Macroeconomics

Application and Practice

Van Tran
2024
All rights reserved. Do not share or circulate without author’s permission

Part 1. Introduction
Chapter 1. Introduction to Macroeconomics
1.1. Multiple choice
1. Macroeconomists study
a. decisions of households and firms.
b. the interaction of households and firms.
c. economy-wide phenomena.
d. regulations on firms and unions.
2. Which of the following newspaper headlines would be more closely related to what microeconomists study
than to what macroeconomists study?
a. Unemployment rate rises from 5 percent to 5.5 percent.
b. Real GDP grows by 3.1 percent in the third quarter.
c. Retail sales at stores show large gains.
d. The price of oranges rises after an early frost.
3. Which of the following topics are more likely to be studied by a macroeconomist than by a microeconomist?
a. the effect of taxes on the prices of airline tickets, the profitability of automobile-manufacturing firms,
and employment trends in the food-service industry
b. the price of beef, wage differences between genders, and antitrust laws
c. how consumers maximize utility, and how prices are established in markets for agricultural products
d. the percentage of the labor force that is out of work, and differences in average income from country to
country
4. Because it is difficult for economists to use experiments to generate data, they generally must
a. do without data.
b. substitute assumptions for data when data are unavailable.
c. rely upon hypothetical data that were previously concocted by other economists.
d. use whatever data the world gives them.
5. One thing economists do to help them understand how the real world works is as follows:
a. They make assumptions.
b. They ignore the past.
c. They try to capture every aspect of the real world in the models they construct.
d. All of the above are correct.
6. Economic models
a. cannot be useful if they are based on false assumptions.
b. were once thought to be useful, but that is no longer true.
c. must incorporate all aspects of the economy if those models are to be useful.
d. can be useful, even if they are not particularly realistic.

Part 2. Measuring an economy’s performance

Chapter 2. Basic maceconomic indicators
2.1. Multiple choice
1. Which of the following statistics is usually regarded as the best single measure of a society’s economic well-
being?
a. the unemployment rate
b. the inflation rate
c. gross domestic product
d. the trade deficit
2. For an economy as a whole,
a. income is greater than expenditure
b. expenditure is greater than income.
c. income is equal to expenditure.
d. GDP measures income more precisely than it measures expenditure.
3. Gross domestic product serves as a measure of two things:
a. the total spending of everyone in the economy and the total saving of everyone in the economy.
b. the total income of everyone in the economy and the total expenditure on the nation's output of goods
and services.
c. the value of the nation's output of goods and services for domestic citizens and the value of the nation's
output of goods and services for the rest of the world.
d. the nation's saving and the nation's investment.
4. If a nation’s GDP rises, then it must be the case that the nation’s
a. income and expenditure both rise.
b. income and saving both rise.
c. income rises, but expenditure may rise or fall.
d. saving rises, but income may rise or fall.
5. In a simple circular-flow diagram total income and total expenditure are
a. never equal because total income always exceeds total expenditure.
b. seldom equal because of the ongoing changes in an economy’s unemployment rate.
c. equal only when one dollar is spent on goods for every dollar that is spent on services.
d. always equal because every transaction has a buyer and a seller.
6. For an economy, expenditure is equal to income because
a. by law firms must pay out all their revenue as income to someone.
b. for every sale there is a buyer and a seller.
c. prices of individual goods and services change, but the average price level stays the same.
d. None of the above is correct; expenditure is not always equal to income for an economy.
7. GDP is defined as
a. the market value of all goods and services produced within a country in a given period of time.
b. the market value of all goods and services produced by the citizens of a country, regardless of where
they are living in a given period of time.
c. the market value of all final goods and services produced within a country in a given period of time.
d. the market value of all final goods and services produced by the citizens of a country, regardless of
where they are living, in a given period of time.
8. To compute GDP, we
a. add up the wages paid to all workers.
b. add up the costs of producing all final goods and services.
c. add up the market values of all final goods and services.
d. take the difference between the market value of all final goods and services and the cost of producing
those final goods and services.
9. Which of the following is not included in GDP?
 a. unpaid cleaning and maintenance of houses
b. services such as those provided by lawyers and hair stylists
c. the estimated rental value of owner-occupied housing
d. production of foreign citizens living in Vietnam
10. Which of the following statements is correct?
a. The value of all intermediate goods and final goods is included in GDP.
b. The value of intermediate goods is included in GDP only if those goods were produced in the previous
year.
c. The value of intermediate goods is included in GDP only if those goods are added to firms’ inventories to
be used or sold at a later date.
d. The value of intermediate goods is never included in GDP.
11. A steel company sells some steel to a bicycle company for $100. The bicycle company uses the steel to
produce a bicycle, which it sells for $200. Taken together, these two transactions contribute
a. $100 to GDP.
b. $200 to GDP.
c. between $200 and $300 to GDP, depending on the profit earned by the bicycle company when it sold the
bicycle.
d. $300 to GDP.
12. The total sales of all firms in the economy for a year
a. equals GDP for the year.
b. is larger than GDP for the year.
c. is smaller than GDP for the year.
d. equals GNP for the year.
13. Gasoline is considered a final good if it is sold by a
a. gasoline station to a bus company that operates a bus route between San Francisco and Los Angeles.
b. pipeline operator to a gasoline station in San Francisco.
c. gasoline station to a motorist in Los Angeles.
d. All of the above are correct.
14. An Italian company operates a pasta restaurant in the U.S. The profits from this pasta restaurant are included
in
a. U.S. GNP and Italian GNP.
b. U.S. GDP and Italian GDP.
c. U.S. GDP and Italian GNP.
d. U.S. GNP and Italian GDP.
15. Which of the following items is included in GDP?
a. the sale of stocks and bonds
b. the sale of used goods
c. the sale of services such as those performed by a doctor
d. All of the above are included in GDP.
16. Which of the following items is included in GDP?
a. the sale of stocks and bonds
b. the estimated rental value of owner-occupied housing
c. unpaid production of goods and services at home
d. All of the above are included in GDP.
17. National income is defined as
a. GDP minus losses from depreciation.
b. GDP plus personal income.
c. GDP minus taxes paid by U.S. residents.
d. the total income earned by a nation's residents in the production of goods and services.
18. National income differs from net national product in that it includes business subsidies and excludes
 a. profits of corporations.
b. indirect business taxes.
c. retained earnings of corporations.
d. depreciation.
19. Retained earnings is the part of income that
a. households retain after paying taxes.
b. businesses retain after paying taxes.
c. corporations have earned but have not used to invest in plant, equipment, and inventories.
d. corporations have earned but have not paid out to their owners.
Table 23-1. The data pertain to the nation of Simplia for the year 2006.
GDP $110
Income Earned by Citizens Abroad $5
Income Foreigners Earn here $ 15
Losses from Depreciation $4
Indirect Business Taxes $6
Business Subsidies $2
Statistical Discrepancy $0
Retained Earnings $5
Corporate Income Taxes $6
Social Insurance Contributions $ 10
Interest Paid to Households by Government $5
Transfer Payments to Households from Government $ 15
Personal Taxes $ 30
Non-tax payments to Government $5
20. Refer to Table 23-1. GNP for Simplia is
a. $96.
b. $100.
c. $105.
d. $110.
21. Refer to Table 23-1. The market value of all final goods and services produced within Simplia in 2006 is
a. $96.
b. $100.
c. $105.
d. $110.
22. Refer to Table 23-1. NNP for this economy is
a. $100.
b. $96.
c. $90.
d. $88.
23. Refer to Table 23-1. National income for this economy is
a. $96.
b. $92.
c. $90.
d. $88.
24. Refer to Table 23-1. Personal income for this economy is
a. $91.
b. $81
c. $80.
d. $51.
25. Refer to Table 23-1. Disposable personal income for this economy is
 a. $61
b. $56.
c. $47.
d. $41.
26. The component of GDP called consumption consists of
a. household spending on durable goods, but not household spending on nondurable goods or on services.
b. household spending on durable and nondurable goods, but not household spending on services.
c. household spending on durable and nondurable goods as well as household spending on services.
d. spending by households and business firms on durable and nondurable goods as well as spending by
households and business firms on services.
27. For the purpose of calculating GDP, investment is spending on
a. stocks, bonds, and other financial assets.
b. real estate and financial assets.
c. new capital equipment, inventories, and structures, including new housing.
d. capital equipment, inventories, and structures, excluding household purchases of new housing.
28. The value of goods added to a firm's inventory in a certain year is treated as
a. consumption, since the goods will be sold to consumers in another period.
b. saving, since the goods are being saved until they are sold in another period.
c. investment, since GDP aims to measure the value of the economy's production.
d. spending on durable goods, since the goods could not be inventoried unless they were durable.
29. Government purchases include spending on goods and services by
a. the federal government only.
b. state and federal governments only.
c. local, state and federal governments.
d. local, state and federal governments, as well household spending by employees of those governments.
30. Which of the following examples of household spending are categorized as investment rather than
consumption?
a. expenditures on new housing
b. expenditures on intangibles items such as medical care
c. expenditures on durable goods such as automobiles and refrigerators
d. All of the above are correct.
31. If net exports is a negative number for a particular year, then
a. the value of firms’ inventories declined over the course of the year.
b. consumption exceeded the sum of investment and government purchases during the year.
c. the value of goods sold to foreigners exceeded the value of foreign goods purchased during the year.
d. the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.
32. In a certain economy in 2005, the value of imports amounted to 80 percent of the value of exports.
Consumption, investment, and government purchases added up to $5,000. The market value of all final goods
and services produced within the economy was $5,500. It follows that the economy exported
a. $500 worth of goods and services.
b. $1,000 worth of goods and services.
c. $1,500 worth of goods and services.
d. $2,500 worth of goods and services.
33. In a certain economy in 2005, government purchases exceeded investment by $2,000; investment amounted
to 1/6 of GDP; consumption amounted to 1/2 of GDP; and the economy’s imports exceeded its exports by
$500. It follows that GDP amounted to
a. $4,500.
b. $7,500.
c. $9,000.
d. $10,500.
34. If total spending rises from one year to the next, then
 a. the economy must be producing a larger output of goods and services.
b. prices at which goods and services are sold must be higher.
c. either the economy must be producing a larger output of goods and services, or the prices at which
goods and services are sold must be higher, or both.
d. employment or productivity must be rising.
35. Which of the following statements about GDP is correct?
a. GDP measures two things at once: the total income of everyone in the economy and the unemployment
rate.
b. Money continuously flows from households to government and then back to households, and GDP
measures this flow of money.
c. GDP is to a nation’s economy as household income is to a household.
d. All of the above are correct.
36. When a firm sells a good or a service, the sale contributes to the nation’s income
a. only if the buyer of the good or service is a household.
b. only if the buyer of the good or service is a household or another firm.
c. whether the buyer of the good or a service is a household, another firm, or the government.
d. We have to know whether the item being sold is a good or a service in order to answer the question.
37. Which of the following is not included in GDP?
a. unpaid cleaning and maintenance of houses
b. services such as those provided by lawyers and hair stylists
c. the estimated rental value of owner-occupied housing
d. production of foreign citizens living in the United States
38. Estimates of the values of which of the following non-market goods or services are included in GDP?
a. the value of unpaid housework
b. the value of vegetables and other foods that people grow in their gardens
c. the estimated rental value of owner-occupied homes
d. All of the above are included.
39. Transfer payments are
a. included in GDP because they represent income to individuals.
b. included in GDP because the income eventually will be spent on consumption.
c. not included in GDP because they are not payments for currently produced goods or services.
d. not included in GDP because taxes will have to be raised to pay for them.
40. Unemployment compensation is
a. part of GDP because it represents income.
b. part of GDP because the recipients must have worked in the past to qualify.
c. not part of GDP because it is a transfer payment.
d. not part of GDP because the payments reduce business profits.
41. The GDP deflator is the ratio of
a. real GDP to nominal GDP multiplied by 100.
b. real GDP to the inflation rate multiplied by 100.
c. nominal GDP to real GDP multiplied by 100.
d. nominal GDP to the inflation rate multiplied by 100.
42. Dave, a student who knits ski caps with tassels and sells them on the Quad, sells the same number of caps this
year as last year, but at 20 percent higher prices. Which of the following statements is correct?
a. Dave must be better off than last year because his income is higher.
b. Dave cannot be better off than last year because he sold the same number of caps both years.
c. We do not have enough information to determine whether Dave is better off this year than last year.
d. Dave is better off this year only if there was no inflation over the past year.

2.2. Problems and applications

43. Answer questions 6 and 7 (in Mankiw 2018. Principles of Macroeconomics, Chapter 2, pp. 44)
44. Suppose that a farmer grows wheat, which she sells to a miller for $10.
The miller turns the wheat into flour, which she sells to a baker for $55.
The baker turns the wheat into bread, which she sells to consumers for $140.
Consumers eat the bread.
What is GDP in this economy?
45. Consider the following table showing the breakdown of GDP (in billions) for China: Consumption 1700,
Investment 700, Government purchase (expenditure) 100, Exports 50, imports 40. Using the expenditure
approach, calculate GDP for China
46. Consider the following table showing the breakdown of GDP (in billions) for China.
GDP Category Amount GDP Category Amount
Wages and Salaries 1000 Taxes 300
Consumption 1700 Exports 50
Investment 700 Imports 40
Depreciation 50 Income receipts from rest of the world 10
Government purchase 100 Income payment to rest of the world 50
What are net exports for China?
47. Suppose that GDP in Japan is 1030 and then grows to 1160 (all numbers in billions). What is the growth rate
of GDP in Japan?
48. The table below shows data on prices and quantities of Oranges and Shoes produced in China.
Year Price of Oranges Quantity of Oranges Price of Shoes Quantity of Shoes
2014 0.7 200 10 270
2015 0.9 150 14 250
2016 1.4 300 15 330
a. What is the Nominal GDP in 2014, 2015, and 2016?
b. Using 2014 as the base year, what is the Real GDP in 2014, 2015, 2016?
c. What is the growth rate between 2014 to 2015, between 2015 to 2016
d. Using 2014 as the base year, what is the GDP Deflator in 2014, 2015, 2016?
e. Using 2014 as the base year, what is the GDP Deflator in 2015, 2016?
f. Using 2014 as the base year, what is the growth rate of the GDP deflator (also known as inflation rate)
between 2014 and 2015, between 2015 and 2016?
49. The table below shows data from an economy in 2022 (in billion)
GDP category Amount GDP category Amount
Investment 150 Indirect tax 20
Net investment 100 Personal income tax 10
Wage 230 Transfer payment 20
Rent 35 Income receipts from rest of the world 30
Exports 100 Income payment to rest of the world 80
Imports 50 Corporate income tax 20
Corporate profit 90 Corporate profit kept at firms 15
Consumption 200 GDP Deflator 2021 against 2010 115
Government purchase 50 GDP Deflator 2022 against 2010 120
Interest 25 Contribution to social benefit funds 70
a. Calculate nominal GDP using expenditure approach and income approach?
b. Calculate nominal GNP, national income, disposable income
c. Calculate real GDP, real GNP
50. An economy with three sectors I, II, and III with following data (Nền kinh tế được chia làm ba khu vực I, II và III
với số liệu sau)
Sector (Khu vực) I II III
Intermediate cost (Chi phí trung gian) 100 140 60
Depreciation (Khấu hao) 70 30 50
Other costs (Chi phí khác) 400 360 190
 Gross output (Giá trị sản lượng) 570 530 300
a. Calculate GDP via production approach (Tính GDP bằng ba phương pháp sản xuất).

Part 3.1. Short-run macroeconomic analysis

Chapter 3. Equilibrium in the goods market and the effects of fiscal policy
3.1. Multiple choice
1.When opening a restaurant, you may need to buy ovens, freezers, tables, and cash registers. Economists call
these expenditures
a. capital investment.
b. investment in human capital.
c. business consumption expenditures.
d. None of the above is correct.
2.When a country saves a larger portion of its GDP, it will have
a. more capital and higher productivity.
b. more capital and lower productivity.
c. less capital and higher productivity.
d. less capital and lower productivity.
3.Lekeisha's income exceeds her expenditures. Lekeisha is a
a. saver who demands money from the financial system.
b. saver who supplies money to the financial system.
c. borrower who demands money from the financial system.
d. borrower who demands money from the financial system.
4.Which of the following explains why production rises in most years?
a. increases in the labor force
b. increases in the capital stock
c. advances in technological knowledge
d. All of the above are correct.
5. The MPC (cm or c1) is
a. the change in consumption divided by the change in income.
b. consumption divided by income.
c. the change in consumption divided by the change in saving.
d. the change in saving divided by the change in income.
6. The MPS (sm or s1) is
a. the change in saving divided by the change in income.
b. 1 + MPC
c. income divided by saving.
d. total saving divided by total income.
7. Saving equals
a. Y - C
b. Y - planned I.
c. Y - actual I.
d. Inventory changes.
8. If the MPS is .60, MPC
a. is 1.60.
b. is .30.
c. is .40.
d. cannot be determined by the given information.
9. If you earn additional $500 in disposable income one week for painting your neighbors house,
 a. the total of your consumption and saving will increase by more than $500.
b. the total of your consumption and saving will increase by $500.
c. the total of your consumption and saving will increase by less than $500.
d. your consumption will increase by more than $500, even if your MPS is 0.1.
9. If Logan received a $2,500 bonus and his MPS is 0.20, his consumption rises by $________ and his saving rises
by $________.
A) 500; 100
B) 2,500; 200
C) 2,000; 500
D) 2,500; 20
10. Saving is a ________ variable and savings is a ________ variable.
A) flow; flow
B) stock; stock
C) flow; stock
D) stock; flow
11. Uncertainty about the future is likely to
A) increase current spending.
B) have no impact on current spending.
C) decrease current spending.
D) either increase or decrease current spending.
12. Higher interest rates are likely to
A) have no effect on consumer spending or saving.
B) decrease consumer spending and increase consumer saving.
C) decrease both consumer spending and consumer saving.
D) increase consumer spending and decrease consumer saving.
13. Consumption is
A) positively related to household income and wealth and householdsʹ expectations about the future, but
negatively related to interest rates.
B) negatively related to household income and wealth, interest rates, and householdsʹ expectations about
the future.
C) determined only by income.
D) positively related to household income and wealth, interest rates, and householdsʹ expectations about
the future.
14. In a closed economy with no government, aggregate expenditure is
A) consumption plus investment.
B) saving plus investment.
C) consumption plus the MPC.
D) MPC + MPS.
15. If Wandaʹs income is reduced to zero after she loses her job, her consumption will be ________ and her saving
will be ________.
A) less than zero; less than zero
B) greater than zero; greater than zero
C) less than zero; greater than zero
D) greater than zero; less than zero

Figure 8.1
16. Refer to Figure 8.1. The MPS for this household is ________ and the MPC is ________.
A) 0.4; 0.6
B) 0.5; 0.5
C) 0.2; 0.8
D) 0.3; 0.7
17. Refer to Figure 8.1. The equation for this householdʹs saving function is
A) S = -200 + .8Y.
B) S = -300 + 0.25Y.
C) S = -500 + .5Y.
D) S = -1,000 + 0.8Y.
18. Refer to Figure 8.1. At income level $1,500, this householdʹs saving is ________ than (to) zero and this
householdʹs consumption is ________ zero.
A) less than; greater than
B) equal to ; equal to
C) greater than; less than
D) greater than; greater than
19. Refer to Figure 8.1. This householdʹs consumption function is
A) C = 200 + 0.2Y.
B) C = 300 + 0.75Y.
C) C = 500 + 0.5Y.
D) C = 1,000 + 0.2Y.
20. Refer to Figure 8.1. This household saves -$300 at an income level of
A) $400.
B) $300
C) $250.
D) $125.
21. Refer to Figure 8.1. This household consumes $2,000 at an income level of
A) $3,000.
B) $2,000.
C) $2,275.
D) $1,840.
22. Refer to Figure 8.1. An increase in the amount of consumption this household makes when this householdʹs
income is zero
A) makes the consumption function steeper.
B) makes the saving function flatter.
C) shifts the consumption function downward.
D) shifts the saving function downward.
23. Refer to Figure 8.1. An increase in the MPC
A) makes the consumption function flatter.
B) makes the saving function flatter.
C) shifts the consumption function upward.
D) shifts the saving function downward.
Figure 8.2

24. Refer to Figure 8.2. The line segment BD represents Jerryʹs

A) consumption when income equals Y1.
B) saving when income equals zero.
C) saving when income is Y1.
D) consumption when income equals zero.
25. Refer to Figure 8.2. Jerryʹs consumption equals his income at Point
A) B.
B) A.
C) D.
D) C.
26. Refer to Figure 8.2. Jerryʹs saving equals zero at income level
A) zero.
B) Y1.
C) Y2.
D) Y2 - Y1.
27. Refer to Figure 8.2. Along the line segment AC, Jerryʹs
A) consumption equals his income.
B) consumption is greater than his income.
C) saving is zero.
D) saving is positive.
28. Refer to Figure 8.2. Along the segment AB, Jerryʹs
A) consumption is less than his income.
B) saving is positive.
C) consumption equals his income.
D) saving is negative.
29. Refer to Figure 8.2. Positive saving occurs along the line segment
A) BC.
B) DC.
C) AC.
D) BA.
30. Refer to Figure 8.2. An increase in Jerryʹs income is represented by
A) an upward shift in Jerryʹs consumption function.
B) an increase in the slope of Jerryʹs consumption function.
C) a movement from Point B to A.
D) none of the above
31. Refer to Figure 8.2. Suppose Jerryʹs MPC increases. At income Y1, Jerryʹs
 A) consumption will be greater than his income.
B) consumption will be less than his income.
C) saving will be zero.
D) all of the above
32. The fraction of a change in income that is consumed or spent is called
A) the marginal propensity of income.
B) the marginal propensity to save.
C) the marginal propensity to consume.
D) average consumption.
33. If you save $80 when you experience a $400 rise in your income,
A) your MPS (sm) is 0.25.
B) your MPC (cm) is 0.80.
C) your MPC is 0.85.
D) your MPS is 0.40.
34. If consumption is $30,000 when income is $35,000, and consumption increases to $36,000 when income
increases to $43,000, the MPC is
A) 0.65.
B) 0.80.
C) 0.75.
D) 0.95.
35. If consumption is $10,000 when income is $10,000, and consumption increases to $11,000 when
income increases to $12,000, the MPS (sm) is
A) 0.10.
B) 0.25.
C) 0.50.
D) 0.90.
36. Suppose consumption is $5,000 when income is $8,000 and the MPC (cm) equals 0.9. When income increases
to $10,000, consumption is
A) $4,500.
B) $2,700.
C) $6,800.
D) $7,200.
37. Suppose saving is $1,400 when income is $10,000 and the MPC equals 0.8. When income increases to $12,000,
saving is
A) $1,680.
B) $1,800.
C) $2,200.
D) $3,000.
38. Suppose consumption is $60,000 when income is $90,000 and the MPS equals 0.25. When income increases to
$100,000, consumption is
A) $70,000.
B) $85,000.
C) $67,500.
D) $90,250.
39. If the MPS is .22, the MPC (cm) is
A) -0.22.
B) 0.78.
C) 1.22.
D) 0.66.
40. If the MPS is .05, the MPC is
 A) -0.05.
B) 2.25.
C) 0.95.
D) 1.05.
41. If the consumption function is of the form C = 80 + 0.4Y, the MPS (sm) equals
A) -0.4.
B) 0.4.
C) 0.6.
D) -0.6.
42. If the saving function is of the form S = -20 + 0.3Y, consumption at an income level of 200 is
A) 80.
B) 120.
C) 160.
D) 180.
43. If Lilyʹs consumption function is of the form C = 100 + 0.8Y, her saving equals zero at an income level of
A) 180.
B) 500.
C) 800.
D) cannot be determined from the given information
44. If Zanderʹs saving function is of the form S = -150 + 0.5Y, his consumption equals his income at an income level
of
A) 150.
B) 225.
C) 1,500.
D) 300.
Table 8.1

45. Refer to Table 8.1. The equation for the aggregate consumption function is
A) C = 80 + .95Y.
B) C = 80 + .9Y.
C) C = 80 + .75Y.
D) C = -80 + .45Y.
46. Refer to Table 8.1. Societyʹs MPC (or cm) is
A) 0.90.
B) 0.95.
C) 0.80.
D) 0.05.
47. Refer to Table 8.1. Societyʹs MPS (or sm) is
A) 0.05.
B) 0.10.
C) 0.20.
D) 0.95.
48. Refer to Table 8.1. At an aggregate income level of $100, aggregate saving would be
 A) -$30
B) $30.
C) -$70.
D) $50.
49. Refer to Table 8.1. Assuming societyʹs MPC (or cm) is constant at an aggregate of income of $300, aggregate
consumption would be ________.
A) $325.
B) $350.
C) $305.
D) $425.
Table 8.2

50. Refer to Table 8.2. The equation for the aggregate saving function is
A) S = -100 + .15Y.
B) S = -100 + .1Y.
C) S = -150 + .2Y.
D) S = -150 + .85Y.
51. Refer to Table 8.2. Societyʹs MPC (cm) is
A) 0.1.
B) 0.2.
C) 0.8.
D) 0.9.
52. Refer to Table 8.2. Societyʹs MPS (sm) is
A) 0.2.
B) 0.3.
C) 0.1.
D) 0.9.
53. Refer to Table 8.2. Assuming societyʹs MPC is constant, at an aggregate income level of $900,
aggregate consumption would be
A) $665.
B) $910.
C) $1,200.
D) $1,750.
54. Refer to Table 8.2. Assuming societyʹs MPC is constant, at an aggregate income of $1,200 aggregate saving
would be ________.
A) $0
B) $20
C) $55
D) $150
Figure 8.3
55. Refer to Figure 8.3. The equation for the aggregate consumption function is
A) C = 140 + .5Y.
B) C = 60 + .7Y.
C) C = 80 + .6Y.
D) C = 60 + .4Y.
56. Refer to Figure 8.3. The equation for the aggregate saving function is
A) S = -60 + .3Y.
B) S = -200 + .6Y.
C) S = -140 + .5Y.
D) S = -80 + .4Y
57. Refer to Figure 8.3. In this economy, aggregate saving will be zero if income is
A) $100 billion.
B) $200 billion.
C) $300 billion.
D) $400 billion.
58. Refer to Figure 8.3. For this society, aggregate saving is positive if aggregate income is
A) above zero.
B) between $0 and $150 billion.
C) equal to $200 billion.
D) above $200 billion.
59. Refer to Figure 8.3. If aggregate income is $1,000 billion, then in this society aggregate saving is
________ billion.
A) $300
B) $320
C) $240
D) $550
60. Refer to Figure 8.3. Which of the following statements is FALSE?
A) Aggregate saving is negative for all income levels below $400 billion.
B) For all aggregate income levels above $200 billion, aggregate consumption is less than aggregate income.
C) If consumption is the only expenditure, this economy would be in equilibrium at an aggregate income
level of $200 billion.
D) Saving is negative at all income levels below $200 billion.
Figure 8.4
61. Refer to Figure 8.4. The aggregate consumption functions C1 and C2
A) have the same MPC (cm) values.
B) imply a different MPS (sm) values.
C) have the same autonomous consumption values.
D) have the same break-even values.
62. Refer to Figure 8.4. Which consumption function has the largest MPC?
A) C1.
B) C2.
C) C3.
D) cannot be determined from the figure
63. Refer to Figure 8.4. Suppose the consumption function for C1 = 10 + 0.8Y, the consumption
function that best fits C2 is
A) C2 = 20 + 0.8Y.
B) C2 = 10 + 0.4Y.
C) C2 = 40 + 0.5Y.
D) C2 = 20 + 0.1Y.
64. Refer to Figure 8.4. Suppose the consumption function for C1 = 20 + 0.5Y, the consumption function that best
fits C3 is
A) C3 = 20 + 0.8Y.
B) C3 = 20 + 0.4Y.
C) C3 = 40 + 0.5Y.
D) C3 = 40 + 0.4Y.
65. Refer to Figure 8.4. If income is Y1, aggregate consumption is the greatest when the aggregate
consumption function is
A) C3.
B) C2.
C) C1.
D) cannot be determined from the figure
66. Refer to Figure 8.4. If income is Y2
A) the society's saving is negative along C1, C2, and C3.
B) the society's consumption is equal along C2 and C3.
C) the society's saving is positive along C2 and C3.
D) the society's savings is negative along C1.
67. If the consumption function is below the 45-degree line,
A) consumption is less than income and saving is positive.
B) consumption is less than income and saving is negative.
C) consumption exceeds income and saving is positive.
D) consumption exceeds income and saving is negative.
68. The Tiny Tots Toy Company manufactures only sleds. In 2007 Tiny Tots manufactured 10,000 sleds, but sold
only 8,000 sleds. In 2007 Tiny Totsʹ change in inventory was
 A) -2,000 sleds.
B) 1,000 sleds.
C) 2,000 sleds.
D) 3,000 sleds.
69. The Jackson Tool Company manufactures only tools. In 2008 Jackson Tools manufactured 20,000 tools, but
sold 21,000 tools. In 2008 Jackson Toolsʹ change in inventory was
A) -2,000 tools.
B) 1,000 tools.
C) -1,000 tools.
D) 3,000 tools.
70. Which of the following is NOT considered investment?
A) The acquisition of capital goods
B) The purchase of government bonds
C) The increase in planned inventories
D) The construction of a new factory
71. Which of the following is an investment?
A) the purchase of a new printing press by a business
B) the purchase of a corporate bond by a household
C) the purchase of a share of stock by a household
D) a leveraged buyout of one corporation by another
72. Over which component of investment do firms have the least amount of control?
A) purchases of new equipment
B) construction of new factories
C) changes in inventories
D) building new machines
73. Assume that in Scandia, planned investment is $80 billion but actual investment is $60 billion. Unplanned
inventory investment is
A) -$10 billion.
B) $140 billion.
C) -$20 billion.
D) $70 billion.
74. Assume that in Jabara, planned investment is $30 billion, but actual investment is $45 billion. Unplanned
inventory investment is
A) $75 billion.
B) -$15 billion.
C) $15 billion.
D) -$75 billion.
75. If unplanned business investment is $20 million and planned investment is $20 million, then actual investment
is
A) $20 million.
B) $40 million.
C) -$20 million.
D) $200 million.
76. In 2006 Happylandʹs planned investment was $90 billion and its actual investment was $140
billion. In 2006 Happylandʹs unplanned inventory change was
A) -$50 billion.
B) -$115 billion.
C) $50 billion.
D) $230 billion.
77. If planned investment exceeds actual investment,
 A) there will be an accumulation of inventories.
B) there will be no change in inventories.
C) there will be a decline in inventories.
D) none of the above
78. If Inventory investment is higher than firms planned,
A) actual and planned investment are equal.
B) actual investment is less than planned investment.
C) actual investment is greater than planned investment.
D) actual investment must be negative.
79. In macroeconomics, equilibrium is defined as that point at which
A) saving equals consumption.
B) planned aggregate expenditure equals aggregate output.
C) planned aggregate expenditure equals consumption.
D) aggregate output equals consumption minus investment.
80. The economy can be in equilibrium if, and only if,
A) planned investment is zero.
B) actual investment is zero.
C) planned investment is greater than actual investment.
D) planned investment equals actual investment.
81. If aggregate output is greater than planned spending, then
A) unplanned inventory investment is zero.
B) unplanned inventory investment is negative.
C) unplanned inventory investment is positive.
D) actual investment equals planned investment.
82. If unplanned inventory investment is positive, then
A) planned investment must be zero.
B) planned aggregate spending must be greater than aggregate output.
C) planned aggregate spending must be less than aggregate output.
D) planned aggregate spending must equal aggregate output.
83. If aggregate output equals planned aggregate expenditure, then
A) unplanned inventory investment is zero.
B) unplanned inventory adjustment is negative.
C) unplanned inventory adjustment is positive.
D) actual investment is greater than planned investment.
Table 8.3

84. Refer to Table 8.3. At an aggregate output level of $400 billion, planned expenditure equals
A) $550 billion.
B) $450 billion.
C) $500 billion.
D) $850 billion.
85. Refer to Table 8.3. At an aggregate output level of $800 billion, aggregate saving
 A) equals -$50 billion.
B) equals $0.
C) equals $50 billion.
D) cannot be determined from this information.
86. Refer to Table 8.3. At an aggregate output level of $200 billion, the unplanned inventory change is
A) -$150 billion.
B) -$200 billion.
C) -$50 billion.
D) $100 billion.
87. Refer to Table 8.3. At an aggregate output level of $600 billion, the unplanned inventorychange is
A) -$100 billion.
B) -$50 billion.
C) $0.
D) $50 billion.
88. Refer to Table 8.3. If aggregate output equals ________, there will be a $100 billion unplanned
decrease in inventories.
A) $200 billion
B) $400 billion
C) $600 billion
D) $800 billion
89. Refer to Table 8.3. The equilibrium level of aggregate output equals
A) $400 billion.
B) $600 billion.
C) $800 billion.
D) $1,000 billion.
90. Refer to Table 8.3. Which of the following statements is FALSE?
A) At output levels greater than $800 billion, there is a positive unplanned inventory change.
B) If aggregate output equals $1000 billion, then aggregate saving equals $100.
C) The MPC for this economy is .75.
D) At an output level of $400 billion, there is a $150 billion unplanned inventory decrease.
91. Refer to Table 8.3. Planned saving equals planned investment at an aggregate output level
A) of $1000 billion.
B) of $600 billion.
C) of $800 billion.
D) that cannot be determined from this information.
92. Refer to Table 8.3. Planned investment equals actual investment at
A) all income levels.
B) all income levels above $600 billion.
C) all income levels below $600 billion.
D) $1000 billion.
93. In an economy, there is $200 million in currency held outside banks, $100 million in traveler's checks,
$250 million in currency held inside the banks, $300 million in checking deposits, and
$600 million in savings deposits. The value of M1 is .
A) $750 million
B) $1,200 million
C) $1,150 million
D) $600 million
94. For a commercial bank, the term "reserves" refers to
E) a banker's concern ("reservation") in making loans to an individual without a job.
F) the profit that the bank retains at the end of the year.
G) the cash in its vaults and its deposits at the central bank.
H) the net interest that it earns on loans.
3.2. Problem
95. An economy with available data as follow, unit billion dollar (Một nền kinh tế có các thông số sau):
C = 200 + 0.75Yd G = 580 X = 350 potential output Yp = 4400
I = 100 + 0.2Y T = 40 + 0.2Y M = 200 + 0.05Y
a, What is the aggregate demand function (Xác định hàm tổng cầu)
b, What is the demand multiplier (Xác định số nhân tổng cầu)
c, What is the equilibrium output (Xác định sản lượng cân bằng)
d, When the economy is in equilibrium, what is disposable income, consumption, and saving?
e, When the economy is in equilibrium, what is tax revenue, and budget balance?
f, When the economy is in equilibrium, what is imports, exports, and trade balance?
g, If the government’s purchase increases by 60 units, how much the output would changc?
h, If the government’s purchase increases by 60 units, and net taxes increases by 60 units, how much the output
would changc (compared with the initial equilibrium)?
k, From the initial point, in order to reach the potential output level, how the government should change the net
taxes?
i, Illustrate the results of question a, g, k in a graph.

96. An economy with available data as C = 45 + 0.75Yd, I = 60 + 0.15Y, G = 90, net taxes T = 40 + 0.2Y, potential
output Yp = 740, natural rate of unemployment un = 5%.
a, What is the aggregate demand function
b, What is the demand multiplier
c, What is the equilibrium output (Xác định sản lượng cân bằng)
d, When the economy is in equilibrium, what is disposable income, consumption, and saving?
e, When the economy is in equilibrium, what is tax revenue, and budget balance?
f, When the economy is in equilibrium, what is imports, exports, and trade balance?
g, If the government’s purchase increases by 10 units, how much the output would changc? What is the additional
net tax revenue?
h, From the initial point, in order to reach the potential output level, how the government should change it’s
purchase?
i, Illustrate the results of question a, g, h in a graph.

Chapter 4. Equilibrium in the monetary market and the effects of monetary policy
4.1. Multiple choice questions
2) The functions of money are
medium of exchange and the ability to buy goods and services.
A)
medium of exchange, unit of account, and means of payment.
B)
pricing, contracts, and means of payment.
C)
medium of exchange, unit of account, and store of value.
D)
3) Which of the following does NOT describe a function of money?
A) a unit of account
B) a hedge against inflation
C) a medium of exchange
D) a store of value
4) Which of the following is a primary function of money?
A) to serve as a unit of account
B) to serve as an encouragement to work
C) to reduce the burden of excessive imports
 D) to raise funds for the government
5) The most direct way in which money replaces barter is through its use as a
A)medium of exchange.
B)recording device.
C)store of value.
D)unit of account.
6) When you buy a hamburger for lunch, you are using money as a
A) store of value.
B) standard of deferred payment.
C) medium of exchange.
D) unit of accounting.
7) The unit of account function occurs when money serves as a
A) means of payment.
B) medium of exchange.
C) pricing mechanism.
D) double coincidence of wants.
8) A $25,000 price tag on a new car is an example of money as
A) medium of exchange.
B) a unit of account.
C) a store of value.
D) a time deposit.
9) In a world with no money, costs are expressed in terms of other goods. If one video game costs two
hamburgers, and a hamburger costs three sodas, how many sodas would it take to buy a video game?
A) 6
B) 5
C) 3
D) D) 3/2
10) Which of the following is an example of using money as a store of value?
A) paying for a new dress with a credit card
B) paying cash for a new automobile
C) paying rent with a check on a demand deposit
D) keeping $200 on hand for an emergency
11) When you keep money in a change jar to be used later, what function is it fulfilling?
A) medium of exchange.
B) recording device.
C) store of value.
D) unit of account.
12) M1 is a measure of
A) money and includes both currency and checking deposits.
B) liquidity and in which the most liquid asset is money.
C) money and includes both savings deposits and currency.
D) money and includes both savings deposits and money market mutual funds.
13) Which of the following is NOT included in the M1 definition of money?
A) currency held outside banks
B) time deposits
C) traveler's checks
D) checking deposits at savings and loans
14) The largest component of M1 is
A) currency.
B) checking deposits.
C) coins.
D) savings deposits.
15) The definition of M2 includes
A) M1.
B) savings deposits.
C) time deposits.
D) all of the above
16) Which of the following is NOT included in the M2 definition of money?
A) currency held by banks
B) money market mutual fund balances
C) savings deposits
D) checkable deposits
17) The largest component of M2 is
A) deposits
B) currency
C) money market mutual funds
D) travelers checks
18) Which of the following is part of M2?
A) checks
B) credit cards
C) currency held inside a bank
D) none of these are part of M1 or M2
19) If you use $500 of currency to purchase a saving deposit,
A) M1 decreases, but M2 is unchanged
B) M1 decreases and M2 increases
C) M1 is unchanged, but M2 increases
D) M1 and M2 both increase
20) Liquidity is the
A) speed with which the price of an asset changes as its intrinsic value changes.
B) inverse of the velocity of money.
C) same as the velocity of money.
D) ease with which an asset can be converted into money.
21) An individual wanting the most liquid asset possible will hold
A) currency.
B) a savings account.
C) checkable deposits at a bank.
D) U.S government bonds.
22) Checks are
A) money, as are credit cards.
B) not money, but credit cards are.
C) money, but credit cards are not.
D) not money, and neither are credit cards.
23) Credit cards are
A) money but are not a large part of the money supply.
B) not money.
C) money and are the largest part of the money supply.
D) not money because they are not made of paper.
24) Using a credit card can best be likened to
A) taking out a loan.
B) a barter exchange.
C) using any other form of money because you immediately get to take the goods home.
D) writing a check on your demand deposit account.
25) Credit cards are NOT money because they
A) have a value in exchange but little intrinsic value.
 B) are not issued by the government.
C) do not serve as a unit of account.
D) are ID cards that make borrowing easier.
26) Which of the following is NOT a function of money?
A) medium of exchange
B) barter
C) unit of account
D) store of value
27) The fact that money can be exchanged for goods reflects money's role as a
A) cause of inflation.
B) medium of exchange.
C) unit of account.
D) store of value.
28) Money .
A) is always composed of coins and paper
B) loses its value as it becomes older
C) requires a double coincidence of wants
D) is any commodity that is generally acceptable as a means of payment
29) In an economy, there is $200 million in currency held outside banks, $100 million in traveler's checks,
$250 million in currency held inside the banks, $300 million in checking deposits, and
$600 million in savings deposits. The value of M1 is .
A) $750 million
B) $1,200 million
C) $1,150 million
D) $600 million
30) Sam has $500 in traveler's checks. He cashes a $100 traveler check, deposits $150 into his checking
account at a Savings and Loan Association, and deposits the remaining $250 into a savings account at a
credit union. Immediately, .
A) M1 decreases by $250 and M2 does not change
B) M1 decreases by $400 and M2 increases by $250
C) M1 does not change and M2 increases by $250
D) M1 and M2 do not change
31) A firm that takes deposits from households and firms and makes loans to other households and
firms is a
A) usurer.
B) depository institution.
C) credit company.
D) stockbroker.
32) A depository institution is best defined as
A) as the lender of last resort.
B) an insurance agency, such as the FDIC.
C) the most powerful body within the Federal Reserve.
D) as an institution that accepts deposits and makes loans.
33) The major role of a commercial bank is to
A) make mortgage loans.
B) sell shares and use the proceeds to buy stocks.
C) receive deposits and make loans.
D) restrain the growth of the quantity of money.
34) Banks are in business
A) because they keep all their assets as reserves.
B) to maximize their reserves.
C) to make a profit.
 D) to make as many loans as possible.
35) For a commercial bank, the term "reserves" refers to
A) a banker's concern ("reservation") in making loans to an individual without a job.
B) the profit that the bank retains at the end of the year.
C) the cash in its vaults and its deposits at the central bank.
D) the net interest that it earns on loans.
36) A bank's reserves include
A) the cash in its vault plus the value of its depositors' accounts.
B) the cash in its vault plus its deposits held at the central bank.
C) the cash in its vault plus any gold held for the bank at Fort Knox.
D) its common stock holdings, the cash in its vault, and any deposits at the central bank.
37) Bank managers lend excess reserves because they want to
A) make a profit
B) create new money in the economy
C) curry favor with borrowers
D) borrow money from the the central bank
38) Which of the following statements concerning commercial banks is true?
A) Banks need to maintain cash reserves equal to their deposits.
B) Most banks maintain cash reserves equal to a fraction of deposits.
C) Cash reserves earn the highest rate of return of any asset for a bank.
D) Since the advent of the central bank, banks do not need to maintain cash reserves.
39) Bank managers lend the excess reserves created when new deposits come in because they want to
A) create new money in the economy.
B) earn a profit.
C) deplete required reserves.
D) deplete desired reserves.
40) The reserve ratio is a bank's reserves as a fraction of its
A) total assets.
B) total loans.
C) currency.
D) total deposits.
41) Excess reserves are
A) desired reserves minus actual reserves.
B) required reserves minus actual reserves.
C) liquidity funds minus actual reserves.
D) actual reserves minus desired reserves.
42) The majority of money is created when
A) banks make loans
B) new coins are minted
C) new bills are printed
D) the central bank sells bonds
43) A bank creates money by
A) lending its excess reserves
B) purchasing currency from the Federal Reserve
C) buying bonds from the Federal Reserve
D) printing more checks
44) Banks make additional loans when desired reserves
A) exceed actual reserves, a situation of negative excess reserves.
B) are less than actual reserves, a situation of negative excess reserves.
C) exceed actual reserves, a situation of positive excess reserves.
D) are less than actual reserves, a situation of positive excess reserves.
45) Whenever actual reserves exceed desired reserves, the bank
 A) can lend out additional funds.
B) needs to call in loans.
C) will go out of business.
D) must increase the amount of its required reserves by obtaining more cash.
46) You deposit $4,000 in currency in your checking account. The bank holds 20 percent of all deposits as
desired reserves. As a direct result of your deposit, your bank will create
A) $200 of new money.
B) $800 of new money.
C) $1,600 of new money.
D) $3,200 of new money.
47) You withdraw $2,000 from your account. Your bank has a desired reserve ratio of 20 percent. This
transaction, by itself, will directly reduce
A) the quantity of money by $1,600.
B) deposits by $1,600.
C) the quantity of money by $2,000.
D) deposits by $2,000.
Assets Liabilities
Reserves $100 Deposits $400
Loans $600 Net Worth $300
Total $700 Total $700
48) The above table gives the initial balance sheet for Mini Bank. Mini Bank's actual reserve ratio equals
.
A) 25 percent
B) 14.3 percent
C) 33.3 percent
D) 20 percent
49) The above table gives the initial balance sheet for Mini Bank. If the bank's desired reserve ratio is 10
percent, how much does this bank have in excess reserves?
A) $60
B) $100
C) $40
D) $10
50) The above table gives the initial balance sheet for Mini Bank. Mini Bank's balance sheet is such that it
will make
A) more loans.
B) fewer loans.
C) no change in its lending.
D) you cannot predict what the bank will do from this balance sheet.
51) When part of the quantity of money is held in currency, then
A) a currency drain occurs.
B) there is a higher level of excess reserves.
C) the money multiplier will increase in value.
D) the Fed will find it beneficial to increase the discount rate.
52) Currency outside of banks increases from $100 million to $200 million. This change is considered
A) a currency drain.
B) a decrease in the monetary base.
C) expansionary monetary policy.
D) contractionary monetary policy.
53) The monetary expansion process from an open market operation continues until
A) required reserves are eliminated.
B) the Federal Reserve takes actions to stop the process.
C) the discount rate is lower than market interest rates.
 D) excess bank reserves are eliminated.
54) The money multiplier determines how much
A) real GDP will be expanded given an increase in autonomous investment.
B) the monetary base will be expanded given a change in the quantity of money.
C) the quantity of money will be expanded given a change in the monetary base.
D) money demand will expand given a change in the quantity of money.
55) The money multiplier is the ratio of the change in the
A) quantity of money to the change in the monetary base
B) currency drain to the change in the quantity of money.
C) monetary base to the change in the quantity of money
D) desired reserve ratio to the change in the monetary base
56) The money multiplier is
A) the amount by which a change in the quantity of money is multiplied to determine the change in
the monetary base.
B) the amount by which a change in the monetary base is multiplied to determine the change in the
quantity of money.
C) equal to bank reserves divided by the change in the monetary base.
D) equal to bank reserves divided by the change the quantity of money.
57) When the monetary base increases by $2 billion, the quantity of money increases by $10 billion.
Thus, the money multiplier equals
A) 0.2
B) 5
C) 20.0
D) none of the above
58) in the desired reserve ratio will the money multiplier.
A) An increase; have no effect on
B) An increase; decrease
C) A decrease; decrease
D) A decrease; will have no effect on
59) When the monetary base increases by $4 billion, the quantity of money increases by $10 billion.
Thus, the money multiplier equals
A) 0.4
B) 2.5
C) 40.0
D) none of the above
60) Suppose that the money multiplier is 3. If the monetary base decreases by $2 million, the quantity
of money will
A) increase by $6 million.
B) increase by $666,667.
C) decrease by $6 million.
D) decrease by $666,667.
61) Suppose that the money multiplier is 6. If the monetary base increases by $1 million, the quantity of
money will
A) increase by $6 million.
B) increase by $166,667.
C) decrease by $6 million.
D) decrease by $166,667.
62) Suppose that the money multiplier is 3. If the monetary base increases by $1 million, the quantity of
money will
A) increase by $3 million.
B) increase by $300,000.
C) decrease by $3 million.
 D) decrease by $300,000.
63) Suppose that the money multiplier is 4. If the monetary base decreases by $2 million, the quantity
of money will
A) increase by $8 million.
B) increase by $500,000.
C) decrease by $8 million.
D) decrease by $500,000.
64) The banking system has just experienced an increase in deposits of $50,000. The currency drain ratio
is 20 percent and the desired reserve ratio is 10 percent. What does the money multiplier equal?
A) 4.00
B) 3.33
C) 0.25
D) 10.00
65) If the money multiplier is 3.5, a $10 billion increase in the monetary base
A) increases the quantity of money by $35 billion.
B) increases the quantity of money by $10 billion.
C) increases the quantity of money by $3.5 billion.
D) increases the quantity of money but not by an amount given above.
66) If a customer deposits $10,000 in currency into a checking account, the bank's total reserves ____.
A) increase
B) do not change
C) are greater than 100 percent
D) decrease
67) A bank's required reserves are calculated by multiplying .
A) its deposits by the required reserve ratio
B) the sum of its deposits and cash in its vault by the reserve ratio
C) cash in its vault by the required reserve ratio
D) the gold in its vault by the reserve ratio
68) A bank cannot create money unless its .
A) required reserves are greater than actual reserves
B) excess reserves are zero
C) desired reserves are greater than actual reserves
D) excess reserves equal deposits multiplied by the reserve ratio
69) The change in the quantity of money divided by the change in the monetary base is called the
___multiplier.
A) monetary base
B) money
C) deposit
D) monetary policy
70) The nominal demand for money is
A) inversely related to GDP.
B) measured in constant dollars.
C) inversely related to the price level.
D) proportional to the price level.
71) If the price level doubles, the
A) nominal demand for money increases.
B) nominal demand for money decreases.
C) real demand for money decreases.
D) real demand for money increases.
72) Suppose you hold $50 to buy groceries weekly and then the price of groceries increases by 5
percent. To be able to buy the same amount of groceries, what must happen to your nominal money
holdings?
 A) They must increase by $5.
B) They can decrease by $5.
C) They must increase by $2.50.
D) They must increase, but the amount of the increase is different than the above answers.
73) The real quantity of money is
A) inversely related to GDP.
B) measured in current dollars.
C) inversely related to the price level.
D) measured in constant dollars.
74) The opportunity cost of holding money is the
A) interest rate.
B) price of goods and services.
C) level of wage and rental income.
D) ease with which an asset can become money.
75) The opportunity cost of holding money balances increases when
A) the purchasing power of money rises.
B) the interest rate rises.
C) the price of goods and services falls.
D) consumers' incomes increase.
76) When the interest rate rises, the
A) quantity of money demanded decreases.
B) demand for money decreases.
C) demand for money increases.
D) quantity of money demanded increases.
77) When the interest rate rises, the quantity of money demanded decreases because
A) people will buy fewer goods and hold less money.
B) the price level also rises and people decrease their demand for money.
C) people move funds from interest-bearing assets into money.
D) people shift funds from money holdings to interest-bearing assets.
78) Which of the following is correct? The demand for money
A) increases as real GDP increases.
B) decreases as the price level increases.
C) depends on the quantity of money.
D) increases when the interest rate increases.
79) When real GDP increases, the demand for money
A) increases.
B) decreases.
C) stays the same.
D) we cannot make a prediction without additional information.
80) The demand for money curve
A) is horizontal.
B) has a positive slope.
C) is vertical.
D) has a negative slope.
81) Use the figure above to answer this question. Suppose the economy is operating at point a. A move
to could be explained by .
A) point e; a decrease in the interest rate
B) point c; an increase in the interest rate
C) point d; an increase in real GDP
D) point b; an increase in real GDP
82) Use the figure above to answer this question. Suppose the economy is operating at point a. A move
to could be explained by .
A) point c; an increase in the use of credit cards
B) point b; an increase in real GDP
C) point b; an increase in interest rates
D) point e; an increase in exports

83) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is
the effect of a fall in the interest rate?
A) The demand for money curve would shift rightward to MD2.
B) The demand for money curve would shift leftward to MD0.
C) There would be a movement upward along the demand for money curve MD1.
D) There would be a movement downward along the demand for money curve MD1.
84) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is
the effect of a rise in the interest rate?
A) The demand for money curve would shift rightward to MD2.
B) The demand for money curve would shift leftward to MD0.
C) There would be a movement upward along the demand for money curve MD1.
D) There would be a movement downward along the demand for money curve MD1.
85) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is
the effect of an increase in real GDP?
A) The demand for money curve would shift rightward to MD2.
B) The demand for money curve would shift leftward to MD0.
 C) There would be a movement upward along the demand for money curve MD1.
D) There would be a movement downward along the demand for money curve MD1.
86) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is
the effect of an increase in financial innovation such as the introduction of ATMs?
A) The demand for money curve would shift rightward to MD 2.
B) The demand for money curve would shift leftward to MD 0.
C) There would be a movement upward along the demand for money curve MD1.
D) There would be a movement downward along the demand for money curve MD1.
87) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is
the effect of increased use of credit cards?
A) The demand for money curve would shift rightward to MD 2.
B) The demand for money curve would shift leftward to MD 0.
C) There would be a movement upward along the demand for money curve MD1.
D) There would be a movement downward along the demand for money curve MD1.

88) In the figure above, an increase in the monetary base would create a change such as a
A) movement from point a to point b along the supply of money curve MS 0.
B) movement from point b to point a along the supply of money curve MS 0.
C) shift from the supply of money curve MS 0 to the supply of money curve MS 1.
D) shift from the supply of money curve MS 1 to the supply of money curve MS 0.
89) In the figure above, a decrease in the monetary base would create a change such as a
A) movement from point a to point b along the supply of money curve MS 0.
B) movement from point b to point a along the supply of money curve MS 0.
C) shift from the supply of money curve MS0 to the supply of money curve MS 1.
D) shift from the supply of money curve MS1 to the supply of money curve MS 0.

90) The figure above illustrates the effect of

A) an increase in real GDP.
B) a decrease in real GDP.
C) an increase in the monetary base.
D) a decrease in the monetary base.
91) In the money market, if the interest rate exceeds the equilibrium interest, there is a surplus of
money. How is the surplus eliminated?
A) People buy bonds to rid themselves of the surplus money, bidding up their price and pushing
interest rates down.
B) Banks will lend out the surplus, lowering interest rates.
C) The Federal Reserve will destroy currency, reducing the quantity of money.
D) The high interest rate increases the demand for money, eliminating the surplus.

92) In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion
A) less money than the quantity supplied and the interest rate will rise.
B) less money than the quantity supplied and the interest rate will fall.
C) more money than the quantity supplied and the interest rate will fall.
D) more money than the quantity supplied and the interest rate will rise.
93) In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion
A) less money than the quantity supplied and bond prices will rise.
B) less money than the quantity supplied and bond prices will fall.
C) more money than the quantity supplied and bond prices will fall.
D) more money than the quantity supplied and bond prices will rise.
94) In the figure above, if the interest rate is 4 percent, there is a $0.1 trillion excess
A) quantity of money and the interest rate will rise.
B) quantity of money and the interest rate will fall.
C) demand for money and the interest rate will fall.
D) demand for money and the interest rate will rise.
95) In the figure above, if the interest rate is 4 percent, there is a $0.1 trillion excess
A) quantity of money and bond prices will rise.
B) quantity of money and bond prices will fall.
C) demand for money and bond prices will fall.
D) demand for money and bond prices will rise.
96) In the figure above, if the interest rate is 6 percent,
A) there is a $0.1 trillion excess quantity of money and the interest rate will rise.
B) there is a $0.1 trillion excess quantity of money and the interest rate will fall.
C) the money market is in equilibrium and the interest rate will remain constant.
D) there is a $0.1 trillion excess demand for money and the interest rate will rise.
97) If real GDP decreases, the demand for money curve will shift
A) leftward and the interest rate will rise.
B) leftward and the interest rate will fall.
C) rightward and the interest rate will rise.
D) rightward and the interest rate will fall.
98) If people are holding more money than they would willingly hold, they will bonds. The price of a
bond will and the interest rate will .
A) sell; rise; fall
B) sell; fall; rise
C) purchase; rise; fall
 D) purchase; fall; rise
99) In the short run, which of the following actions raise the interest rate?
A) a decrease in the demand for money
B) an increase in bond prices
C) an increase in the quantity of money
D) an increase in the demand for money
100) In the short run, which of the following actions lower the interest rate?
A) a decrease in the demand for money
B) an increase in the demand for money
C) a decrease in the quantity of money
D) a decrease in bond prices

4.2. Problems
101) An economy with the stock of deposits is 100, cash holdings outside the banking system is 20, the total
reserves by banks is 10, of which derised (required) reserves is 8, excess reserves is 2, unit triliion dong.
a. What is money multipler, money base, and money supply?
b. Suppose the central bank raises the derised reserves by 2 and the banks keep the excess reserves the same,
how much the money supply would change? Note that the money base doesn’t change.
c. Suppose the central bank buys bonds of 4 in value, how much the money supply would change (compared with
the initial amount).

Chapter 5. The combination of fiscal and monetary policies

5.1. Multiple choice questions
1. The market in which the equilibrium level of aggregate output is determined is the
A) labor market.
B) bond market.
C) money market.
D) goods market.
2. The market in which the equilibrium level of the interest rate is determined is the
A) money market.
B) goods market.
C) labor market.
D) services market.
3. The two links between the goods market and the money market are
A) income and the inflation rate.
B) the interest rate and the unemployment rate.
C) income.
D) the inflation rate and the unemployment rate.
4. Which of the following is determined in the goods market?
A) the equilibrium interest rate
B) money demand
C) income
D) money supply
5. Which of the following is determined in the money market?
A) the equilibrium interest rate
B) income
C) employment
D) the government budget
6. If planned investment is perfectly unresponsive to changes in the interest rate, the planned investment
schedule
A) has a negative slope.
B) is horizontal.
C) is vertical.
D) has a positive slope.
7. If planned investment is perfectly responsive to changes in the interest rate, the planned investment
schedule
A) has a negative slope.
B) is horizontal.
C) is vertical.
D) has a positive slope.
8. The money market and the goods market are linked through the impact of the interest rate on
A) government spending.
B) planned investment.
C) money supply.
D) unplanned spending.
9. Which of the following equations represents equilibrium in the goods market?
A) Y = Ms.
B) Md = C + I + G + NX.
C) Md = Ms.
D) Y = C + I + G + NX.
Figure 12.1

10. Refer to Figure 12.1. If the interest rate drops from 8% to 4%, planned investment
A) increases, causing aggregate expenditure and aggregate output to fall.
B) increases, causing aggregate expenditure to fall.
C) decreases, causing both aggregate expenditure and aggregate output to rise.
D) increases, causing both aggregate expenditure and aggregate output to rise.
11. Refer to Figure 12.1. If the interest rate rises from 4% to 8%, planned investment
A) decreases, causing both aggregate expenditure and aggregate output to fall.
B) increases, causing aggregate expenditure to fall.
C) decreases, causing both aggregate expenditure and aggregate output to rise.
D) increases, causing both aggregate expenditure and aggregate output to rise.
12. Refer to Figure 12.1. If the interest rate increases from 4% to 8%,
A) aggregate expenditure increases.
B) equilibrium aggregate output decreases.
C) planned expenditure increases.
D) both aggregate expenditure and aggregate output increase.
13. Refer to Figure 12.1. If the interest rate decreases from 8% to 4%,
A) aggregate expenditure increases.
B) equilibrium aggregate output decreases.
 C) planned expenditure decreases.
D) the money supply will increase.

14. Refer to Table 12.1. If the interest rate dropped from 15% to 6%, planned investment would ___ by $___
billion.
A) increase; 120
B) increase; 180
C) decrease; 120
D) decrease; 180
15. Refer to Table 12.1. Suppose the expenditure multiplier is 3. An increase in the interest rate from 6% to 9%,
ceteris paribus, would
A) increase planned expenditure by $120 billion.
B) increase aggregate expenditure by $120 billion.
C) decrease equilibrium output by $120 billion.
D) decrease planned investment by $120 billion.
16. Refer to Table 12.1. Suppose the expenditure multiplier is 4. A drop in the interest rate from
15% to 9%, ceteris paribus, would increase equilibrium output by $________ billion.
A) 320
B) 20
C) 240
D) 160
17. Refer to Table 12.1. Suppose the expenditure multiplier is 5 and the initial interest rate is 12%. A move to
what interest rate will increase equilibrium output by 400 billion?
A) 3%
B) 6%
C) 9%
D) 18%
18. Refer to Table 12.1. Suppose the expenditure multiplier is 5, the initial interest rate is 9%, and the initial
equilibrium output is $600 billion. What is the interest rate that increases equilibrium output to $800 billion?
A) 12%
B) 15%
C) 6%
D) 3%
19. Refer to Table 12.1. Suppose the expenditure multiplier is 10, and the initial interest rate is15%. What would
be the impact on the equilibrium output if the interest rate fell to 6%?
A) It would increase by $1,200 billion.
B) It would decrease by $1,200 billion.
C) It would decrease by $3,600 billion.
D) It would increase by $3,600 billion.
20. The interest rate is determined in the
A) money market and has no influence on the goods market.
B) money market and influences the level of planned investment and thus the goods market.
C) goods market and has no influence on the money market.
D) goods market and influences the level of planned investment and thus the money market.
21. Output is determined in
 A) the goods market and also influences money demand.
B) the money market and also influences money demand.
C) the goods market with no influence from the money market.
D) the money market with no influence on the goods market.
22. When income increases, the money demand curve shifts to the ____, which ____ the interest rate with a
fixed money supply.
A) right; increases
B) right; decreases
C) left; increases
D) left; decreases
23. When income ________, the money ________ curve shifts to the right.
A) increases; demand
B) increases; supply
C) decreases; demand
D) decreases; supply
24. Fiscal policy affects the goods market through
A) changes in money supply.
B) changes in taxes and money supply.
C) changes in government spending and money supply.
D) changes in taxes and government spending.
25. Fiscal policy affects the money market through its effect on
A) income and money supply.
B) income and money demand.
C) money supply and money demand.
D) money supply and income.
26. Monetary policy affects the goods market through its effect on
A) the interest rate and planned investment.
B) the interest rate and money demand.
C) income and planned investment.
D) income and money demand.
27. Which of the following is an example of an expansionary fiscal policy?
A) the Fed selling government securities in the open market
B) the federal government increasing the marginal tax rate on incomes above $200,000
C) the federal government increasing the amount of money spent on public health programs
D) the federal government reducing pollution standards to allow firms to produce more output
28. The objective of a contractionary fiscal policy is to
A) reduce unemployment.
B) increase growth in output.
C) reduce inflation.
D) increase stagflation.
29. The objective of an expansionary fiscal policy is to
A) reduce unemployment.
B) reduce inflation.
C) reduce growth in output.
D) reduce growth in international trade.
30. A decrease in the money supply aimed at decreasing aggregate output is referred to as
A) contractionary fiscal policy.
B) expansionary fiscal policy.
C) expansionary monetary policy.
D) contractionary monetary policy.
31. An example of a contractionary monetary policy is
 A) an increase in the required reserve ratio.
B) a decrease in the discount rate.
C) a reduction in the taxes banks pay on their profits.
D) the Fed buying government securities in the open market.
32. An example of an expansionary monetary policy is
A) a decrease in the required reserve ratio.
B) the Fed selling bonds in the open market.
C) an increase in the required reserve ratio.
D) a law placing a ceiling on the maximum interest rate that banks can pay to depositors.
33. An intended goal of contractionary fiscal and monetary policy is
A) an increase in interest rates.
B) an increase in the price level.
C) a decrease in the unemployment rate.
D) a decrease in the level of aggregate output.

Figure 12.4

34. Refer to Figure 12.4. Planned investment could decrease from $12 million to $8 million if
A) the government increases government purchases.
B) the Fed increases the money supply.
C) the government reduces government purchases.
D) the government increases net taxes.
35. Refer to Figure 12.4. Planned investment could decrease from $16 million to $12 million if
A) the government reduces government purchases.
B) the Fed buys bonds in the open market.
C) the government reduces net taxes.
D) firms expect their sales to decrease in the future.
36. Refer to Figure 12.4. Planned investment could increase from $8 million to $12 million if
A) the government increases government purchases.
B) the government decreases net taxes.
C) the Fed sells bonds in the open market.
D) the Fed reduces the required reserve ratio.
37. Refer to Figure 12.4. Planned investment could decrease from $12 million to $8 million if
A) the government increases net taxes.
B) the government increases government purchases.
C) the Fed buys bonds in the open market.
D) Both B and C
38. Refer to Figure 12.4. Planned investment could decrease from $16 million to $12 million if
A) the government reduces government purchases.
B) the Fed sells bonds in the open market.
 C) the Fed lowers the discount rate.
D) B and C
39. Refer to Figure 12.4. Planned investment could increase from $8 million to $12 million if
A) the government increases government purchases.
B) the government increases net taxes.
C) the Fed sells bonds in the open market.
D) the Fed lowers the discount rate.
40. Which of the following sequence of events follows an expansionary monetary policy?
A) i↑ ⇒ I↓ ⇒ AD↓ ⇒ Y↓.
B) i↑ ⇒ I↑ ⇒ AD↓ ⇒ Y↑.
C) i↓ ⇒ I↑ ⇒ AD↑ ⇒ Y↑.
D) i↓ ⇒ I↓ ⇒ AD↓ ⇒ Y↓.
41. Which of the following sequence of events follows a rise in the discount rate?
A) i↓ ⇒ I↓ ⇒ AD↓ ⇒ Y↑.
B) i↑ ⇒ I↓ ⇒ AD↓ ⇒ Y↓.
C) i↓ ⇒ I↑ ⇒ AD↑ ⇒ Y↑.
D) i↑ ⇒ I↑ ⇒ AD↑ ⇒ Y↑.
42. Which of the following sequence of events follows an expansionary fiscal policy?
A) AD↑ ⇒ Y↑ ⇒ Md↓ ⇒ i↓ ⇒ I↓ ⇒ AD↓.
B) AD↑ ⇒ Y↑ ⇒ Md↑ ⇒ i↑ ⇒ I↓ ⇒ AD↓.
C) AD↓ ⇒ Y↓ ⇒ Md↓ ⇒ i↓ ⇒ I↑ ⇒ AD↑.
D) AD↓ ⇒ Y↑ ⇒ Md↓ ⇒ i↓ ⇒ I↓ ⇒ AD↓.
43. Which of the following sequence of events follows an increase in net taxes?
A) AD↑ ⇒ Y↑ ⇒ Md↑ ⇒ i↑ ⇒ I↑ ⇒ AD↑.
B) AD↓ ⇒ Y↑ ⇒ Md↓ ⇒ i↑ ⇒ I↓ ⇒ AD↓.
C) AD↑ ⇒ Y↑ ⇒ Md↓ ⇒ i↓ ⇒ I↓ ⇒ AD↓.
D) AD↓ ⇒ Y↓ ⇒ Md↓ ⇒ i↓ ⇒ I↑ ⇒ AD↑.
44. If planned investment decreases as the interest rate increases, the size of the government spending multiplier
will be
A) zero
B) larger than the government spending multiplier that would result if planned investment were independent
of the interest rate.
C) the same as the government spending multiplier that would result if planned investment were
independent of the interest rate.
D) smaller than the government spending multiplier that would result if planned investment were
independent of the interest rate.
45. If planned investment decreases as the interest rate increases, the absolute value of the tax multiplier will be
A) the same as the absolute value of the tax multiplier that would result if planned investment were
independent of the interest rate.
B) larger than the absolute value of the tax multiplier that would result if planned investment were
independent of the interest rate.
C) smaller than the absolute value of the tax multiplier that would result if planned investment were
independent of the interest rate.
D) zero.
 Assume the following for the long run:
1. For every 1% increase (decrease) in interest rate, planned investment decreases (increases) by $5 billion.
2. For every $10 billion increase (decrease) in government spending, interest rate increases (decreases) by
1%.
3. The MPC = 0.8
46. Refer to Table 12.2. Assuming the economy is in equilibrium, how much is equilibrium output?
A) $750 billion.
B) $900 billion
C) $1,050 billion
D) $1,350 billion
47. Refer to Table 12.2. When government spending increases by $30 billion, the crowding-out effect can be
represented by a
A) $30 billion decrease in investment.
B) $15 billion decrease in investment.
C) 3% decrease in the interest rate.
D) 1% increase in the interest rate.
48. The severity of the crowding-out effect will be reduced if
A) the Fed increases the money supply at the same time the federal government increases government
spending.
B) the Fed decreases the money supply at the same time the federal government increases
government spending.
C) the Fed does not change the money supply when the government increases government
spending.
D) business firms become pessimistic about the future.
49. The severity of the crowding-out effect will be reduced if
A) the Fed increases the money supply at the same time the federal government increases government
spending.
B) the Fed decreases the money supply at the same time the federal government increases
government spending.
C) the Fed does not change the money supply when the government increases government
spending.
D) business firms become pessimistic about the future.
50. The steeper the planned investment schedule (curve)
A) the larger is the crowding-out effect.
B) the smaller is the crowding-out effect.
C) the larger is the change in planned investment as a result of changes in the interest rate.
D) the smaller is the change in money demand as a result of changes in the interest rate.
51. The flatter the planned investment schedule (curve)
A) the smaller is the change in planned investment as a result of changes in the interest rate.
B) the smaller is the crowding-out effect.
C) the larger is the crowding-out effect.
D) the larger is the change in money demand as a result of changes in the interest rate.
38. If planned investment does not fall when the interest rate rises, there will be
A) a slight crowding-out effect.
B) a substantial crowding-out effect.
 C) no crowding-out effect.
D) a complete crowding-out effect.
39. Which of the following reduces the severity of the crowding-out effect whenever government
spending increases?
A) An expansionary monetary policy
B) An expansionary fiscal policy
C) A contractionary monetary policy
D) A contractionary fiscal policy
40. There will be no crowding-out effect when the government increases spending and the
planned investment schedule (curve) is
A) vertical.
B) downward sloping.
C) upward sloping.
D) horizontal.
41. If firms sharply increase the number of investment projects undertaken when interest rates fall and sharply
reduce the number of investment projects undertaken when interest rates increase, then, ignoring the
crowding out effect,
A) expansionary fiscal policy will be very effective.
B) expansionary monetary policy will be very effective.
C) contractionary fiscal policy will be very effective.
D) contractionary monetary policy will not be very effective.
42. If planned investment is sensitive to the interest rate, an increase in the interest rate causes the
A) aggregate expenditure curve to shift down.
B) aggregate expenditure curve to shift up.
C) long-run aggregate supply curve to shift out.
D) investment demand schedule to shift to the right.
43. Monetary policy can be effective only if
A) the money supply reacts to changes in the interest rate.
B) planned investment reacts to changes in the interest rate.
C) money demand reacts to changes in the interest rate.
D) government spending reacts to changes in the interest rate.
44. Dan, a writer for a business magazine, interviewed managers at 100 large corporations. All of the managers
indicated that the primary determinant of planned investment is expected sales and not the interest rate.
From this information, Dan concluded that
A) fiscal policy would be very effective, but monetary policy would not be very effective.
B) neither expansionary nor contractionary fiscal policy would be very effective.
C) both expansionary and contractionary monetary policy would be very effective.
D) contractionary fiscal policy would not be very effective, but contractionary monetary
policy would be very effective.
45. Assume that investment spending depends on the interest rate. As the supply of money is increased, the
interest rate ________ and planned investment spending ________.
A) falls; increases
B) falls; decreases
C) rises; decreases
D) rises; increases
46. If the interest rate is so high that it is hurting economic growth, the recommended policy
action should be
A) an expansionary fiscal policy.
B) an expansionary monetary policy.
C) a contractionary monetary policy.
D) the demand for money should be increased.
47. Monetary policy affects the money market by
A) changing the interest rate, which changes planned investment.
B) directly increasing consumption, which increases aggregate output.
C) changing the money supply, which changes the interest rate.
D) changing the level of aggregate output, which changes the level of planned expenditure.
48. If the investment demand curve is vertical,
A) both monetary and fiscal policy are ineffective.
B) both monetary and fiscal policy are effective.
C) monetary policy is effective, but fiscal policy is ineffective.
D) monetary policy is ineffective, but fiscal policy is effective.

Figure 12.5

49. Refer to Figure 12.5. As a result of an expansionary fiscal policy, the largest crowding-out
effect occurs if the planned investment schedule (curve) is similar to the one in Panel ________.
A) A
B) B
C) C
D) D
50. Refer to Figure 12.5. Assume the current equilibrium output is $500 billion, the spending multiplier is 5, and
the government increases purchases by $10 billion. If the new equilibrium output increases to $530 billion,
most likely the planned investment schedule (curve) is similar to the one in Panel ________.
A) A
B) B
C) C
D) D
51. Refer to Figure 12.5. Assume the current equilibrium output is $500 billion, the spending multiplier is 5, and
the government increased spending by $10 billion. If the new equilibriumoutput increased to $550 billion,
most likely the planned investment schedule (curve) is similar to the one in Panel ________.
A) A
B) B
C) C
D) D
52. Which of the following actions is an example of an expansionary fiscal policy?
A) an increase in the discount rate
B) a decrease in defense spending
 C) a sale of government securities in the open market
D) a decrease in net taxes.
53. Which of the following sequence of events occurs in response to an expansionary fiscal policy?
A) Aggregate output decreases, causing money demand to decrease, causing the interest
rate to decrease and planned investment to increase.
B) Aggregate output decreases, causing money demand to increase, causing interest rates to
increase and planned investment to decrease.
C) Aggregate output increases, causing money demand to increase, causing interest rates to
increase and planned investment to decrease.
D) Aggregate output decreases, causing the demand for money to increase, causing interest
rates to increase and planned investment to increase.

Figure 12.6

54. Refer to Figure 12.6. After government purchases are reduced, the planned aggregate expenditure function
may shift from C + I + G'' to C + I''+ G'' because the reduction in output will cause
A) money supply to increase, the interest rate to decrease, and planned investment to increase.
B) money supply to decrease, the interest rate to decrease, and planned investment to increase.
C) money demand to decrease, the interest rate to decrease, and planned investment to increase.
D) money demand to increase, the interest rate to decrease, and planned investment to increase.
55. Refer to Figure 12.6. The initial aggregate expenditure function is given by C + I + G. A decrease in
government spending shifts the aggregate expenditure function to C + I + G''. If investment does NOT depend
on the interest rate, the multiplier
A) is .5.
B) is 1.33.
C) is 2.
D) cannot be determined from the information available.
56. Refer to Figure 12.6. If investment does NOT depend on the interest rate, the change in government
purchases that decreases income from $400 billion to $100 billion is
A) an increase of $150 billion.
B) a decrease of $150 billion.
C) a decrease of $300 billion.
D) cannot be determined from the information available.
57. Refer to Figure 12.6. If investment DOES depend on the interest rate, the change in planned investment that
the decrease in government spending brought about so that income fell from $400 billion to $200 billion
rather than $100 billion would have been
A) an increase of $50 billion.
B) a decrease of $100 billion.
 C) a decrease of $200 billion.
D) cannot be determined from the information available.

Figure 12.7

58. Refer to Figure 12.7. What is the multiplier in this economy?

A) 2
B) 4
C) 5
D) 10
59. Refer to Figure 12.7. The initial aggregate expenditures are represented by the line AE0. If the government
increases spending by $100 billion and the aggregate expenditures curve shifts to AE1, we know for sure that
A) there is $100 billion decline in planned investment.
B) there is total crowding-out effect.
C) the planned investment schedule is vertical.
D) the planned investment schedule is downward sloping.
60. Refer to Figure 12.7. The initial aggregate expenditures are represented by the line AE0 (AD0). If the
government increases spending by $100 billion and the aggregate expenditures curve shifts to
AE2, we know for sure that
A) the interest rate does not change as a result of fiscal policy.
B) planned investment is perfectly insensitive to changes in the interest rate.
C) there is total crowding-out effect.
D) the planned investment schedule is horizontal.
61. Refer to Figure 12.7. The initial aggregate expenditures are represented by the line AE0. If the government
increases spending by $100 billion and the aggregate expenditures curve remains AE0, we know for sure that
A) the interest rate does not change as a result of fiscal policy.
B) planned investment is perfectly insensitive to changes in the interest rate.
C) there is total crowding-out effect.
D) the planned investment schedule is downward sloping.
62. If investment depends on the interest rate, a decrease in net taxes will cause aggregate output
to ________ than if investment doesnʹt depend on the interest rate.
A) increase by more
B) increase by less
C) decrease by more
D) decrease by less
63. A decrease in the money supply aimed at decreasing aggregate output is
A) an expansionary fiscal policy.
B) a contractionary monetary policy.
 C) a contractionary fiscal policy.
D) an expansionary monetary policy.
64. Which of the following is the sequence of events following a contractionary monetary policy?
A) Money demand increases ⇒ interest rates increase ⇒ planned investment falls and aggregate output falls.
B) Interest rates increase ⇒ planned investment decreases ⇒ aggregate output decreases ⇒money demand
decreases.
C) Interest rates decrease ⇒ planned investment decreases ⇒ aggregate output decreases ⇒money demand
decreases.
D) Aggregate output falls ⇒ the demand for money falls ⇒ interest rates rises ⇒ planned investment
decreases.

Figure 12.8

65. Refer to Figure 12.8. Interest rate r 1 is greater than interest rate r 0 . Which of the following would have
caused the planned aggregate expenditure function to shift from C + I + G to C + Iʹ + G?
A) a contractionary monetary policy
B) a contractionary fiscal policy
C) a decrease in the cost of capital relative to labor
D) an expansionary monetary policy
66. Which of the following actions is an example of an expansionary monetary policy?
A) a reduction in federal spending on education
B) a purchase of government securities in the open market
C) an increase in the discount rate
D) an increase in income tax rates
67. If you are concerned that the inflation rate is too high, which of the following policies would
you recommend?
A) a decrease in the money supply
B) an increase in the money supply
C) a decrease in income tax rates
D) an increase in government spending
68. The combination of monetary and fiscal policies in use at a given time is referred to as the
A) crowding-out mix.
B) policy mix.
C) discretionary mix.
D) package mix.
69. A policy mix that consists of a contractionary fiscal policy and an expansionary monetary policy would
A) be neutral with respect to the composition of aggregate spending in the economy.
B) lead to higher interest rates.
C) favor government spending over investment spending.
D) favor investment spending over government spending.
70. A policy mix that consists of an expansionary fiscal policy and a contractionary monetary
policy would
A) be neutral with respect to the composition of aggregate spending in the economy.
B) favor investment spending over government purchases.
C) lead to lower interest rates.
D) favor government purchases over investment spending.
71. A policy mix of an expansionary fiscal policy and a contractionary monetary policy would cause
A) output to decrease and interest rates to decrease.
B) output to decrease and interest rates to increase.
C) output to decrease and interest rates to either increase, decrease, or remain unchanged.
D) output to either increase, decrease, or remain unchanged and interest rates to increase.
72. A policy mix of an expansionary fiscal policy and an expansionary monetary policy would
cause output to ________ and interest rates to ________.
A) increase; increase
B) increase; increase, decrease, or remain unchanged
C) increase, decrease, or remain unchanged; increase
D) decrease; increase
73. The policy mix of a contractionary fiscal policy and a contractionary monetary policy would
cause output to ________, and interest rates to ________.
A) decrease; increase, decrease, or remain unchanged
B) decrease; decrease
C) decrease; increase
D) increase, decrease, or remain unchanged; decrease
74. The policy mix that would cause the interest rate to increase and investment to decrease, but
have an indeterminate effect on aggregate output, is a mix of
A) expansionary fiscal policy and expansionary monetary policy.
B) contractionary fiscal policy and expansionary monetary policy.
C) expansionary fiscal policy and contractionary monetary policy.
D) contractionary fiscal policy and contractionary monetary policy.
75. The policy mix that would cause the interest rate to decrease and investment to increase, but
have an indeterminate effect on aggregate output, is a mix of
A) contractionary fiscal policy and expansionary monetary policy.
B) expansionary fiscal policy and contractionary monetary policy.
C) expansionary fiscal policy and expansionary monetary policy.
D) contractionary fiscal policy and contractionary monetary policy.
76. If GDP increases, there will initially be
A) a shortage of money and the equilibrium interest rate will rise.
B) a shortage of money and the equilibrium interest rate will fall.
C) a surplus of money and the equilibrium interest rate will rise.
D) a surplus of money and the equilibrium interest rate will fall.
77. If GDP decreases, there will initially be
A) a surplus of money and the equilibrium interest rate will rise.
B) a surplus of money and the equilibrium interest rate will fall.
C) a shortage of money and the equilibrium interest rate will rise.
D) a shortage of money and the equilibrium interest rate will fall.

5.2. Problems
78. An economy with the following data (unit tril. USD): C = 200 + 0,25Yd; I = 150 + 0,25Y – 1000i; T = 200; G =
250, MS/P = 1600; MD/P = 2Y – 8000i
a. Specify the aggregate demand function of the economy
b. Specify the IS relation
 c. Specify the LM relation
d. What is the equilibrium output?
e. Graph the IS-LM curves in the same diagram
f. Suppose the real money supply (MS/P) increases to 1840, how much the equilibrium output would change?
Graph the effect of the policy.
g. Suppose the government raises its spending to 400, how much the equilibrium output would change?
Graph the effect of the policy.
h. Suppose there is an economic shock and household decide to cut their autonomous consumption to 100.
What should the government do with its spending in order to keep the equilibrium output unchanged?
79. An economy with following data: C = 400 + 0,75Yd ; M = 50 + 0,15Y; I = 800 + 0,15Y – 80i ; T = 200 + 0,2 Y ; G =
900; X = 400 ; MD = 800 + Y – 100i ; MS = 600; potential output (Yp) = 5500
a. Specify the aggregate demand function
b. Specify the IS relation
c. Specify the LM relation
d. What is the equilibrium output?
e. Graph the IS-LM curves in the same diagram
Chapter 6. Theories of open economy
6.1. Multiple choice questions
1. International trade
a. raises the standard of living in all trading countries.
b. lowers the standard of living in all trading countries.
c. leaves the standard of living unchanged.
d. raises the standard of living for importing countries and lowers it for exporting countries.
2. Foreign-produced goods and services that are sold domestically are called
a. imports.
b. exports.
c. net imports.
d. net exports.
3. Net exports of a country are the value of
a. goods and services imported minus the value of goods and services exported.
b. goods and services exported minus the value of goods and services imported.
c. goods exported minus the value of goods imported.
d. goods imported minus the value of goods exported.
4. One year a country has negative net exports. The next year it still has negative net exports and imports have
risen more than exports.
a. its trade surplus fell.
b. its trade surplus rose.
c. its trade deficit fell.
d. its trade deficit rose
5. Suppose that a country imports $100 million of goods and services and exports $75 million of goods and
services, what is the value of net exports?
a. $175 million
b. $75 million
c. $25 million
d. -$25 million
6. Oceania buys $40 of wine from Escudia and Escudia buys $100 of wool from Oceania. Supposing this is the
only trade that these countries do. What are the net exports of Oceania and Escudia in that order?
a. $140 and $140
b. $100 and $40
c. $60 and -$60
d. None of the above is correct.
21. A country sells more to foreign countries than it buys from them. It has
a. a trade surplus and positive net exports.
b. a trade surplus and negative net exports.
c. a trade deficit and positive net exports.
d. a trade deficit and negative net exports.
22. A country's trade balance
a. must be zero.
b. must be greater than zero.
c. is greater than zero only if exports are greater than imports.
d. is greater than zero only if imports are greater than exports.
31. Net capital outflow refers to the purchase of
a. foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.
b. foreign assets by domestic residents minus the purchase of foreign goods and services by domestic
residents.
c. domestic assets by foreign residents minus the purchase of domestic goods and services by foreign
residents.
 d. domestic assets by foreign residents minus the purchase of foreign assets by domestic residents.
32. Net capital outflow measures
a. foreign assets held by domestic residents minus domestic assets held by foreign residents.
b. the imbalance between the amount of foreign assets bought by domestic residents and the amount of
domestic assets bought by foreigners.
c. the imbalance between the amount of foreign assets bought by domestic residents and the amount of
domestic goods and services sold to foreigners.
d. None of the above is correct.
50. When making investment decisions, investors
a. compare the real interest rates offered on different bonds.
b. compare the nominal, but not the real, interest rates offered on different bonds.
c. purchase the highest-priced bond available.
d. All of the above are correct.
51. Net capital outflow equals the difference between a country's
a. income and expenditure.
b. investment and saving.
c. buying of foreign goods and services and sales of goods and services abroad.
d. purchases of foreign assets and sales of domestic assets abroad.
52. Net exports measures the difference between a country's
a. income and expenditures.
b. sale of goods and services abroad and purchase of foreign goods and services.
c. sale of domestic assets abroad and purchase of foreign assets.
d. All of the above are correct.
57. Net capital outflow
a. is always greater than net exports.
b. is always less than net exports.
c. is always equal to net exports.
d. could be any of the above.
58. Which of the following is correct?
a. NCO = NX
b. NCO + I = NX
c. NX + NCO = Y
d. Y = NCO - I
81.If a country has a trade surplus
a. it has positive net exports and positive net capital outflow.
b. it has positive net exports and negative net capital outflow.
c. it has negative net exports and positive net capital outflow.
d. it has negative net exports and negative net capital outflow.
82. If a country has a trade deficit
a. it has positive net exports and positive net capital outflow.
b. it has positive net exports and negative net capital outflow.
c. it has negative net exports and positive net capital outflow.
d. it has negative net exports and negative net capital outflow.
127. Other things the same, if the exchange rate changes from 115 yen per dollar to 125 yen per dollar, the dollar
has
a. appreciated and so buys more Japanese goods.
b. appreciated and so buys fewer Japanese goods.
c. depreciated and so buys more Japanese goods.
d. depreciated and so buys fewer Japanese goods.
128. Other things the same, if the exchange rate changes from 41 Thai bhat per dollar to 35 Thai bhat per dollar,
the dollar has
a. appreciated and so buys more Thai goods.
 b. appreciated and so buys fewer Thai goods.
c. depreciated and so buys more Thai goods.
d. depreciated and so buys fewer Thai goods.
129. Other things the same, if the exchange rate changes from .30 Kuwaiti dinar per dollar to .35 Kuwaiti dinar
per dollar, the dollar has
a. appreciated and so buys more Kuwaiti goods.
b. appreciated and so buys fewer Kuwaiti goods.
c. depreciated and so buys more Kuwaiti goods.
d. depreciated and so buys fewer Kuwaiti goods.
130. If the exchange rate is 125 yen = $1, a bottle of rice wine that costs 2,500 yen costs
a. $20.
b. $25.
c. $22.
d. None of the above is correct.
167. Nominal exchange rates
a. vary little over time.
b. vary substantially over time.
c. appreciate over time for most countries.
d. depreciate over time for most countries.
21.Other things the same, an increase in the interest rate would tend to reduce
a. domestic investment, but not net capital outflow.
b. net capital outflow, but not domestic investment.
c. both domestic investment and net capital outflow.
d. neither domestic investment nor not capital outflow.
59. The price that balances supply and demand in the market for foreign-currency exchange in the open-
economy macroeconomic model is the
a. nominal exchange rate.
b. nominal interest rate.
c. real exchange rate.
d. real interest rate.
58. The real exchange rate measures the
a. price of domestic currency relative to foreign currency.
b. price of domestic goods relative to the price of foreign goods.
c. rate of domestic and foreign interest.
d. None of the above is correct.
59. The price that balances supply and demand in the market for foreign-currency exchange in the open-
economy macroeconomic model is the
a. nominal exchange rate.
b. nominal interest rate.
c. real exchange rate.
d. real interest rate.
64. If the real exchange rate for the dollar is above the equilibrium level, the quantity of dollars supplied in the
market for foreign-currency exchange is
a. greater than the quantity demanded and the dollar will appreciate.
b. greater than the quantity demanded and the dollar will depreciate.
c. less than the quantity demanded and the dollar will appreciate.
d. less than the quantity demanded and the dollar will depreciate.
65. If the real exchange rate for the dollar is below the equilibrium level, the quantity of dollars supplied in the
market for foreign-currency exchange is
a. less than the quantity demanded and the dollar will appreciate.
b. less than the quantity demanded and the dollar will depreciate.
c. greater than the quantity demanded and the dollar will appreciate.
 d. greater than the quantity demanded and the dollar will depreciate.
120. A tax on imported goods is called a(n)
a. excise tax.
b. tariff.
c. import quota.
d. None of the above is correct.
121. A limit on the quantity of a good produced abroad that can be purchased domestically is called a(n)
a. tariff.
b. excise tax.
c. import quota.
d. None of the above is correct.

Part 4. Short-run and Long-run macroeconomic analysis

Chapter 7. Aggregate demand and aggregate supply
7.1. Multiple choice questions
1. Which of the following explains why production rises in most years?
a. increases in the labor force
b. increases in the capital stock
c. advances in technological knowledge
d. All of the above are correct.
2. A short period of falling incomes and rising unemployment is called a
a. depression.
b. recession.
c. expansion.
d. business cycle.
4. During recessions
a. workers are laid off.
b. factories are idle.
c. firms may find they are unable to sell all they produce.
d. All of the above are correct.
5. During a recession the economy experiences
a. rising employment and income.
b. rising employment and falling income.
c. rising income and falling employment.
d. falling employment and income.
6. Which of the following is correct?
a. Economic fluctuations are easily predicted by competent economists.
b. Recessions have never occurred very close together.
c. Other measures of spending, income, and production do not fluctuate closely with real GDP.
d. None of the above is correct.
7. Which of the following is correct?
a. Over the business cycle consumption fluctuates more than investment.
b. Economic fluctuations are easy to predict.
c. During recessions sales and profits tend to fall.
d. Because of government policy the U.S. has suffered no recessions in the last 25 years.
8. Which of the following typically rises during a recession?
a. garbage collection
b. unemployment
c. corporate profits
d. automobile sales
10. Most economists use the aggregate demand and aggregate supply model primarily to analyze
a. short-run fluctuations in the economy.
b. the effects of macroeconomic policy on the prices of individual goods.
c. the long-run effects of international trade policies.
d. productivity and economic growth.
11. Real GDP
a. is the current dollar value of all goods produced by the citizens of an economy within a given time.
b. measures economic activity and income.
c. is used primarily to measure long-run trends rather than short-run fluctuations.
d. All of the above are correct.
12. As recessions begin, production
a. and unemployment both rise.
b. rises and unemployment falls.
c. falls and unemployment rises.
 d. and unemployment both fall.
34. The model of short-run economic fluctuations focuses on the price level and
a. real GDP.
b. economic growth.
c. the neutrality of money.
d. None of the above is correct.
35. The average price level is measured by
a. any real variable.
b. the rate of inflation.
c. the level of the money supply.
d. the CPI or the GDP deflator.
36. The model of aggregate demand and aggregate supply explains the relationship between
a. the price and quantity of a particular good.
b. unemployment and output.
c. wages and employment.
d. real GDP and the price level.
37. The variables on the vertical and horizontal axes of the aggregate demand and supply graph are
a. the price level, real output.
b. real output, employment.
c. employment, the inflation rate.
d. the value of money, the price level.
39. Which of the following adjusts to bring aggregate supply and demand into balance?
a. the price level and real output
b. the real rate of interest and the money supply
c. government expenditures and taxes
d. the saving rate and net exports
40. The aggregate demand curve
a. has a slope that is explained in the same way as the slope of the demand curve for a particular product.
b. is vertical in the long run.
c. shows an inverse relation between the price level and the quantity of all goods and services demanded.
d. All of the above are correct.
41. Other things the same, a fall in the economy's overall level of prices tends to
a. raise both the quantity demanded and supplied of goods and services.
b. raise the quantity demanded of goods and services, but lower the quantity supplied.
c. lower the quantity demanded of goods and services, but raise the quantity supplied.
d. lower both the quantity demanded and the quantity supplied of goods and services.
42. As the price level rises
a. people will want to buy more bonds, so the interest rate rises.
b. people will want to buy fewer bonds, so the interest rate falls.
c. people will want to buy more bonds, so the interest rate falls.
d. people will want to buy fewer bonds, so the interest rate rises.
43. Which of the following is included in the aggregate demand for goods and services?
a. consumption demand
b. investment demand
c. net exports
d. All of the above are correct.
44. Which of the following is not included in aggregate demand?
a. purchases of stock and bonds
b. purchases of services such as visits to the doctor
c. purchases of capital goods such as equipment in a factory
d. purchases by foreigners of consumer goods produced in the United States
45. The effect of an increase in the price level on aggregate demand is represented by a
 a. shift to the right of the aggregate demand curve.
b. shift to the left of the aggregate demand curve.
c. movement to the left along a given aggregate demand curve.
d. movement to the right along a given aggregate demand curve.
46. The wealth effect, interest rate effect, and exchange rate effect are all explanations for
a. the slope of short-run aggregate supply.
b. the slope of long-run aggregate supply.
c. the slope of the aggregate demand curve.
d. everything that makes the aggregate demand curve shift.
47. Other things the same, as the price level falls,
a. the money supply falls.
b. interest rates rise.
c. a dollar buys more domestic goods.
d. the aggregate demand curve shifts right.
48. Other things the same, as the price level rises, the real value of a dollar
a. rises, and interest rates rise.
b. rises, and interest rates fall.
c. falls, and interest rates rise.
d. falls, and interest rates fall.
49. Other things the same, as the price level falls, the real value of a dollar
a. rises, and interest rates rise.
b. rises, and interest rates fall.
c. falls, and interest rates rise.
d. falls, and interest rates fall.
50. Other things the same, as the price level falls, a country's exchange rate
a. and interest rates rise.
b. and interest rates fall.
c. falls and interest rates rise.
d. rises and interest rates fall.
51. Other things the same, as the price level rises, exchange rates
a. and interest rates rise.
b. and interest rates fall.
c. fall and interest rates rise.
d. rise and interest rates fall.
52. Other things the same, as the price level rises, the real value of money
a. and the exchange rate rise.
b. and the exchange rate fall.
c. rises and the exchange rate falls.
d. falls and the exchange rate rises.
53. Other things the same, an increase in the price level makes consumers feel
a. less wealthy, so the quantity of goods and services demanded falls.
b. less wealthy, so the quantity of goods and services demanded rises.
c. more wealthy, so the quantity of goods and services demanded rises.
d. more wealthy, so the quantity of goods and services demanded falls.
54. Other things the same, a decrease in the price level makes the dollars people hold worth
a. more, so they are willing to spend more.
b. more, so they are willing to spend less.
c. less, so they are willing to spend more.
d. less, so they are willing to spend less.
55. Other things the same, an increase in the price level makes the dollars people hold worth
a. more, so they spend more.
b. more, so they spend less.
 c. less, so they spend more.
d. less, so they spend less.
56. People will spend more if the price level
a. rises because rising prices increase the real value of a dollar.
b. rises because rising prices decrease the real value of a dollar.
c. falls because falling prices increase the real value of a dollar.
d. falls because falling prices decrease the real value of a dollar.
57. People will spend more if real wealth
a. and interest rates rise.
b. rises and interest rates fall.
c. falls and interest rates rise.
d. and interest rates fall.
62. Other things the same, the aggregate quantity of goods demanded decreases if
a. real wealth falls.
b. the interest rate rises.
c. the dollar appreciates.
d. All of the above are correct.
63. Other things the same, a decrease in the price level induces people to hold
a. less money, so they lend less, and the interest rate rises.
b. less money, so they lend more, and the interest rate falls.
c. more money, so they lend more, and the interest rate rises.
d. more money, so they lend less, and the interest rate falls.
64. Other things the same, an increase in the price level induces people to hold
a. less money, so they lend less, and the interest rate rises.
b. less money, so they lend more, and the interest rate falls.
c. more money, so they lend more, and the interest rate falls.
d. more money, so they lend less, and the interest rate rises.
65. Other things the same, when the price level rises,
a. interest rates rise, so firms increase investment.
b. interest rates rise, so firms decrease investment.
c. interest rates fall, so firms increase investment.
d. interest rates fall, so firms decrease investment.
66. Other things the same, when the price level falls, interest rates
a. rise, so firms increase investment.
b. rise, so firms decrease investment.
c. fall, so firms increase investment.
d. fall, so firms decrease investment.
67. Other things the same, as the price level falls, which of the following increases?
a. lending and investment spending
b. lending, but not investment spending
c. investment spending, but not lending
d. neither investment spending nor lending
68. Investment spending decreases when the price level
a. rises and interest rates rise.
b. rises and interest rates fall.
c. falls and interest rates rise.
d. falls and interest rates fall.
70. Other things the same, a decrease in the price level causes real wealth to
a. fall, interest rates to fall, and the dollar to appreciate.
b. fall, interest rates to rise, and the dollar to depreciate.
c. rise, interest rates to rise, and the dollar to appreciate.
d. rise, interest rates to fall, and the dollar to depreciate.
71. Other things the same, a decrease in the price level causes the interest rate to
a. increase, the dollar to appreciate, and net exports to increase.
b. increase, the dollar to depreciate, and net exports to decrease.
c. decrease, the dollar to depreciate, and net exports to increase.
d. decrease, the dollar to appreciate, and net exports to decrease.
72. An increase in the price level causes the interest rate to
a. increase, the dollar to depreciate, and net exports to increase.
b. increase, the dollar to appreciate, and net exports to decrease.
c. decrease, the dollar to depreciate, and net exports to increase.
d. decrease, the dollar to appreciate, and net exports to decrease.
75. When the dollar depreciates, each dollar buys
a. more foreign currency, and so buys more foreign goods.
b. more foreign currency, and so buys fewer foreign goods.
c. less foreign currency, and so buys more foreign goods.
d. less foreign currency, and so buys fewer foreign goods.
77. An increase in the interest rate causes investment to
a. rise and the exchange rate to appreciate.
b. fall and the exchange rate to depreciate.
c. rise and the exchange rate to depreciate.
d. fall and the exchange rate to appreciate.
78. Other things the same, as the price level decreases it induces greater spending on
a. both net exports and investment.
b. net exports but not investment.
c. investment but not net exports.
d. neither net exports nor investment.
82. Changes in the price level affect which components of aggregate demand?
a. only consumption and investment
b. only consumption and net exports
c. only investment
d. consumption, investment, and net exports
83. Which of the following does not help explain the direction the quantity of aggregate goods demanded
changes when the price level decreases?
a. consumer wealth rises
b. borrowing rises
c. each dollar is worth more domestic goods
d. the dollar appreciates relative to other currencies
84. Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to
desire
a. increased consumption, which shifts the aggregate demand curve right.
b. increased consumption, which shifts the aggregate demand curve left.
c. decreased consumption, which shifts the aggregate demand curve right.
d. decreased consumption, which shifts the aggregate demand curve left.
85. Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to
a. decrease consumption, shown as a movement to the left along a given aggregate demand curve.
b. increase consumption, shown as a movement to the right along a given aggregate demand curve.
c. decrease consumption, shifting the aggregate demand curve to the left.
d. increase consumption, shifting the aggregate demand curve to the right.
86. Suppose a stock market crash makes people feel poorer. This decrease in wealth would induce people to
a. decrease consumption, which shifts aggregate supply left.
b. decrease consumption, which shifts aggregate demand left.
c. increase consumption, which shifts aggregate supply right.
d. increase consumption, which shifts aggregate demand right.
 87. From 2001 to 2005 there was a dramatic rise in the price of houses. If this made people feel wealthier, then
it would shift
a. aggregate demand right.
b. aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.
89. The initial impact of an increase in an investment tax credit is to shift
a. aggregate demand right.
b. aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.
90. The initial impact of the repeal of an investment tax credit is to shift
a. aggregate demand right.
b. aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.
91. Other things the same, an increase in the amount of capital firms wish to purchase would initially shift
a. aggregate demand right.
b. aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.
92. If businesses in general decide that they have overbuilt and so now have too much capital, their response to
this would initially shift
a. aggregate demand right.
b. aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.
94. When taxes decrease, consumption
a. increases as shown by a movement to the right along a given aggregate demand curve.
b. increases, shifting aggregate demand to the right.
c. decreases, shifting aggregate supply to the right.
d. None of the above is correct.
95. When taxes increase, consumption
a. decreases as shown by a movement to the left along a given aggregate demand curve.
b. decreases as shown by shifting aggregate demand to the left.
c. increases as shown by shifting aggregate supply the left.
d. None of the above is correct.
98. When the money supply increases
a. interest rates fall and so aggregate demand shifts right.
b. interest rates fall and so aggregate demand shifts left.
c. interest rates rise and so aggregate demand shifts right.
d. interest rates rise and so aggregate demand shifts left.
99. When the money supply decreases
a. interest rates fall and so aggregate demand shifts right.
b. interest rates fall and so aggregate demand shifts left.
c. interest rates rise and so aggregate demand shifts right.
d. interest rates rise and so aggregate demand shifts left.
100. An increase in the money supply
a. and the investment tax credit both cause aggregate demand to shift right.
b. and the investment tax credit both cause aggregate demand to shift left.
c. causes aggregate demand to shift right, while the investment tax credit causes aggregate demand to shift
left.
 d. causes aggregate demand to shift left, while the investment tax credit causes aggregate demand to shift
right.
101. Which of the following shifts aggregate demand to the right?
a. an increase in the money supply
b. an increase in net exports due to something other than a change in domestic prices
c. an investment tax credit
d. All of the above are correct.
102. Which of the following shifts aggregate demand to the right?
a. a decrease in the money supply
b. increases in the profitability of capital due perhaps to technological progress.
c. the repeal of an investment tax credit
d. a decrease in the price level
103. Which of the following shifts aggregate demand to the left?
a. an increase in the price level
b. a decrease in the money supply
c. an increase in net exports
d. Congress passes a new investment tax credit
105. Which of the following shifts aggregate demand to the left?
a. The price level rises.
b. The price level falls.
c. The dollar depreciates for some reason other than a change in the price level.
d. Stock prices fall for some reason other than a change in the price level.
106. Other things the same, when the government spends more, the initial effect is that
a. aggregate demand shifts right.
b. aggregate demand shifts left.
c. aggregate supply shifts right.
d. aggregate supply shifts left.
107. Aggregate demand shifts left when the government
a. decreases taxes.
b. cuts military expenditures.
c. creates a new investment tax credit
d. None of the above is correct.
108. Aggregate demand shifts right when the government
a. raises personal income taxes.
b. increases the money supply.
c. repeals an investment tax credit.
d. All of the above are correct.
109. Aggregate demand would shift right if either
a. the price level decreased, or government expenditures increased.
b. the price level decreased, or the government instituted an investment tax credit.
c. government expenditures or the money supply increased.
d. All of the above are correct.
110. Aggregate demand shifts right if
a. net exports rise or the money supply rises.
b. net exports rise or the price level rises.
c. net exports fall or the money supply rises.
d. net exports fall or the price level rises.
111. Aggregate demand shifts right if
a. taxes rise or stock prices rise.
b. taxes rise or stock prices fall.
c. taxes fall or stock prices rise.
d. taxes fall or stock prices fall.
113. If people want to save more for retirement
a. or if the government raises taxes, aggregate demand shifts right.
b. or if the government raises taxes, aggregate demand shifts left.
c. aggregate demand shifts right. If the government raises taxes, aggregate demand shifts left.
d. aggregate demand shifts left. If the government raises taxes, aggregate demand shifts right.
115. If the dollar appreciates, perhaps because of speculation or government policy, then U.S. net exports
a. increase which shifts aggregate demand right.
b. increase which shifts aggregate demand left.
c. decrease which shifts aggregate demand right.
d. decrease which shifts aggregate demand left.
116. If the dollar appreciates because of speculation or government policy
a. or if other countries experience recessions, aggregate demand shifts right in the United States.
b. or if other countries experience recessions, aggregate demand shifts left in the United States.
c. aggregate demand shifts right in the United States. If other countries experience recessions aggregate
demand shifts left in the United States.
d. aggregate demand shifts left in the United States. If other countries experience recessions aggregate
demand shifts right in the United States.
117. An increase in which of the following, other things the same, shifts aggregate demand to the right?
a. consumption
b. investment
c. government expenditures
d. All of the above are correct.
118. If speculators lost confidence in foreign economies and so wanted to buy more U.S. bonds
a. the dollar would appreciate which would cause aggregate demand to shift right.
b. the dollar would appreciate which would cause aggregate demand to shift left.
c. the dollar would depreciate which would cause aggregate demand to shift right.
d. the dollar would depreciate which would cause aggregate demand to shift left.
119. If speculators gained greater confidence so that they wanted to buy more assets of foreign countries and
fewer U.S. bonds,
a. the dollar would appreciate which would cause aggregate demand to shift right.
b. the dollar would appreciate which would cause aggregate demand to shift left.
c. the dollar would depreciate which would cause aggregate demand to shift right.
d. the dollar would depreciate which would cause aggregate demand to shift left.
122. The aggregate supply curve is upward sloping rather than vertical in
a. the short and long run.
b. neither the short nor the long run.
c. the long run, but not the short run.
d. the short run, but not the long run.
123. The aggregate supply curve is upward sloping in
a. the short and long run.
b. neither the short nor long run.
c. the long run, but not the short run.
d. the short run, but not the long run.
126. Which of the following is not a determinant of the long-run level of real GDP?
a. the price level
b. the supply of labor
c. available natural resources
d. available technology
127. The long-run aggregate supply curve
a. is vertical.
b. is a graphical representation of the classical dichotomy.
c. indicates monetary neutrality in the long run.
 d. All of the above are correct.
129. The position of the long-run aggregate supply curve
a. is determined by the things that determine output in the classical model.
b. is at the point where unemployment is zero.
c. shifts to the right when the price level increases.
d. is at the point where the economy would cease to grow.
130. The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would
lead to a long-run change
a. in the price level and real GDP.
b. in the price level, but not real GDP.
c. in real GDP, but not the price level.
d. in neither the price level nor real GDP.
132. The long-run aggregate supply curve shifts right if
a. immigration from abroad increases.
b. the capital stock increases.
c. technology advances.
d. All of the above are correct.
133. The long-run aggregate supply curve shifts left if
a. the capital stock increases.
b. there is a hurricane.
c. the government removes some environmental regulations that limit production methods.
d. None of the above is correct.
134. Which of the following shifts long-run aggregate supply right?
a. an increase in either the physical or human capital stock
b. an increase in the human but not the physical capital stock
c. an increase in the physical capital stock, but no the human capital stock
d. neither an increase in the physical capital stock or the human capital stock
135. Which of the following would shift the long-run aggregate supply curve to the right?
a. an increase in the actual price level
b. an increase in the money supply
c. increased international trade
d. None of the above is correct.
136. The long-run aggregate supply curve would shift right if the government were to
a. increase the minimum-wage.
b. make unemployment benefits more generous.
c. raise taxes on investment spending.
d. None of the above is correct.
137. Which of the following shifts the long-run aggregate supply curve to the left?
a. either an increase in the price of imported natural resources or opening up international trade
b. neither an increase in the price of imported natural resources or opening up international trade
c. an increase in the price of imported natural resources, but not opening up international trade
d. opening up international trade, but not an increase in the price of imported natural resources
139. The long-run aggregate supply curve shifts right if
a. technology improves.
b. the price level decreases.
c. the money supply increases.
d. All of the above are correct.
140. Which of the following would shift long-run aggregate supply to the right?
a. increased immigration from abroad
b. a decrease in the price of an imported natural resource
c. opening the economy to international trade
d. All of the above are correct.
142. In the long run, technological progress
a. and increases in the money supply both make the price level rise.
b. and increases in the money supply both make the price level fall.
c. makes the price level rise, while increases in the money supply make prices fall.
d. makes the price level fall, while increases in the money supply make prices rise.
143. Other things the same, if the long-run aggregate supply curve shifts right, prices
a. and output both increase.
b. and output both decrease.
c. increase and output decreases.
d. decrease and output increases.
144. Other things the same, if the long-run aggregate supply curve shifts left, prices
a. and output both increase.
b. and output both decrease.
c. increase and output decreases.
d. decrease and output increases.
145. According to the aggregate demand and aggregate supply model, in the long run an increase in the money
supply leads to
a. increases in both the price level and real GDP.
b. an increase in real GDP but does not change the price level.
c. an increase in the price level but does not change real GDP.
d. no change in either the price level or real GDP.
148. Which of the following, other things the same, would make the price level decrease and real GDP increase?
a. long-run aggregate supply shifts right
b. long-run aggregate supply shifts left
c. aggregate demand shifts right
d. aggregate demand shifts left
152. Other things the same, if workers and firms expected prices to rise by 2 percent but instead they rise by 3
percent, then
a. employment and production rise.
b. employment rises and production falls.
c. employment falls and production rises.
d. employment and production fall.
153. Other things the same, if prices fell when firms and workers were expecting them to rise, then
a. employment and production would rise.
b. employment would rise and production would fall.
c. employment would fall and production would rise.
d. employment and production would fall.
158. Other things the same, an unexpected fall in the price level results in some firms having
a. lower than desired prices which increases their sales.
b. lower than desired prices which depresses their sales.
c. higher than desired prices which increases their sales.
d. higher than desired prices which depresses their sales.
159. Other things the same, when the price level rises more than expected, some firms will have
a. higher than desired prices which increases their sales.
b. higher than desired prices which depresses their sales.
c. lower than desired prices which increases their sales.
d. lower than desired prices which depresses their sales.
169. Other things the same, the aggregate quantity of output supplied will decrease if the price level
a. is lower than expected so that firms believe the relative price of their output has increased.
b. is lower than expected so that firms believe the relative price of their output has decreased.
c. is higher than expected so that firms believe the relative price of their output has increased.
d. is higher than expected so that firms believe the relative price of their output has decreased.
170. Other things the same, the aggregate quantity of output supplied will increase if the price level
a. is lower than expected so that firms believe the relative price of their output has increased.
b. is lower than expected so that firms believe the relative price of their output has decreased.
c. is higher than expected so that firms believe the relative price of their output has increased.
d. is higher than expected so that firms believe the relative price of their output has decreased.
176. The effects of a higher than expected price level are shown by
a. shifting the short-run aggregate supply curve right.
b. shifting the short-run aggregate supply curve left.
c. moving to the right along a given aggregate supply curve.
d. moving to the left along a given aggregate supply curve.
177. An increase in the expected price level shifts short-run aggregate supply to the
a. right, and an increase in the actual price level shifts short-run aggregate supply to the right.
b. right, and an increase in the actual price level does not shift short-run aggregate supply.
c. left, and an increase in the actual price level shifts short-run aggregate supply to the left.
d. left, and an increase in the actual price level does not shift short-run aggregate supply.
178. A decrease in the expected price level would shift
a. only the long-run aggregate supply curve right.
b. only the short-run aggregate supply curve right.
c. both the short-run and the long-run aggregate supply curve right.
d. Neither the short-run nor the long-run aggregate supply curve right.
179. Which of the following shifts both the short-run and long-run aggregate supply right?
a. an increase in the actual price level
b. an increase in the expected price level
c. an increase in the capital stock
d. None of the above is correct.
180. Which of the following shifts both short-run and long-run aggregate supply left?
a. a decrease in the actual price level
b. a decrease in the expected price level
c. a decrease in the capital stock
d. a decrease in the money supply
181. Which of the following shifts short-run, but not long-run aggregate supply right?
a. a decrease in the actual price level
b. a decrease in the expected price level
c. a decrease in the capital stock
d. an increase in the money supply
182. Which of the following shifts short-run aggregate supply right?
a. an increase in the minimum wage
b. an increase in immigration from abroad
c. an increase in the price of oil
d. an increase in the actual price level
183. Which of the following shifts short-run aggregate supply left?
a. an increase in the actual price level
b. an increase in the expected price level
c. an increase in the capital stock
d. None of the above is correct.
184. Which of the following shifts short-run aggregate supply right?
a. an increase in the price level
b. an increase in the minimum wage
c. a decrease in the price of oil
d. more people migrate abroad than immigrate from abroad
185. Which of the following would shift the short-run aggregate supply curve to the right?
a. a decrease in the actual price level.
 b. an increase in the actual price level.
c. a decrease in the expected price level.
d. an increase in the expected price level.
186. The aggregate demand and aggregate supply model implies monetary neutrality
a. only in the short run.
b. only in the long run.
c. in both the short run and the long run.
d. in neither the short run nor long run.
2. Which of the following would cause prices and real GDP to rise in the short run?
a. Short-run aggregate supply shifts right.
b. Short-run aggregate supply shifts left.
c. Aggregate demand shifts right.
d. Aggregate demand shifts left.
3. Which of the following would cause prices to fall and output to rise in the short run?
a. Short-run aggregate supply shifts right.
b. Short-run aggregate supply shifts left.
c. Aggregate demand shifts right.
d. Aggregate demand shifts left.
4. Which of the following would cause prices and real GDP to rise in the short run?
a. an increase in the expected price level
b. an increase in the money supply
c. a decrease in the capital stock
d. None of the above is correct.
5. Which of the following would cause prices to rise and real GDP to fall in the short run?
a. an increase in the expected price level
b. an increase in the capital stock
c. an increase in the quantity of labor available
d. All of the above are correct.
6. Which of the following will reduce the price level and real output in the short run?
a. an increase in the money supply
b. an increase in oil prices
c. a decrease in the money supply
d. technical progress
7. Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with
sufficient speed and precision, they can offset the initial shift by shifting
a. aggregate supply right.
b. aggregate supply left.
c. aggregate demand right.
d. aggregate demand left.
8. If something caused resources to become more readily available, then
a. the price level and real GDP would rise.
b. the price level and real GDP would fall.
c. the price level would rise and real GDP would fall.
d. the price level would fall and real GDP would rise.
9. An economic contraction caused by a shift in aggregate demand remedies itself over time as the expected
price level
a. rises, shifting aggregate demand right.
b. rises, shifting aggregate demand left.
c. falls, shifting aggregate supply right.
d. falls, shifting aggregate supply left.
10. An economic contraction caused by a shift in aggregate demand causes prices to
a. rise in the short run, and rise even more in the long run.
 b. rise in the short run, and fall back to their original level in the long run.
c. fall in the short run, and fall even more in the long run.
d. fall in the short run, and rise back to their original level in the long run.
Consider the exhibit below for the following questions.
Figure 33-1
11. Refer to Figure 33-1. An increase in the money supply would move the economy from C to
a. B in the short run and the long run.
b. D in the short run and the long run.
c. B in the short run and A in the long run.
d. D in the short run and C in the long run.
12. Refer to Figure 33-1. If the economy starts at C, an increase in the money supply moves the economy
a. to A in the long run.
b. to B in the long run.
c. back to C in the long run.
d. to D in the long run.
13. Refer to Figure 33-1. If the economy is at A and there is a fall in aggregate demand, in the short run the
economy
a. stays at A.
b. moves to B.
c. moves to C.
d. moves to D.
14. Refer to Figure 33-1. If the economy starts at A and there is a fall in aggregate demand, the economy moves
a. back to A in the long run.
b. to B in the long run.
c. to C in the long run.
d. to D in the long run.
15. Refer to Figure 33-1. If the economy starts at A and moves to D in the short run, the economy
a. moves to A in the long run.
b. moves to B in the long run.
c. moves to C in the long run.
d. stays at D in the long run.
16. Refer to Figure 33-1. The economy would be moving to long-run equilibrium if it started at
a. A and moved to B.
b. C and moved to B.
c. D and moved to C.
d. None of the above is correct.
17. Refer to Figure 33-1. If the economy is in long-run equilibrium, then an adverse shift in aggregate supply
would move the economy from
a. A to B.
b. C to D.
c. B to A.
d. D to C.
18. Refer to Figure 33-1. In the short run, a favorable shift in aggregate supply would move the economy from
a. A to B.
b. B to C.
c. C to D.
d. D to A.
19. Suppose the economy is initially in long-run equilibrium and aggregate demand rises. In the long run prices
a. and output are higher than in the original long-run equilibrium.
b. and output are lower than in the original long-run equilibrium.
c. are higher and output is the same as the original long-run equilibrium.
d. are the same and output is lower than in the original long-run equilibrium.
20. The long-run effect of an increase in government spending is to raise
a. both real output and the price level.
b. real output and lower the price level.
c. real output and leave the price level unchanged.
d. the price level and leave real output unchanged.
47. An increase in the price level and a reduction in real GDP could be created by
a. a fall in stock prices.
b. natural disasters such as hurricanes and famines.
c. declining government expenditures.
d. tax rebates.
48. An increase in the price level and a decrease in real GDP in the short run could be created by
a. an increase in the money supply.
b. an increase in government expenditures.
c. a fall in stock prices.
d. bad weather in farm states.
49. A decrease in the availability of an important major resource such as oil shifts
a. aggregate supply right.
b. aggregate supply left.
c. aggregate demand right.
d. aggregate demand left.
54. When production costs rise,
a. the short-run aggregate supply curve shifts to the right.
b. the short-run aggregate supply curve shifts to the left.
c. the aggregate demand curve shifts to the right.
d. the aggregate demand curve shifts to the left.
55. In the short-run an increase in the costs of production makes
a. output and prices rise.
b. output rise and prices fall.
c. output fall and prices rise.
d. output and prices fall.
56. Which of the following shifts short-run aggregate supply left?
a. an increase in price expectations
b. an increase in the actual price level
c. a decrease in the money supply
d. a decrease in the price of oil
60. Suppose the economy is in long-run equilibrium. If there is a tax cut at the same time that major new
sources of oil are discovered in the country, then in the short-run we would expect
a. real GDP will rise and the price level might rise, fall, or stay the same.
b. real GDP will fall and the price level might rise, fall, or stay the same.
c. the price level will rise, and real GDP might rise, fall, or stay the same.
d. the price level will fall, and real GDP might rise, fall, or stay the same.
69. In 1986, OPEC countries increased their production of oil. This caused
a. the price level to rise.
b. aggregate supply to shift right.
c. unemployment to rise.
d. None of the above is correct.
70. In the mid-1970s the price of oil rose dramatically. This
a. shifted aggregate supply left.
b. caused U.S. prices to fall.
c. was the consequence of OPEC increasing oil production.
d. All of the above are correct.
71. The recessions of the 1970s are often attributed to
a. declining inflation expectations.
b. an increase in oil prices.
c. declines in the price of stock.
d. decreases in the money supply.
72. Changes in the price of oil
 a. can only lead to recessions.
b. have not contributed much to output fluctuations in the United States.
c. change the economy principally by changing aggregate demand.
d. created both inflation and recession in the United States in the 1970s.
Chapter 8. Inflation, unemployment and their short-run trade-off
8.1. Multiple choice questions
2. When the consumer price index rises, the typical family
a. has to spend more dollars to maintain the same standard of living.
b. can spend fewer dollars to maintain the same standard of living.
c. finds that its standard of living is not affected.
d. can offset the effects of rising prices by saving more.
3. The consumer price index is used to
a. track changes in the level of wholesale prices in the economy.
b. monitor changes in the cost of living.
c. monitor changes in the level of real GDP.
d. track changes in the stock market.
4. The consumer price index is used to
a. differentiate gross national product from net national product.
b. turn dollar figures into meaningful measures of purchasing power.
c. characterize the types of goods and services that consumers purchase.
d. measure the quantity of goods and services that the economy produces.
5. The term inflation is used to describe a situation in which
a. the overall level of prices in the economy is increasing.
b. incomes in the economy are increasing.
c. stock-market prices are rising.
d. the economy is growing rapidly.
6. Economists use the term inflation to describe a situation in which
a. some prices are rising faster than others.
b. the economy's overall price level is rising.
c. the economy's overall price level is high, but not necessarily rising.
d. the economy's overall output of goods and services is rising faster than the economy's overall price level.
7. When the overall level of prices in the economy is increasing, we say that the economy is experiencing
a. economic growth.
b. stagflation.
c. inflation.
d. deflation.
8. The inflation rate is defined as the
a. price level.
b. change in the price level from one period to the next.
c. percentage change in the price level from the previous period.
d. price level minus the price level from the previous period.
9. The economy's inflation rate is the
a. price level in the current period.
b. change in the price level from the previous period.
c. change in the gross domestic product from the previous period.
d. percentage change in the price level from the previous period.
10. The CPI is a measure of the overall cost of
a. inputs purchased by a typical producer.
b. goods and services bought by a typical consumer.
c. goods and services produced in the economy.
 d. stocks on the New York Stock Exchange.
11. Which of the following agencies calculates the CPI?
a. the National Price Board
b. the Department Of Weight and Measurements
c. the Bureau of Labor Statistics
d. the Congressional Budget Office
13. The CPI is calculated
a. weekly.
b. monthly.
c. quarterly.
d. yearly.
14. The CPI is calculated
a. monthly by the Department of Commerce.
b. monthly by the Bureau of Labor Statistics.
c. quarterly by the Department of Commerce.
d. quarterly by the Bureau of Labor Statistics.
15. What basket of goods is used to construct the CPI?
a. a random sample of all goods and services produced in the economy
b. the goods and services that are typically bought by consumers as determined by government surveys
c. only food, clothing, transportation, entertainment, and education
d. the least expensive and the most expensive goods and services in each major category of consumer
expenditures
16. In the calculation of the CPI, coffee is given greater weight than tea if
a. consumers buy more coffee than tea.
b. the price of coffee is higher than the price of tea.
c. it costs more to produce coffee than it costs to produce tea.
d. coffee is more readily available than is tea to the typical consumer.
17. In the CPI, goods and services are weighted according to
a. how long a market has existed for each good or service.
b. the extent to which each good or service is regarded by the government as a necessity.
c. how much consumers buy of each good or service.
d. the number of firms that produce and sell each good or service.
18. The steps involved in calculating the consumer price index, in order, are as follows:
a. Choose a base year, fix the basket, compute the inflation rate, compute the basket's cost, and compute
the index.
b. Choose a base year, find the prices, fix the basket, compute the basket's cost, and compute the index.
c. Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index.
d. Fix the basket, find the prices, compute the inflation rate, choose a base year and compute the index.
Table 24-1
Year Peaches Pecans
2005 $11 per bushel $6 per bushel
2006 $9 per bushel $10 per bushel
 19. Refer to Table 24-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels
of pecans. Using 2005 as the base year, the CPI for 2006 is
a. 100.
b. 120.
c. 200.
d. 240.
20. Refer to Table 24-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels
of pecans. Using 2005 as the base year, what was the inflation rate in 2006?
a. 20 percent
b. 16.7 percent
c. 10 percent
d. 8 percent
Table 24-2

Year Price of pork Price of corn

2005 $20 $12
2006 $25 $18

21.Refer to Table 24-2. Suppose the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn.
What is the consumer price index for 2006 if the base year is 2005?
a. 73.47
b. 109.22
c. 136.11
d. 150.00
22. Refer to Table 24-2. Suppose the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn.
What is the inflation rate for 2006 if the base year is 2005?
a. 21.33 percent
b. 25.00 percent
c. 28.89 percent
d. 36.11 percent
23. The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts and 2
pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each and pants cost
$10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each and
pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonia’s inflation rate in 2006?
a. 30 percent
b. 24.4 percent
c. 21.6 percent
d. It is impossible to determine without knowing the base year.
42. If this year the CPI is 125 and last year it was 120, then
a. the cost of the CPI basket of goods and services has increased this year by 4.17 percent.
b. the price level as measured by the CPI has increased by 4.17 percent.
c. the inflation rate for this year is 4.17 percent.
d. All of the above are correct.
43. If this year the CPI is 110 and last year it was 100, then
a. the cost of the CPI basket of goods and services has increased this year by 110 percent.
b. the price level as measured by the CPI has increased by 10 percent.
c. the inflation rate for this year has increased by 10 percent over last year’s inflation rate.
d. All of the above are correct.
44. If the consumer price index was 100 in the base year and 107 in the following year, the inflation rate was
a. 107 percent.
b. 10.7 percent.
c. 7 percent.
 d. 1.07 percent.
105. Recent changes in methods used to compute the CPI have made the
a. upward bias in the CPI inflation rate more severe than it used to be.
b. upward bias in the CPI inflation rate less severe than it used to be.
c. downward bias in the CPI inflation rate more severe than it used to be.
d. downward bias in the CPI inflation rate less severe than it used to be.
106. The measurement problems in the consumer price index as an indicator of the cost of living are important
because
a. even the appearance of high rates of inflation cause voters to become disenchanted.
b. politicians have manipulated the measurement problems to their advantage.
c. many government programs use the CPI to adjust for changes in the overall level of prices.
d. if the price level is overstated, consumers will be taken advantage of by sellers of consumer goods.
107. The GDP deflator reflects the
a. level of prices in the base year relative to the current level of prices.
b. current level of prices relative to the level of prices in the base year.
c. level of real output in the base year relative to the current level of real output.
d. current level of real output relative to the level of real output in the base year.
110. An increase in the price of domestically-produced industrial robots will be reflected in
a. both the GDP deflator and the consumer price index.
b. neither the GDP deflator nor the consumer price index.
c. the GDP deflator but not in the consumer price index.
d. the consumer price index but not in the GDP deflator.
111. By itself, a reduction in the price of large tractors imported into the United States from Russia
a. decreases the GDP deflator and increases the consumer price index.
b. increases the GDP deflator but leaves the consumer price index unchanged.
c. increases both the GDP deflator and the consumer price index.
d. leaves both the GDP deflator and the consumer price index unchanged.
1. Inflation can be measured by the
a. change in the consumer price index.
b. percentage change in the consumer price index.
c. percentage change in the price of a specific commodity.
d. change in the price of a specific commodity.
13. The classical theory of inflation
a. is also known as the quantity theory of money.
b. was developed by some of the earliest economic thinkers.
c. is used by most modern economists to explain the long-run determinants of the inflation rate.
d. All of the above are correct.
16. As the price level decreases, the value of money
a. increases, so people want to hold more of it.
b. increases, so people want to hold less of it.
c. decreases, so people want to hold more of it.
d. decreases, so people want to hold less of it.
25. When the money market is drawn with the value of money on the vertical axis, as the price level increases
the quantity of money
a. demanded increases.
b. demanded decreases.
c. supplied increases.
d. supplied decreases.
1. The natural rate of unemployment is the
a. unemployment rate that would prevail with zero inflation.
b. rate associated with the highest possible level of GDP.
c. difference between the long-run and short-run unemployment rates.
 d. amount of unemployment that the economy normally experiences.
2. Cyclical unemployment refers to
a. the relation between the probability of unemployment and a worker's changing level of experience.
b. how often a worker is likely to be employed during her lifetime.
c. year-to-year fluctuations of unemployment around its natural rate.
d. long-term trends in unemployment.
3. Cyclical unemployment is closely associated with
a. long-term economic growth.
b. short-run ups and downs of the economy.
c. fluctuations in the natural rate of unemployment.
d. changes in the minimum wage.
4. The natural rate of unemployment is the economist's notion of
a. full employment.
b. cyclical employment.
c. structural unemployment.
d. frictional unemployment.
5. The natural rate of unemployment
a. is a constant.
b. is the desirable rate of unemployment.
c. cannot be altered by economic policy.
d. None of the above is correct.
6. The natural rate of unemployment
a. refers mostly to unemployment created by the cyclical fluctuations in real GDP.
b. cannot be changed by government policy.
c. varies over time.
d. is the optimal rate of unemployment in an economy.
7. Which of the following is correct?
a. Some degree of unemployment is inevitable.
b. Other things the same an increase in the number of people who are unemployed is associated with a
decrease in real GDP.
c. Cyclical unemployment is inversely related to short-run economic fluctuations in GDP.
d. All of the above are correct.
13. The labor force equals the
a. number of people who are employed.
b. number of people who are unemployed.
c. number of people employed plus the number of people unemployed.
d. adult population.
14. The labor force
a. equals the number of people employed.
b. equals the number of people employed plus the number of people unemployed.
c. equals the non-institutionalized adult population.
d. equals the number of people employed plus the number of people cyclically unemployed.
19. Which of the following would be counted as unemployed according to official statistics?
a. George, a full-time student who is not looking for work
b. Jenna, who is on temporary layoff
c. Larry, who has retired and is not looking for work
d. All of the above would be counted as unemployed.
20. Sam just lost his job, but isn't yet looking for a new one. Sam is
a. counted as unemployed and part of the labor force.
b. counted as unemployed, but not part of the labor force.
c. not counted as unemployed, but counted as part of the labor force.
d. not counted as unemployed or counted as part of the labor force.
 21. Who would not be included in the labor force?
a. Sally, who is on temporary layoff
b. Sue, who has retired and is not looking for work
c. Kylie, who does not have a job, but has applied for several in the last week
d. None of the above is included in the labor force.
22. Who would be included in the labor force?
a. Dakota, an unpaid homemaker not looking for other work
b. Brad, a full-time student not looking for work
c. Maggie, who does not have a job, but is looking for work
d. None of the above is included in the labor force.
23. Who would be included in the labor force?
a. Karen, who works most of the week in a steel factory
b. Beth, who is waiting for her new job at the bank to start
c. Dave, who does not have a job, but is looking for work
d. All of the above are included in the labor force.
24. Who would be included in the labor force?
a. Homer, who is waiting for his new job to start
b. Michelle, who has become discouraged looking for a job and has quit looking for awhile
c. Derrick, an unpaid homemaker
d. None of the above would be included in the labor force.
Labor Stats
The Labor Market
This table shows the 2003 data for males and females ages 16 and over in the imaginary country of Meditor.
Not in labor Unemployed Employed
force
male 45 million 5 million 85 million
female 35 million 5 million 65 million
36.Refer to Labor Stats. What is the adult population in Meditor?
a. 90 million
b. 150 million
c. 160 million
d. 240 million
37. Refer to Labor Stats. What is the adult labor force in Meditor?
a. 90 million
b. 150 million
c. 160 million
d. 240 million
38. Refer to Labor Stats. What is the adult unemployment rate in Meditor?
a. 4.12%
b. 6.25%
c. 11.11%
d. 12.50%
39. Refer to Labor Stats. What is the adult labor-force participation rate in Meditor?
a. 4.12%
b. 12.50%
c. 37.50%
d. 66.67%
40. Refer to Labor Stats. What is the adult female population in Meditor?
a. 35 million
b. 40 million
c. 70 million
d. 105 million
 41. Refer to Labor Stats. What is the adult male population in Meditor?
a. 85 million
b. 120 million
c. 135 million
d. 240 million
42. Refer to Labor Stats. What is the adult female labor force in Meditor?
a. 35 million
b. 40 million
c. 70 million
d. 105 million
43. Refer to Labor Stats. What is the adult male labor force in Meditor?
a. 85 million
b. 90 million
c. 120 million
d. 135 million
44. Refer to Labor Stats. What is the adult female unemployment rate in Meditor?
a. 4.76%
b. 7.14%
c. 7.69%
d. 14.29%
45. Refer to Labor Stats. What is the adult male unemployment rate in Meditor?
a. 3.70%
b. 4.00%
c. 5.56%
d. 5.88%
46. Refer to Labor Stats. What is the adult female labor-force participation rate in Meditor?
a. 4.76%
b. 38.10%
c. 66.67%
d. 80.95%
47. Refer to Labor Stats. What is the adult male labor-force participation rate in Meditor?
a. 7.40%
b. 33.33%
c. 37.03%
d. 66.67%
197. The minimum wage
a. creates frictional unemployment. Efficiency wages create structural unemployment.
b. creates structural unemployment. Efficiency wages create frictional unemployment.
c. and efficiency wages both create structural unemployment.
d. and efficiency wages both create frictional unemployment.
6. In the long run, the inflation rate depends primarily on
a. the ability of unions to raise wages.
b. government spending.
c. the money supply growth rate.
d. the monopoly power of firms.
8. There is a
a. short-run tradeoff between inflation and unemployment.
b. short-run tradeoff between the actual unemployment rate and the natural rate of unemployment.
c. long-run tradeoff between inflation and unemployment.
d. long-run tradeoff between the actual unemployment rate and the natural rate of unemployment.
9. If policymakers decrease aggregate demand, the price level
a. falls, but unemployment rises.
 b. and unemployment fall.
c. and unemployment rise.
d. rises, but unemployment falls.
12. If the government raises government expenditures, in the short run, prices
a. rise and unemployment falls.
b. fall and unemployment rises.
c. and unemployment rise.
d. and unemployment fall.
13. If the central bank increases the money supply, in the short run, prices
a. rise and unemployment falls.
b. fall and unemployment rises.
c. and unemployment rise.
d. and unemployment fall.
14. Unemployment would decrease and prices increase if
a. aggregate demand shifted right.
b. aggregate demand shifted left.
c. aggregate supply shifted right.
d. aggregate supply shifted left.
20. Phillips found a
a. positive relation between unemployment and inflation in the United Kingdom.
b. positive relation between unemployment and inflation in the United States.
c. negative relation between unemployment and inflation in the United States.
d. negative relation between unemployment and inflation in the United Kingdom.
21. Phillips found a negative relation between
a. output and unemployment.
b. output and employment.
c. wage inflation and output.
d. wage inflation and unemployment.
22. A. W. Phillips' findings were based on data
a. from 1861-1957 for the United Kingdom.
b. from 1861-1957 for the United States.
c. mostly from the post-World War II period in the United Kingdom.
d. mostly from the post-World War II period in the United States.
58. Which of the following is downward sloping?
a. both the long-run Phillips curve and the short-run Phillips curve
b. neither the long-run Phillips curve nor the short-run Phillips curve
c. the long-run Phillips curve, but not the short-run Phillips curve
d. the short-run Phillips curve, but not the long-run Phillips curve
59. Which of the following is upward sloping?
a. both the long-run Phillips curve and the long-run aggregate supply curve
b. neither the long-run Phillips curve nor the long-run aggregate supply curve
c. the long-run Phillips curve, but not the long-run aggregate supply curve
d. the short-run Phillips curve, but not the long-run aggregate supply curve
66. How would a decrease in the natural rate of unemployment affect the long-run Phillips curve?
a. It would shift the long-run Phillips curve right.
b. It would shift the long-run Phillips curve left.
c. There would be an upward movement along a given long-run Phillips curve.
d. There would be a downward movement along a given long-run Philips curve.
67. Which of the following would shift the long-run Phillips curve right?
a. expansionary fiscal policy.
b. an increase in the inflation rate.
c. increases in unemployment compensation.
 d. None of the above is correct.
72. If the long-run Phillips curve shifts to the right, for any given rate of money growth and inflation the
economy will have
a. higher unemployment and lower output.
b. higher unemployment and higher output.
c. lower unemployment and lower output.
d. lower unemployment and higher output.
73. If the long-run Phillips curve shifts to the left, for any given rate of money growth and inflation the economy
will have
a. higher unemployment and lower output.
b. higher unemployment and higher output.
c. lower unemployment and lower output.
d. lower unemployment and higher output.
74. If the minimum wage increased, then at any given rate of inflation
a. both output and employment would be higher.
b. neither output nor employment would be higher.
c. output would be higher and unemployment would be lower.
d. output would be lower and unemployment would be higher.