M1) is:
A) gold certificates.
B) the accumulated credit on all credit cards
C) coins.
D) checkable deposits.
E) paper money in circulation.
121. The money supply is “backed”:
A) dollar-for-dollar with gold bullion.
B) by government bonds.
C) by the government’s ability to control the supply of money and
therefore to keep its value relatively stable.
D) dollar-for-dollar with gold and silver.
122. The principal type of paper money used in the United States is:
A) Federal Reserve Notes.
B) National Bank Notes.
C) United States Notes.
D) Treasury Notes of 1890.
123. The transactions demand for money will shift to the:
A) right when aggregate income decreases.
B) right when the interest rate increases.
C) left when the interest rate decreases.
D) right when aggregate income increases.
E) left when aggregate income increases.
124. If you place a part of your summer earnings as cash in a safety
deposit box, you are employing money as:
A) a standard of value.
B) all of the above.
C) a store of value.
D) a medium of exchange.
E) none of the above.
125. “Checkable” deposits include:
A) only the demand and savings deposits of commercial banks.
B) only the demand deposits of commercial banks.
C) both large and small time deposits.
D) demand deposits, ATS accounts, NOW accounts, and share draft
accounts.
127. In the United States the money supply (M1) is comprised of:
A) coins, paper currency, checkable deposits, and credit balances held
by commercial banks.
B) paper currency, coins, gold certificates, and time deposits.
C) currency, checkable deposits, and Series E bonds.
D) coins, paper currency, and checkable deposits held by the public.
E) coins, paper currency, and monopoly money held by everyone.
130. The total demand for money will shift to the left as a result of:
A) an increase in nominal GDP.
B) a change in the interest rate.
C) an increase in the price level.
D) a decline in nominal GDP.
131. If the reserve requirement is 10 percent, how much EXCESS reserves
does a bank acquire when a business deposits a $500 check drawn on
another bank?
A) $550
B) $5000
C) $450
D) $500
133. Suppose a commercial bank has demand deposits of $100,000 and the
legal reserve ratio is 10 percent. If the bank’s required and
excess reserves are equal, then its actual reserves:
A) cannot be determined from the given information.
B) are $10,000.
C) are $30,000.
D) are $20,000.
136. The goldsmith’s ability to create money was based on the fact that:
A) withdrawals of gold tended to exceed deposits of gold in any given
time period.
B) consumers and merchants preferred to use gold for transactions,
rather than paper money.
C) the goldsmith was required to keep 100 percent gold reserves.
D) paper money was rarely redeemed for gold.
137. Suppose a commercial banking system has $100,000 of outstanding
demand deposits and actual reserves of $35,000. If the reserve
ratio is 20 percent, the banking system can expand the supply of
money by the maximum amount of:
A) $15,000.
B) $122,000.
C) $75,000.
D) $175,000.
E) $300,000.
138. When a commercial bank has “excess reserves”:
A) it is charging too high an interest rate on its loans.
B) its actual reserves are less than its required reserves.
C) it is in a position to make additional loans.
D) its reserves exceed its assets.
E) the supply of its loans exceeds the demand for its loans.
139. When a check is drawn and cleared:
A) the bank against which the check is cleared loses reserves and
deposits equal to the amount of the check.
B) the reserves and deposits of both the bank against which the check
is cleared and the bank receiving the check are unchanged by this
transaction.
C) the bank against which the check is cleared acquires reserves and
deposits equal to the amount of the check.
D) the bank receiving the check loses reserves and deposits equal to
the amount of the check.
140. Banks create money when they:
A) allow loans to mature.
B) sell government bonds.
C) accept deposits of cash.
D) buy government bonds.
141. Required reserves must be deposited in the Federal Reserve Banks by:
A) only commercial banks which are members of the Federal Reserve
System.
B) state chartered commercial banks only.
C) federally chartered commercial banks only.
D) all depository institutions, that is, all commercial banks and
thrift institutions.
154. Other things being equal, in which of the following cases would the
amount of money demanded be the greatest? When nominal GDP is:
A) $700 billion and the interest rate is 6 percent.
B) $700 billion and the interest rate is 12 percent.
C) $400 billion and the interest rate is 10 percent.
D) $600 billion and the interest rate is 8 percent.
NATIONAL INCOME ACCOUNTING
926. GDP is:
a) the sum of coins, bills, and demand deposits circulating in an economy one year period
b) the market value of an economy’s production of all goods and services one year period.
c) the total expenditures of the federal government over the period of one year.
d) the market value of an economy’s production of final goods and services in a one year period.
927. GDP includes:
a) complementary but not intermediate products. c) final but not intermediate products.
b) intermediate but not final products. d) substitute but not intermediate products.
928. Value added is calculated by:
a) adding the cost of materials used in production to the value of sales.
b) adding the value of output to the value of inputs.
c) subtracting the cost of materials used in production from the value of sales.
d) subtracting the value of sales from the cost of materials used in production.
929. The sum of the values added throughout the economy in one year is equal to:
a) GDP.
b) nominal GDP minus real GDP.
c) the dollar value of intermediate products.
d) the value of intermediate products minus the value of final goods and services.
930. For purposes of calculating GDP using the expenditure approach, which of the following is NOT included in the government expenditures account?
a) the welfare payments made to the poor. c) the payroll of the federal government.
b) the government’s purchase of a computer. d) the government’s purchase of pencils.
931. Net exports are defined as:
a) exports less imports. b) imports less exports. c) exports plus imports. d) investment less saving.
932. GDP is a
a) good measure of relative living standards in various countries.
b) good measure of relative prices in various countries.
c) good measure of production at market prices.
d) good measure of relative welfare in various countries.
933. Real GDP is calculated by:
a) multiplying nominal GDP by the appropriate price index times 100.
b) dividing nominal GDP by the inflation rate times 100.
c) dividing nominal GDP by the appropriate price index times 100.
d) multiplying nominal GDP by the inflation rate times 100.
934. Investment includes:
a) an increase in corporate stock volumes during the year.
b) an increase in government spending.
c) an increase in business inventories.
d) the purchase of medical supplies by the National Guard.
935. If a woman divorces her house spouse and hires him to continue cleaning her house for $20,000 per year, GDP will
a) remain constant. b) remain unchanged. c) decrease by $20,000 per year. d) increase by $20,000 per year.
32. The term “final goods and services” refers to:
A) the excess of American exports over American imports.
B) goods and services which are unsold and therefore added to
inventories.
C) consumer goods, as opposed to investment goods.
D) goods and services whose value has been adjusted for changes in the
price level.
E) goods and services purchased by ultimate users, as opposed to resale
or further processing.
34. The GDP tends to:
A) overstate economic welfare because it does not include certain
nonmarket activities such as the productive work of housewives.
B) overstate economic welfare because it does not reflect improvements
in product quality.
C) understate economic welfare because it includes expenditures
undertaken to offset or correct pollution.
D) understate economic welfare because it does not take into account
increases in leisure.
37. The largest component of total expenditures is:
A) net investment.
B) gross investment.
C) net exports.
D) consumption.
E) government purchases.
38. If intermediate goods and services were included in GDP:
A) the GDP would then have to be deflated for changes in the price
level.
B) the GDP would be overstated.
C) the GDP would be understated.
D) money GDP would exceed real GDP.
39. Net exports may be defined as:
A) imports less exports.
B) that portion of consumption and investment goods sent to other
countries.
C) exports less imports.
D) exports plus imports.
40. If real GDP increases and the price index has increased:
A) nominal GDP may have either increased or decreased.
B) nominal GDP must have increased.
C) the percentage increase in nominal GDP must have been less than the
percentage increase in the price level.
D) nominal GDP must have fallen.
E) none of the other answers is correct.
203. Which of the following is the best example of a transfer payment
A) profits of defense contractors
B) purchases of planes for the air force
C) local government expenditures for schools
D) salaries of judges
E) social security pensions paid to the elderly
207. Net exports may be defined as:
A) imports less exports.
B) that portion of consumption and investment goods sent to other countries.
C) exports less imports.
D) exports plus imports.
236. This year’s nominal GDP measures
A) NDP less sales taxes
B) National income less depreciation
C) this year’s output at this year’s prices
D) NDP less depreciation
E) this year’s output at base-year prices
246. Transfer payments are included in:
A) NDP
B) Consumption expenditures
C) Personal income
D) National income
E) GDP
247. When investment demand increases, which of the following functions
shifts upward:
A) consumption
B) leakages
C) aggregate expenditures
D) saving
E) aggregate supply
GDP EQUILIBRIUM AND THE KEYNESIAN MODEL
53. The aggregate demand curve is:
A) downsloping because production costs decrease as real national
output increases.
B) vertical if full employment exists.
C) downsloping because of the wealth, and foreign
purchases effects.
D) horizontal when there is considerable unemployment in the economy.
58. An increase in aggregate demand in the classical range of the
aggregate supply curve will:
A) increase both real national output and the price level.
B) increase real national output, but not the price level.
C) increase the price level, but not affect the real national output.
D) none of the above
E) decrease both real national output and the price level.
66. The consumption schedule shows:
A) that households consume more when interest rates are low.
B) the amounts households plan or intend to consume at various possible
levels of aggregate income.
C) that consumption depends primarily upon the level of business
investment.
D) that the MPC increases in proportion to NDP.
67. If the MPC is .8 and disposable income is $200, then
A) saving will be $40.
B) saving will be $20.
C) personal consumption expenditures will be $160.
D) personal consumption expenditures will be $80.
E) consumption and saving cannot be determined from the information
given.
68. Keynesian economics discredits price-wage flexibility as a mechanism
for achieving full employment by arguing that:
A) monopolistic forces in the economy cause wages and prices to be
inflexible and lower wages will result in spending declines.
B) in modern capitalism there is too much competition to permit price-
wage flexibility.
C) wage receivers and price setters belong to different income groups.
D) the interest rate will not synchronize saving and investment plans.
69. According to Keynesian economics:
A) saving varies directly with the level of disposable income.
B) saving is inversely related to the rate of interest.
C) consumption rises, but saving declines, as disposable income rises.
D) saving varies directly with the profitability of investment.
72. If an unintended increase in business inventories occurs:
A) we can expect businesses to lower the level of production.
B) we can expect aggregate production to be unaffected.
C) we can expect businesses to increase the level of production.
D) aggregate expenditures must exceed the national output.
E) planned investment must exceed saving.
73. The equilibrium level of NDP in a private economy is where:
A) unemployment is about 3 percent of the labor force.
B) saving equals planned investment.
C) planned consumption equals saving.
D) planned consumption equals planned investment.
76. If the MPC is .70 and net investment increases by $3 billion, the
equilibrium NDP will:
A) increase by $10 billion.
B) increase by $4.29 billion.
C) increase by $2.10 billion.
D) increase by $6 billion.
E) decrease by $4.29 billion.
77. The economy will tend to expand when:
A) saving exceeds planned investment.
B) actual GDP is less than potential GDP.
C) unplanned disinvestment occurs.
D) the national output exceeds aggregate expenditures.
E) unplanned investment occurs.
79. The simple multiplier may be calculated as:
A) MPC/MPS
B) 1 – MPC = MPS
C) 1/(1 – MPC)
D) 1/(1 – MPS)
E) 1/(MPS + MPC)
80. If 100 percent of any change in income is spent, the multiplier will be:
A) zero.
B) infinitely large.
C) equal to the MPS.
D) equal to the MPC.
E) 1.
81. The simple multiplier is defined as:
A) 1 – MPS.
B) change in NDP x initial change in spending.
C) change in NDP – initial change in spending.
D) change in NDP/initial change in spending.
E) initial change in spending/change in NDP.
82. The level of aggregate expenditures in a public-private economy is
comprised of:
A) Ca + In + G – T.
B) Ca + G.
C) Ca + In + G.
D) none of the above.
E) Ca + In + G + T.
97. In a mixed (public-private) economy, where aggregate expenditures
exceed NDP:
A) In > S.
B) disposable income exceeds NDP.
C) Ca + In + G < national output.
D) In + G > Sa + T.
E) In + G = Ca.
146. A decline in the equilibrium level of NDP is most likely to be
caused by:
A) a downshift in the investment schedule.
B) an upshift in the saving schedule.
C) an upshift in the investment schedule.
D) a downshift in the consumption schedule.
204. According to Keynesian theory:
A) prices and wages are flexible downward.
B) The economy will automatically tend to full employment equilibrium.
C) changes in the interest rate will always equate saving and planned
investment.
D) supply creates its own demand.
E) none of the other answers is correct.
209. Which of the following best defines disposable income?
A) the market value of the annual output net of capital consumption
allowances
B) income received by households less personal taxes
C) all income earned by resource suppliers for their current
contributions to production
D) the before-tax income received by households
214. Suppose that MPC equals 0.75 and that all taxes are lump-sum taxes.
If national product is $3,000 billion and full-employment national
product is $3,400 billion, then the output gap is:
A) $600 billion B) $700 billion C) $100 billion D) $1,600 billion E) $400 billion
215. The marginal tax rate is:
A) the amount of income which must be given up when Congress increases
taxes.
B) the amount of additional taxes paid as a result of a rise in income.
C) less than the average tax rate when a tax is progressive.
D) calculated by dividing total taxes paid by one’s total taxable
income.
E) the percentage of one’s total income which is paid in taxes.
225. Consider a simple economy, with no government and no international
trade. The multiplier is equal to:
A) MPS
B) 1/MPS
C) 1 – MPC
D) MPC
E) 1/MPC
229. If an unintended increase in business inventories occurs at some
level of NDP, we can surmise that NDP:
A) is too high for equilibrium and will start to fall.
B) may be either above or below the equilibrium output.
C) causes aggregate expenditures to exceed aggregate production.
D) causes planned investment to exceed savings.
E) is too low for equilibrium and will start to rise.
231. The formula for the simple spending multiplier is:
A) 1/(1 – MPS).
B) 1/MPC.
C) 1/(1 + MPC).
D) 1/MPS.
E) 1/(1 + MPS)
241. In his theories, Keynes’ principal concern was with the goal of:
A) allocative efficiency
B) technological efficiency
C) stable prices
D) reducing unemployment
E) an equitable distribution of income
242. Based on the diagram, the equilibrium level of NDP in this economy:
A) is $180 billion.
B) is $60 billion.
C) cannot be determined from the information given.
D) is between $60 and $180 billion.
FISCAL POLICY
59. Which of the following is an expansionary fiscal policy?
A) decreased government spending and tax increases
B) decreased government spending and tax decreases
C) increased government spending and tax decreases
D) increased government spending and tax increases
E) an increase in the money supply
61. If stagflation occurs and the government uses expansionary fiscal
and monetary policies, then in the short-run:
A) employment will increase and the price level will fall.
B) the price level will fall, but unemployment will rise.
C) employment will increase, but inflation will worsen.
D) employment will increase and the price level will remain unchanged.
65. The investment-demand curve will shift to the right as a result of:
A) an increase in business taxes.
B) an increase in the excess productivity capacity available in
industry.
C) an increase in the acquisition and maintenance cost of capital
goods.
D) technological progress.
88. An increase in taxes will reduce the equilibrium NDP:
A) the larger the MPS.
B) the smaller the MPC.
C) if the tax revenues are redistributed through transfer payments.
D) the larger the MPC.
90. A $1 increase in government spending on goods and services will have
a greater impact upon the equilibrium NDP than will a $1 decline in
taxes because:
A) government spending is more employment-intensive than is either
consumption or investment spending.
B) taxes vary directly with income.
C) government spending increases the money supply and a tax reduction
does not.
D) a portion of a tax cut may be saved.
91. The “political business cycle” refers to the possibility that:
A) politicians will manipulate the economy to enhance their chances of
being reelected.
B) there is more inflation during Democratic administrations than
during Republican administrations.
C) incumbent politicians will be reelected regardless of the state of
the economy.
D) recessions coincide with election years.
92. If an expansionary fiscal policy were to shift the aggregate demand
curve rightward within the intermediate range of the aggregate
supply curve, then:
A) the effect of the fiscal policy on real NDP would be strengthened.
B) the price level would tend to fall.
C) the effect of the fiscal policy on real NDP would be weakened.
D) tax revenues would tend to fall because of built-in stability.
93. If the MPC is .50, all taxes are lump-sum taxes, and the equilibrium
NDP is $40 billion below the full-employment NDP, then the size of
the recessionary gap:
A) is $20 billion.
B) is $60 billion.
C) is $40 billion.
D) cannot be determined from the information given.
NDP C S Yd I G T
0 14 -34 -20 60 26 20
100 94 -14 80 60 26 20
200 174 6 180 60 26 20
300 254 26 280 60 26 20
400 334 46 380 60 26 20
500 414 66 480 60 26 20
600 494 86 580 60 26 20
700 574 106 680 60 26 20
800 654 126 780 60 26 20
900 734 146 880 60 26 20
1000 814 166 980 60 26 20
96. In the accompanying table, the government spending multiplier is:
A) 2
B) 4
C) none of the answers shown is correct
D) 3
E) 5
98. If the government increases its spending during recession in order
to assist the economy in recovery, the funds for such expenditures
must come from some source. Which of the following sources would
tend to be the most expansionary?
A) borrowing from the public
B) additional taxes upon corporate profits
C) additional taxes upon personal incomes
D) creating new money
99. If a lump-sum income tax of $25 billion is levied and the MPS is
.20, the:
A) consumption schedule will shift downward by $20 billion.
B) consumption schedule will shift downward by $25 billion.
C) consumption schedule will shift upward by $20 billion.
D) saving schedule will shift upward by $5 billion.
E) consumption schedule will shift upward by $25 billion.
217. The GDP gap (output gap) measures the:
A) difference between NDP and GDP.
B) amount by which nominal GDP exceeds real GDP.
C) amount by which potential GDP exceeds actual GDP.
D) amount by which actual GDP exceeds potential GDP.
218. A $100 million increase in taxes causes aggregate demand to:
A) shift up by $100 million
B) shift down by $100 million
C) remain stable
D) shift up by less than $100 million
E) shift down by less than $100 million
220. The “crowding out” effect of fiscal policy applies to which of the following ideas?
A) an increase in G leads to an increase in interest rates, which leads to a decline in Investment
B) an increase in G leads to an increase in interest rates, which leads to an increase in Investment
C) an increase in G leads to a decrease in interest rates, which leads to an increase in Investment
D) an increase in G leads to an increase in the money supply, which leads to a decrease in interest rates
E) an increase in the number of people trying to board a subway which is already full leads to
somebody getting pushed out
234. Suppose that the recessionary gap is $10 billion, and it is expected
to remain at that amount into the future if no action is taken. The
appropriate policy to eliminate this $10 billion gap is:
A) an increase in taxes of $10 billion
B) a cut in taxes of $10 billion
C) an increase in government spending of $10 billion x the multiplier
D) an increase in government spending of $10 billion
E) a cut in government spending of $10 billion
250. A large GDP (OUTPUT) gap implies:
A) a sharply rising price level.
B) an excess of imports over exports.
C) that the structure of consumer demand has changed from goods to
services.
D) a high rate of unemployment.
E) a low rate of unemployment.
MONETARY POLICY
142. A contraction of the money supply tends to:
A) lower both the interest rate and aggregate expenditures.
B) increase the interest rate, but decrease aggregate expenditures.
C) lower the interest rate, but increase aggregate expenditures.
D) increase the interest rate and aggregate expenditures.
144. If the amount of money demanded exceeds the amount supplied, it can
be expected that the:
A) demand-for-money curve will shift to the left.
B) money supply curve will shift to the right.
C) interest rate will rise.
D) interest rate will fall.
147. Assume that the commercial banking system has demand deposits of $10
billion and excess reserves of $1 billion at a time when the reserve
requirement is 20 percent. If the reserve requirements is now
raised to 30 percent, the banking system then has:
A) a deficiency of reserves of $1/2 billion.
B) neither an excess nor a deficiency of reserves.
C) excess reserves of only $1/2 billion.
D) excess reserves of $2 billion.
148. Which of the following is an illustration of a minor selective
credit control?
A) increasing the discount rate
B) lowering the margin requirement
C) lowering the reserve ratio
D) selling government bonds in the open market
149. Which of the following is not a tool of monetary policy?
A) changes in the discount rate
B) changes in tax rates
C) changes in reserve requirements
D) changes in margin requirements
E) open market operations
150. Which of the following is correct?
A) If nominal GDP is expanding, the monetary authorities will have to
decrease the money supply to keep interest rates stable.
B) If nominal GDP is contracting, the monetary authorities will have to
increase the money supply to keep interest rates stable.
C) If nominal GDP is expanding, the monetary authorities will have to
increase the money supply to keep interest rates stable.
D) If the demand for money changes, the monetary authorities can
simultaneously achieve the money supply and the level of interest
rates they desire.
151. Keynesians argue that the amount of money the public holds to
satisfy the asset demand for money:
A) varies directly with the size of NDP.
B) has nothing to do with the velocity of money.
C) varies inversely with the rate of interest.
D) varies directly with the rate of interest.
152. According to Keynesians velocity varies:
A) directly with the rate of interest and inversely with the supply of
money.
B) inversely with both the rate of interest and the supply of money.
C) inversely with the rate of interest and directly with the supply of
money.
D) directly with both the rate of interest and the supply of money.
153. Which of the following is not a component of the equation of
exchange?
A) the velocity of money
B) the supply of money
C) real output
D) the interest rate
E) the price level
155. The “monetary rule” is the notion that:
A) the annual rate of increase in the money supply should be equal to
the long-term increase in the price level.
B) monetary policy does not have an impact upon the economy until 6 to
9 months after the money supply is changed.
C) an expansionary fiscal policy should always be accompanied by an
easy monetary policy.
D) the annual rate of increase in the money supply should be equal to
the potential annual growth rate of real GDP.
158. Keynesian economists believe that the supply of money (M), the rate
of interest (i), and the velocity of money (V) are related as
follows:
A) An increase in M will lower i and the reduction in i tends to
increase V.
B) A reduction in M will reduce i and the reduction in i tends to
increase V.
C) An increase in M will increase i and the increase in i will tend to
increase V.
D) A reduction in M will increase i and the increase in i tends to
increase V.
159. Monetarists are of the opinion that the private economy is
inherently:
A) unstable and the public sector should be large in scope.
B) unstable and the public sector should be small in scope.
C) stable and that the government sector should be small in scope.
D) stable, but that the public sector should be large in scope.
160. The velocity of money measures the:
A) ratio of the transactions demand to the asset demand for money.
B) number of times per year the average dollar is spent on final goods
and services.
C) average annual rate of increase in the money supply.
D) proportion of the money supply which is held as an asset.
52. A tight money policy involves:
A) increasing the money supply to shift the aggregate demand curve
rightward.
B) increasing the money supply to shift the aggregate demand curve
leftward.
C) decreasing the money supply to shift the aggregate demand curve
rightward.
D) decreasing the money supply to shift the aggregate demand curve
leftward.
210. An important ROUTINE function of the Federal Reserve Banks is to:
A) advise commercial banks as to the most profitable ways of
reinvesting profits.
B) provide facilities by which commercial banks and thrift institutions
may collect checks.
C) help new commercial banks sell capital stock.
D) help large commercial banks develop correspondent relationships with
smaller commercial banks.
E) supervise the liquidation of the assets of bankrupt state banks.
216. If the Fed reduces the required reserve ratio, then:
A) the amount of checking deposits that can be created on any given
reserve base will decrease
B) the amount of checking deposits that can be created on any given
reserve base will increase
C) it must follow this step with an open market sale, if there is to be
any effect on the money stock
D) bond prices will rise, and so will interest rates
E) it must follow this step with an open market purchase, if there is
to be any effect on the money stock
235. The discount rate refers to:
A) the rate at which banks write off bad loans
B) the penalty paid by risky bank borrowers; that is, the amount of
interest they pay in excess of the prime rate
C) the rate at which money loses its value as a result of inflation
D) the rate of interest that the Fed charges on loans to commercial
banks
E) the rate at which assets lose their real value as a result of
inflation
248. If the Federal Reserve wants to tighten monetary conditions, it is
most likely to:
A) increase the rate of purchases on the open market
B) lower the discount rate
C) lower margin requirements
D) sell securities on the open market
E) cut the required reserve ratio
POLICY DEBATES KEYNES, CLASSICAL, AND SUPPLY SIDERS
55. Supply-side economics stresses:
A) the need to keep the economy operating in the Keynesian range of the
aggregate supply curve so prices will be stable.
B) an easy money policy.
C) the stimulating of incentives to work, to save and invest, and to
undertake entrepreneurial risk.
D) an expansionary fiscal policy.
64. The classical theory of employment held that, if total spending was
less than total output, then:
A) product prices would rise, but resource prices would fall.
B) both product and resource prices would fall.
C) product prices would fall, but resource prices would rise.
D) both product and resource prices would rise.
E) nominal GDP would rise, but real GDP would remain constant.
84. If the economy is encountering inflation, supply-side economists
would recommend:
A) a tax increase to reduce disposable income and consumption.
B) tax reductions to increase the size of the full-employment NDP.
C) wage and price controls.
D) that fiscal policy not be used.
100. Supply-side economists argue that the primary effect of tax cuts is
to:
A) lower real NDP and increase the price level.
B) shift the aggregate supply curve rightward.
C) shift the aggregate demand curve leftward.
D) shift the aggregate supply curve leftward.
145. Assuming government wishes to either increase or decrease the level
of aggregate expenditures, which of the following pairs are not
consistent policy measures?
A) a reduction in government expenditures and a decline in the money
supply
B) a tax increase and an increase in the interest rate
C) a tax increase and an increase in government spending
D) a tax reduction and an increase in the money supply
206. According to classical economists, when the economy was at
equilibrium, then real GDP would be
A) above potential GDP
B) below potential GDP
C) at potential GDP
D) about 10% above the level in the most recent recession
E) either (c) or (d), but we can’t tell which without information on
aggregate demand
211. Which of the following is the best example of an automatic
stabilizer?
A) inheritance taxes
B) the personal income tax
C) temporary tax increases passed by congress to fight inflation
D) local property taxes
E) public works designed to get the economy out of a depression
239. A person who advocates laissez-faire believes that
A) tariffs increase the prosperity of the economy
B) the government should abolish private schools
C) the government has the responsibility to maintain full employment
D) in most instances, the government should leave the economy alone
E) government regulation of wages and prices is needed to prevent
Inflation
244. Which of the following is likely to reduce the natural rate of
unemployment?
A) more generous unemployment insurance benefits
B) more emphasis on fiscal policy, and less on monetary policy
C) a rise in the minimum wage
D) tax breaks for businesses with on-the-job training programs
E) none of the above
NATIONAL DEBT AND DEFICITS
105. If government adhered strictly to the notion of an annually balanced
budget, then during a recession:
A) expenditures would have to be increased and/or tax rates decreased.
B) both expenditures and tax rates would have to be increased.
C) both expenditures and tax rates would have to be decreased.
D) expenditures would have to be reduced and/or tax rates increased.
E) expenditures and tax collections would remain unchanged.
106. The most likely way the public debt imposes a burden upon future
generations is by:
A) shifting attention from the really important issues of today, e.g.,
“Can you get AIDS from mosquitos?”
B) causing future unemployment.
C) causing interest rates to be lower than otherwise.
D) causing interest rates to be higher, thus reducing the current level
of capital accumulation and potential future growth.
E) causing a slowly falling future price level.
108. The notion that the basic purpose of the Federal budget is to
stabilize the economy regardless of resulting increases in the size
of the public debt best describes:
A) functional finance.
B) a procyclical budget.
C) a socially optimum budget.
D) an annually balanced budget.
E) a cyclically balanced budget.
109. Since the 1970s the public debt has:
A) increased absolutely.
B) increased as a percentage of the GDP.
C) increased on a per capita basis.
D) done all of the above.
110. The real burden of an increase in the public debt:
A) can be shifted to future generations if the debt is internally
financed.
B) may be very small or conceivable zero when the economy is in the
midst of a severe depression.
C) will be smaller when full employment exists than it will when the
economy has large quantities of idle resources.
D) can best be measured by the dollar increase in the size of the debt.
245. The most likely way the public debt imposes a burden upon future generations is by:
A) causing future unemployment.
B) causing interest rates to be higher, thus reducing the current level
of capital accumulation and potential future growth.
C) causing interest rates to be lower than otherwise.
D) shifting attention from the really important issues of today, e.g.,
“Can you get AIDS from mosquitos?”
E) causing a slowly falling future price level.
Answers to the Macroeconomics: Practice Multiple Choice Questions
Answer Key:
1. A 41. D 81. D 121. C
2. D 42. D 82. C 122. A
3. A 43. C 83. B 123. D
4. C 44. D 84. B 124. C
5. C 45. A 85. D 125. D
6. C 46. A 86. B 126. B
7. A 47. A 87. A 127. D
8. A 48. B 88. D 128. C
9. B 49. B 89. A 129. C
10. A 50. B 90. D 130. D
11. B 51. A 91. A 131. C
12. A 52. D 92. C 132. B
13. B 53. C 93. A 133. D
14. A 54. D 94. B 134. C
15. B 55. C 95. C 135. D
16. D 56. D 96. E 136. D
17. B 57. B 97. D 137. C
18. B 58. C 98. D 138. C
19. B 59. C 99. A 139. A
20. A 60. D 100. B 140. D
21. B 61. C 101. B 141. D
22. B 62. C 102. C 142. B
23. D 63. B 103. A 143. C
24. D 64. B 104. C 144. C
25. B 65. D 105. D 145. C
26. E 66. B 106. D 146. A
27. B 67. E 107. B 147. B
28. B 68. A 108. A 148. B
29. B 69. A 109. D 149. B
30. B 70. C 110. B 150. C
31. D 71. B 111. A 151. C
32. E 72. A 112. A 152. A
33. B 73. B 113. A 153. D
34. D 74. C 114. D 154. A
35. E 75. E 115. C 155. D
36. B 76. A 116. E 156. C
37. D 77. C 117. A 157. D
38. B 78. A 118. E 158. D
39. C 79. C 119. B 159. C
40. B 80. B 120. B 160. B
201. D 214. E 227. E 239. D
202. D 215. B 228. A 240. B
203. E 216. B 229. A 241. D
204. E 217. C 230. C 242. A
205. A 218. E 231. D 243. B
206. C 219. D 232. C 244. D
207. C 220. A 233. B 245. B
208. E 221. E 234. D 246. C
209. B 222. C 235. D 247. C
210. B 223. D 236. C 248. D
211. B 224. C 237. E 249. B
212. E 225. B 238. A 250. D
213. B 226. B
901. b 911. d 921. b 931.a
902. a 912. d 922. d 932.c
903. d 913. a 923. a 933.c
904. b 914. d 924. a 934.c
905. a 915. d 925. b 935.d
906 b 916. d 926. d
907. b 917. c 927. c
908. a 918. b 928. c
909. c 919. a 929. a
910. d 920. c 930. a