1. Which of the following is a flow variable?

A. The value of the house in which you live 

B. The balance in your savings account 
C. Your monthly consumption of hamburgers 
D. The number of hamburgers in your refrigerator at the beginning of the month

2. Which of the following is not a stock variable?  

A. Government debt 
B. The labor force 
C. The amount of money held by the public 
D. Inventory investment 

3. GDP is  
A. a stock. 
B. a flow. 
C. both a stock and a flow. 
D. neither a stock nor a flow. 

4. GDP measures 
A. expenditure on all final goods and services. 
B. total income of everyone in the economy. 
C. total value-added by all firms in the economy. 
D. all of the above.

5. Suppose that a farmer grows wheat and sells it to a baker for $1, the baker makes bread and
sells it to a store for $2, and the store sells it to the customer for $3. This transaction increases
GDP by  
A. $1. 
B. $2. 
C. $3. 
D. $6.

6. Which of the following is not included in GDP?  

A. The salary paid to a federal judge 
B. The value of housing services enjoyed by homeowners 
C. The value of automobile services enjoyed by car owners
D. The value-added of a shipping company that transports goods from the factory to retail stores 
7. In which case is total expenditure in an economy not equal to total income?  
A. if total saving is larger than total investment 
B. if net exports are not zero 
C. if inventory investment is negative 
D. none of the above--they are always equal

8. All other things equal, GDP will rise if  

A. imports rise. 
B. exports fall. 
C. durable goods consumption rises. 
D. military spending falls.

9. Which of the following statements describes the difference between nominal and real GDP?  
A. Real GDP includes only goods; nominal GDP includes goods and services. 
B. Real GDP is measured using constant base-year prices; nominal GDP is measured using current
prices. 
C. Real GDP is equal to nominal GDP less the depreciation of the capital stock. 
D. Real GDP is equal to nominal GDP multiplied by the CPI.
10. If production remains the same and all prices double, then real GDP  
A. and nominal GDP are both constant. 
B. is constant and nominal GDP is reduced by half. 
C. is constant and nominal GDP doubles. 
D. doubles and nominal GDP is constant.

11. Real GDP equals  

A. nominal GDP minus net exports. 
B. nominal GDP divided by the GDP deflator. 
C. nominal GDP multiplied by the GDP deflator. 
D. GDP minus depreciation.

12. If production remains the same and all prices double relative to the base year, then the GDP
deflator is  
A. 1/4. 
B. 1/2. 
C. 1. 
D. 2.

13. Consider the following table:

APPLES/ Production/Price Production/Price

ORANGES Year
     
1995 20/ $0.50 10/$1.00
2000 10/ $1.00 10/$0.50
     
If 1995 is the base year, what is the GDP deflator for 2000?  
A. 0 
B. between 0 and 1 
C. 1 
D. greater than 1

14. The consumer price index (CPI)  

A. measures the price of a fixed basket of goods and services. 
B. measures the price of a basket of goods and services that constantly changes as the composition of
consumer spending changes. 
C. measures the amount of money that it takes to produce a fixed level of utility. 
D. is one of the many statistics in the National Income Accounts. 

15. Suppose that the typical consumer buys one apple and one orange every month. In the base
year 1986, the price for each was $1. In 1996, the price of apples rises to $2, and the price of
oranges remains at $1. Assuming that the CPI for 1986 is equal to 1, the CPI for 1996 would be
equal to  
A. 1/2. 
B. 1. 
C. 3/2. 
D. 2. 
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16. Which of the following statements about the CPI and the GDP deflator is true?  
A. The CPI measures the price level; the GDP deflator measures the production of an economy. 
B. The CPI refers to a base year; the GDP deflator always refers to the current year. 
C. The weights given to prices are not the same. 
D. The GDP deflator takes the price of imported goods into account; the CPI does not. 

17. All other things equal, if the price of foreign-made cars rises, then the GDP deflator  
A. and the CPI will rise by equal amounts. 
B. will rise and the CPI will remain the same. 
C. will remain the same and the CPI will rise. 
D. and the CPI will rise by different amounts. 
18. General Motors increases the price of a model car produced exclusively for export to Europe. Which
U.S. price index is affected?  
A. The CPI 
B. The GDP deflator 
C. Both the CPI and the GDP deflator 
D. Neither the CPI nor the GDP deflator 
19. Which of the following events will cause the unemployment rate to increase?  
A. An increase in population, with no change in the size of the labor force 
B. A proportionally equal increase in the labor force and the number of unemployed workers 
C. An increase in the labor force with no change in the number of employed workers 
D. An increase in the number of employed workers with no change in the number of unemployed workers 
20. An example of a person who is counted as unemployed is a  
A. retired worker below the mandatory retirement age. 
B. part-time worker who would like to work full-time. 
C. senator who resigns her job to run for president. 
D. student going to school full-time. 
21. Suppose that a factory worker turns 62 years old and retires from her job. Which statistic is not
affected?  
A. Number of unemployed 
B. Unemployment rate 
C. Labor force 
D. Labor-force participation rate 
22. Suppose that the size of the labor force is 100 million and that the unemployment rate is 5 percent.
Which of the following actions would reduce the unemployment rate the most?  
A. 1 million unemployed people get jobs. 
B. 2 million unemployed people leave the labor force. 
C. 3 million people join the labor force and they all get jobs. 
D. 10 million people join the labor force and half of them get jobs. 
23. Okun's law expresses a relationship between a change in  
A. the price level and a change in real GDP. 
B. the price level and a change in the unemployment rate. 
C. investment and change in the unemployment rate. 
D. real GDP and a change in the unemployment rate. 
24. Suppose that a Canadian citizen crosses the border each day to work in the United States. Her
income from this job would be counted in  
A. U.S. GNP and Canadian GNP. 
B. U.S. GNP and Canadian GDP. 
C. U.S. GDP and Canadian GNP. 
D. U.S. GDP and Canadian GDP. 
25. Suppose that an Italian working in the United States renounces his Italian citizenship and is granted
U.S. citizenship. Which of the following will happen?  
A. Italian GDP will fall; U.S. GNP will rise. 
B. Italian GNP will fall; U.S. GNP will rise. 
C. Italian GDP will fall; U.S. GDP will rise. 
D. Italian GNP will fall; U.S. GDP will rises 
26. The returns to scale in the production function Y = K 0.5 L0.5 are  
A. decreasing. 
B. constant. 
C. increasing. 
D. subject to wide fluctuations. 
 
27. If a production function has two inputs and exhibits constant returns to scale, then doubling both
inputs will cause the output to  
A. reduce by half. 
B. stay the same. 
C. double. 
D. quadruple. 
28. In a closed economy, the supply of goods and services must be equal to  
A. consumption. 
B. consumption + investment. 
C. consumption + investment + government purchases. 
D. consumption + investment + government purchases - taxes. 
 
29. Suppose that a consumer has a marginal propensity to consume of 0.8. If this consumer receives and
extra $2 of disposable income, her saving would be expected to increase by  
A. $0.40. 
B. $0.80. 
C. $1.20. 
D. $1.60. 
30. Which of the following operations is not considered investment?  
A. A family builds a house in which it plans to live. 
B. A car dealer stores some of this year's models for next year. 
C. An individual purchases several pieces of antique furniture. 
D. A firm buys a computer for word processing. 
31. Suppose that Jones builds a new house, then she sells it to Smith, and then Smith sells it to Williams.
The total net investment from these transactions is  
A. zero. 
B. 1 house. 
C. 2 houses. 
D. 3 houses. 
32. The real interest rate is equal to the nominal interest rate minus  
A. accounting profit. 
B. economic profit. 
C. taxes. 
D. inflation. 
33. In a closed economy with total income fixed, a reduction in taxes will cause consumption  
A. to rise and investment to fall. 
B. and investment both to rise. 
C. to fall and investment to rise. 
D. and investment both to fall. 
34. In a closed economy with output fixed, an increase in government spending matched by an equal
increase in taxes will
A. increase consumption. 
B. increase the interest rate. 
C. increase investment. 
D. leave all other variables unchanged. 
35. Which of the following is not a function of money?
A. It is a means of production. 
B. It is a unit of account. 
C. It is a store of value. 
D. It is a medium of exchange. 
36. One purpose of money is to transfer purchasing power from the present into the future. This function
of money is called  
A. store of value. 
B. index of inflation. 
C. medium of exchange. 
D. unit of account. 
37. One purpose of money is to provide the terms in which prices are quoted and debts are recorded.
This function of money is called
A. store of value. 
B. index of inflation. 
C. medium of exchange. 
D. unit of account. 
38. One purpose of money is to be the item we use to buy and sell things. This function of money is called

A. store of value. 
B. index of inflation. 
C. medium of exchange. 
D. unit of account. 
39. Of all of the following that could be used as money, which would be most likely to be characterized as
fiat money?  
A. Chocolate bars 
B. Silver jewelry 
C. Gum wrappers 
D. Salt 
40. Which of the following is a type of open-market operation?  
A. The government sells Treasury bills to the public. 
B. The government prints money and uses it to buy army  
uniforms. 
C. The Fed sells Treasury bills to the public. 
D. The Fed buys foreign currency in the exchange market. 
41. M2 does not include  
A. currency. 
B. long-term government bonds. 
C. traveler's checks. 
D. demand deposits. 
42. The difference between the nominal interest rate and the real interest rate is  
A. inflation. 
B. taxes. 
C. seignorage. 
D. hyperinflation. 
43. The Fisher equation states that a 1 percent rise in the rate of inflation causes a 1 percent rise in the  
A. real interest rate. 
B. nominal interest rate. 
C. money supply. 
D. number of transactions. 
 
 

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44. The ex ante real interest rate differs from the ex post real interest rate only when
A. the money supply grows at a constant rate. 
B. the money supply remains the same. 
C. the money supply falls at a constant rate. 
D. actual inflation differs from expected inflation. 
45. Which of the following statements is false?
A. If inflation is higher than the real interest rate, then the nominal interest rate must be negative. 
B. If inflation is higher than the nominal interest rate, then the real interest rate must be negative. 
C. If the nominal interest rate is higher than the real interest rate, then inflation must be positive. 
D. If the nominal interest rate is higher than inflation, then the real interest rate must be positive. 
46. The expected rate of inflation does not influence the  
A. demand for real money balances. 
B. ex post real interest rate. 
C. nominal interest rate. 
D. current price level. 
47. According to the classical dichotomy, which of these magnitudes is affected by monetary policy?  
A. The price level 
B. The real wage 
C. The real interest rate 
D. The rate of growth of real GDP 
48. The Solow growth model assumes that the production function exhibits  
A. decreasing returns to scale. 
B. constant returns to scale. 
C. increasing returns to scale. 
D. increasing marginal product. 
49. In the Solow model, the depreciation rate represents the  
A. fraction of income taken by taxes. 
B. difference between the nominal and real interest rates. 
C. inflation rate. 
D. fraction of the capital stock that wears out each year. 
50. The change in the capital stock is equal to  
A. investment. 
B. investment - depreciation. 
C. investment - inflation. 
D. investment - depreciation - inflation. 
C. 100 
D. 1,000 

67. Which of the following is NOT exogenous in the IS-LM model?  

A. The interest rate 
B. Taxes 
C. The price level 
D. Government expenditure 
68. In the Keynesian cross model, if the interest rate is constant, the MPC is 0.6, and taxes are increased
by $100, by how much does income change?  
A. It increases by $150. 
B. It decreases by $150. 
C. It increases by $166. 
D. It decreases by $166. 
69. The relationship between interest rates and the level of income that arises in the market for goods and
services is called the  
A. LM curve. 
B. IS curve. 
C. aggregate demand curve. 
D. aggregate supply curve. 
70. The investment function and the IS curve slope  
A. upward because higher interest rates induce more investment. 
B. upward because higher interest rates induce less investment. 
C. downward because higher interest rates induce more investment. 
D. downward because higher interest rates induce less investment. 
71. The slope of the IS curve depends on  
A. the sensitivity of investment to the interest rate. 
B. the level of government expenditures. 
C. the sensitivity of the demand for real money balances to the interest rate. 
D. none of the above. 
72. The IS curve is drawn for a given  
A. fiscal policy. 
B. monetary policy. 
C. interest rate. 
D. level of income. 
73. If investment becomes less sensitive to the interest rate, then the  
A. LM curve becomes steeper. 
B. LM curve becomes flatter. 
C. IS curve becomes steeper. 
D. IS curve becomes flatter. 
74. If the marginal propensity to consume is large, then the  
A. LM curve is relatively steep. 
B. LM curve is relatively flat. 
C. IS curve is relatively steep. 
D. IS curve is relatively flat. 
75. The LM curve is drawn for a given  
A. real income. 
B. nominal income. 
C. money supply. 
D. interest rate. 
76. The quantity of real money balances demanded depends on the  
A. nominal interest rate. 
B. rate of inflation. 
C. nominal money supply. 
D. price level. 
77. The relationship between the interest rate and the level of income that arises in the market for money
balances is called the  
A. LM curve. 
B. IS curve. 
C. aggregate demand curve. 
D. aggregate supply curve. 
78. The theory of liquidity preference assumes that the supply of real money balances, plotted against the
interest rate, is  
A. upward sloping. 
B. downward sloping. 
C. horizontal. 
D. vertical. 
79. The theory of liquidity preference postulates that the demand for real money balances, plotted against
the interest rate, is  
A. upward sloping. 
B. downward sloping. 
C. horizontal. 
D. vertical. 
80. In the early 1980's the Federal Reserve, under Paul Volcker, began a period of tight money aimed at
reducing inflation. Under this policy, nominal interest rates were:  
A. higher in the short run and higher in the long run. 
B. higher in the short run and lower in the long run. 
C. lower in the short run and higher in the long run. 
D. lower in the short run and lower in the long run. 
81. If the central bank increased the supply of real money balances, then the LM curve would  
A. become steeper. 
B. become flatter. 
C. shift inward. 
D. shift outward. 
82. If money demand became more sensitive to the level of income, the LM curve would  
A. become steeper. 
B. become flatter. 
C. shift inward. 
D. shift outward. 
83. In the Keynesian cross model, if the interest rate is constant and the MPC is 0.7, then the government
purchases multiplier is  
A. 0.3. 
B. 0.7. 
C. 1.4. 
D. 3.3. 
84. According to the IS-LM model, an increase in government purchases causes a(n)  
A. increase in income and a decrease in the interest rate. 
B. decrease in income and a decrease in the interest rate. 
C. increase in income and an increase in the interest rate. 
D. decrease in income and an increase in the interest rate. 
85. Suppose that the LM curve is vertical. An increase in taxes will  
A. increase income and leave the interest rate unchanged. 
B. decrease income and leave the interest rate unchanged. 
C. increase the interest rate and leave income unchanged. 
D. decrease the interest rate and leave income unchanged. 
86. According to the IS-LM model, if the central bank increases the money supply, then the interest rate  
A. falls and income falls. 
B. falls and income rises. 
C. rises and income falls. 
D. rises and income rises. 
87. The IS-LM model predicts that an increase in the price level will  
A. increase the interest rate and increase income. 
B. increase the interest rate and decrease income. 
C. decrease the interest rate and increase income. 
D. decrease the interest rate and decrease income. 
88. Suppose that the government raises taxes. According to the IS-LM model, what does the Fed have to
do to keep income constant and what is the subsequent effect on interest rates?  
A. The Fed needs to increase the money supply; interest rates remain unchanged. 
B. The Fed needs to increase the money supply; interest rates go down. 
C. The Fed needs to decrease the money supply; interest rates remain unchanged. 
D. The Fed needs to decrease the money supply; interest rates go up. 
89. Suppose that the government gets serious about saving the whales and increases spending
considerably. What does the Fed have to do to keep interest rates constant, and what happens to the
level of income?  
A. The Fed needs to decrease the money supply; income remains unchanged. 
B. The Fed needs to decrease the money supply; income goes down. 
C. The Fed needs to increase the money supply; income remains unchanged. 
D. The Fed needs to increase the money supply; income goes up. 
90. If the government raises taxes and the central bank maintains a policy of keeping the interest rate
constant, then the combined effect of these two policies would cause income to  
A. fall. 
B. stay the same. 
C. rise. 
D. it cannot be determined from the information given. 
91. If the government raises taxes and the central bank increases the money supply, then the combined
effect of these two policies would cause income to  
A. fall. 
B. stay the same. 
C. rise. 
D. it cannot be determined from the information given. 
92. If in response to an increase in government spending, the Fed decides to keep interest rates constant,
the government purchases multiplier is  
A. larger than in the case where the Fed keeps the money supply constant. 
B. smaller than in the case where the Fed keeps the money supply constant. 
C. the same as in the case where the Fed keeps the money supply constant. 
D. larger or smaller than in the case where the Fed keeps money supply constant. 
93. Suppose that income is temporarily above the natural rate level. In the IS-LM model, long-run
equilibrium is achieved when the price level  
A. falls and the LM curve shifts outward. 
B. rises and the LM curve shifts inward. 
C. falls and the IS curve shifts inward. 
D. rises and the IS curve shifts outward. 
94. Because of the relationship between prices and the real money supply, the aggregate demand curve
is  
A. vertical. 
B. upward sloping. 
C. horizontal. 
D. downward sloping. 
95. If the government increases government spending, then the aggregate demand curve will  
A. shift to the right. 
B. shift to the left. 
C. become steeper. 
D. become flatter. 
96. If the central bank decreases the supply of money, then the aggregate demand curve will  
A. shift to the right. 
B. shift to the left. 
C. become steeper. 
D. become flatter. 
97. The "money hypothesis" explaining the Great Depression stipulates that the Depression was caused
by a contractionary shift in the LM curve. Which of the following facts supports this hypothesis?  
A. The stock market crash of 1929 reduced real wealth. 
B. The interest rate did not rise. 
C. The nominal money supply contracted and the price level fell dramatically. 
D. Real balances did not fall. 
98. The "spending hypothesis" explaining the Great Depression stipulates that the main cause of the
Great Depression was a decline in spending. Which of the following does not support this hypothesis?  
A. Investment in housing declined. 
B. Widespread bank failures occurred. 
C. The government budget deficit rose during 1929-1932. 
D. The stock market crash of 1929 reduced real wealth. 
99. If the reserve-deposit ratio is 20 percent, then a bank that receives $1 in new deposits would be able
to loan out an additional
A. $0. 
B. $0.20. 
C. $0.80. 
D. $1.
 
 
Answers 
1. C
2. D
3. B
4. D
5. C
6. C
7. D
8. C
9. B
10. C
11. B
12. D
13. C
14. A
15. C
16. C
17. C
18. B
19. C
20. C
21. A
22. B
23. D
24. C
25. B
26. B
27. C
28. C
29. A
30. C
31. B
32. D
33. A
34 B
35. A
36. A
37. D
38. C
39. C
40. C
41. B
42. A
43. B
44. D
45. A
46. B
47. A
48. B
49. D
50 B
51. D
52. A
53. C
54. B
55. D
56. D
57. C
58. C
59. B
60. B
61. A
62. C
63. D
64. B
65. B
66 C
67 D
68 B
69 B
70 D
71 A
72 A
73 C
74 D
75 C
76 A
77 A
78 D
79 B
80. B
81. D
82. A
83 A
84 C
85. D
86. B
87. B
88. B
89. D
90 A
91. D
92. A
93. B
94. D
95. A
96. B
97. C
98. C
99. C