The following multiple-choice questions are extracted from CourseMate, Principles of

Economics by Mankiw; available when you register through http://login.cengage.com.

Chapter 31 Open-Economy Macroeconomics: Basic Concepts

1. Improvements in transportation help to explain the increase in both U.S. imports and exports relative to
GDP.
a.
b.

True
False

2. Net capital outflow equals net exports.

a.
b.

True
False

3. An open economy can only finance its investment purchases with domestic saving.
a.
b.

True
False

4. Purchasing-power parity means that the prices of goods in terms of local currencies must be the same
across countries.
a.
b.

True
False

5. A country buys $560 billion of goods and services abroad and sells $610 billion of goods and services
abroad. Its exports are
a.
b.
c.
d.

$560 billion and it has a trade surplus of $50 billion.

$560 billion and it has trade deficit of $50 billion.
$610 billion and it has a trade deficit of $50 billion.
$610 billion and it has a trade surplus of $50 billion

6. A mutual fund in China buys $100,000 of bonds sold by a U.S. corporation. This is an example of
a.
b.
c.
d.

foreign portfolio investment. By itself it raises U.S. net capital outflow.

foreign portfolio investment. By itself it reduces U.S. net capital outflow.
foreign direct investment. By itself it reduces U.S. net capital outflow.
foreign direct investment. By itself it raises U.S. net capital outflow.

7. A U.S. retail store uses dollars to purchase yuan (Chinese currency) it then uses all of these yuan to buy
toys from a Chinese firm. Overall these transactions have
a.
b.
c.
d.

increased U.S. net exports and increased U.S. net capital outflow.
increased U.S. net exports and decreased U.S. net capital outflow.
decreased U.S. net exports and decreased U.S. net capital outflow.
decreased U.S. net exports and increased U.S. net capital outflow.

8. If a country's real GDP is 10,000, its consumption is 6,500, its government expenditures are 2,000 and its
net exports are 500 what are saving and net capital outflow?
a.
b.
c.
d.

1500, 500
1000, 500
1000, -500
1500, -500

9. Other things the same, if the U.S. dollar appreciates, then U.S. goods become
a.
b.
c.
d.

cheaper relative to foreign goods, so U.S. net exports increase.

cheaper relative to foreign goods, so U.S. net exports decrease.
more expensive relative to foreign goods, so U.S. net exports decrease.
more expensive relative to foreign goods, so U.S. net exports increase.

10. Which of the following is the correct way to find the real exchange rate?
a.
b.
c.
d.

11. In which of the following cases does purchasing-power parity hold?

a.
b.
c.
d.

the nominal exchange rate is 6 bolovinos per dollar, the price in Bolivia is 1/2 bolovinos, and the price
in the U.S. is $3
the nominal exchange rate is 1.5 reals per dollar, the price in Brazil is 1/2 reals, and the price in the
U.S. is $3
the nominal exchange rate is 12 pesos per dollar, the price in Mexico is 36 pesos, and the price in the
U.S. is $3
None of these choices are correct.

12. If the U.S. inflation rate is positive and higher than the inflation rate in Australia over the next few years
then
a.
b.
c.
d.

the U.S. dollar will buy more goods in the U.S. and buy more Australian dollars in the market for
foreign currency exchange.
the U.S. dollar will buy fewer goods in the U.S. and buy fewer Australian dollars in the market for
foreign currency exchange.
the U.S. dollar will buy more goods in the U.S. but buy fewer Australian dollars in the market for
foreign currency exchange.
the U.S. dollar will buy fewer goods in the U.S. but buy more Australian dollars in the market for
foreign currency exchange.

Chapter 33 Aggregate Demand and Aggregate Supply

1. Short-run fluctuations in output and the price level should be viewed as deviations from the continuing
long-run trends of output growth and inflation.
a.
b.

True
False

2. An increase in the price level shifts the long-run aggregate supply curve to the right.
a.
b.

True
False

3. The recession of 2008-2009 was associated with a decrease in aggregate demand.

a.
b.

True
False

4. If the short-run aggregate supply curve were to shift left, prices and output would fall.
a.
b.

True
False

5. During recessions
a.
b.
c.
d.

unemployment falls and a decline in investment accounts for the majority of the decline in output.
unemployment rises and a decline in consumption accounts for the majority of the decline in output.
unemployment rises and a decline in investment accounts for the majority of the decline in output.
unemployment falls and a decline in consumption accounts for the majority of the decline in output.

6. The variable on the vertical axis of the aggregate demand and aggregate supply model
a.
b.
c.
d.

is a nominal variable. The variable on the horizontal axis is a real variable.

is a real variable. So is the variable on the horizontal axis.
is a real variable. The variable on the horizontal axis is a nominal variable.
is a nominal variable. So is the variable on the horizontal axis.

7. Which of the following is a reason the aggregate demand curve slopes downward?
a.
b.
c.
d.

As the price level falls, the interest rate falls so U.S. savers will choose to buy more assets abroad. This
increase in net capital outflow causes the exchange rate to fall. The decrease in the exchange rate
makes U.S. goods less expensive compared to foreign goods and so net exports rise.
As the price level falls, wealth rises, so consumers desire to spend more.
As the price level falls, households demand less money, so the interest rate falls. As the interest rate
falls spending by firms and households rise.
All of these choices are correct.

8. Which of the following would shift the aggregate demand curve to the right?
a.
b.
c.
d.

A decline in stock prices.

A rise in the interest rate due to a decrease in the money supply.
High growth of output in foreign economies.
A decrease in the price level.

9. Which of the following shifts the long-run aggregate supply curve to the right?
a.
b.
c.
d.

technological progress but not an increase in human capital

neither technological progress nor an increase in human capital
an increase in human capital but not an increase in technological progress
both technological progress and an increase in human capital

10. If some firms have sticky prices and the price level rises more than had been anticipated, then in the
short run those firms with sticky prices will have
a.
b.
c.
d.

decrease in customers but will not change production.

an increase in customers but will not change production.
an increase in customers and so increase production.
a decrease in customers and so reduce production.

11. If firms and businesses became more optimistic about the future, what would happen to prices and
output in the short run?
a.
b.
c.
d.

prices would rise and output would fall

prices and output would fall
prices would fall and output would rise
prices and output would rise

12. If the long-run aggregate supply curve was unchanged, but prices and output fell, how would the
economy move back to long-run equilibrium?
a.
b.
c.
d.

the aggregate demand curve would shift left

the short-run aggregate supply curve would shift left
the short-run aggregate supply curve would shift right
the aggregate demand curve would shift right

Chapter 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand

1. An increase in the interest rate increases the opportunity cost of holding money, so the quantity of
money demanded falls.
a.
b.

True
False

2. Other things the same, an increase in the money supply causes the interest rate to rise to balance
money supply and money demand.
a.
b.

True
False

3. When the Fed announces a target for the federal funds rate it essentially accommodates the day-to-day
shifts in money demand by adjusting the money supply accordingly.
a.
b.

True
False

4. If households view a tax cut as temporary it will have a larger effect on their spending than if they view it
as permanent.
a.
b.

True
False

5. Other things the same, an increase in the price level shifts money demand
a.
b.
c.
d.

left which raises the interest rate.

right which lowers the interest rate.
left which lowers the interest rate.
right which raises the interest rate.

6. Other things the same, if the Fed increases the money supply, the interest rate
a.
b.
c.
d.

falls so aggregate demand shifts right.

rises so aggregate demand shifts left.
falls so aggregate demand shifts left.
rises so aggregate demand shifts right.

7. A stock market boom would shift the aggregate demand curve to the
a.
b.
c.
d.

left. To offset this change, the Fed could increase the money supply.
right. To offset this change, the Fed could decrease the money supply.
left. To offset this change, the Fed could decrease the money supply.
right. To offset this change, the Fed could increase the money supply.

8. If the government increases expenditures by $200 billion dollars, the MPC = .80 and there are no
crowding out effects, in which direction and by how far does the aggregate demand curve shift?
a.
b.
c.
d.

it shifts right by $360 billion.

it shifts left by $1,000 billion.
it shifts right by $1000 billion.
it shifts left by $360 billion.

9. An increase in government expenditures causes money demand to

a.
b.
c.
d.

shift left which raises the interest rate.

shift right which reduces the interest rate.
shift left which reduces the interest rate.
shift right which raises the interest rate.

10. Suppose that the marginal propensity to consume is .60, taxes decrease $600 billion dollars and that
the crowding-out effect is $400 billion. By how much does the aggregate demand curve shift?
a.
b.
c.
d.

$500 billion
$600 billion
$200 billion
$1100 billion

11. If consumers and businesses became more pessimistic about the future of the economy, the
government could try to stabilize output by
a.
b.
c.
d.

increasing government expenditures. The primary objection to this is that an increase in government
expenditures have no impact on the economy.
increasing government expenditures. The primary objection to this is that there are lags in
implementing fiscal policy.
decreasing government expenditures. The primary objection to this is that an increase in government
expenditures have no impact on the economy.
decreasing government expenditures. The primary objection to this is that there are lags in
implementing fiscal policy.

12. During recessions tax revenues

a.
b.
c.
d.

fall, which increases the magnitude of economic fluctuations.

rise, which reduces the magnitude of economic fluctuations.
fall, which reduces the magnitude of economic fluctuations.
rise, which increases the magnitude of economic fluctuations.

Chapter 35 The Short-Run Tradeoff between Inflation and Unemployment

1. The long-run Phillips curve implies that monetary policy influences nominal but not real variables.
a.
b.

True
False

2. According to Friedman and Phelps it is appropriate to view the Phillips curve as a menu of options
available to policymakers.
a.
b.

True
False

3. In the United States during the 1970's, expected inflation rose substantially. This rise was due entirely to
a supply shock not to higher money supply growth.
a.
b.

True
False

4. According to rational expectations if the government made a credible commitment to a policy of low
inflation, people would be rational enough to lower their expectations of inflation immediately. The short
run Phillips curve would shift downward and the economy would reach low inflation quickly.
a.
b.

True
False

5. If aggregate demand shifts right farther than expected, then

a.
b.
c.
d.

inflation is higher than expected and unemployment falls.

inflation is lower than expected and unemployment falls.
inflation is higher than expected and unemployment rises.
inflation is lower than expected and unemployment rises.

6. Classical theory points to money supply growth as the primary determinant of

a.
b.
c.
d.

neither inflation nor unemployment.

unemployment but not inflation.
inflation but not unemployment.
both unemployment and inflation.

7. According to the long-run Phillips curve what are the long-run effects of an increase in the money supply
growth rate?
a.
b.
c.
d.

no change in inflation or unemployment.

higher inflation and no change in unemployment.
higher inflation and lower unemployment
higher inflation and higher unemployment.

8. Which of the following decreases the natural rate of unemployment?

a.
b.
c.
d.

neither an increase in the money supply growth rate nor a decrease in the minimum wage
a decrease in the minimum wage and an increase in the money supply growth rate
an increase in the money supply growth rate but not a decrease in the minimum wage
a decrease in the minimum wage but not an increase in the money supply growth rate

9. Which of the following shift the short-run Phillips curve right?

a.
b.
c.
d.

neither an increase in expected inflation nor an adverse supply shock

an increase in expected inflation but not an adverse supply shock
an adverse supply shock but not an increase in expected inflation
both an increase in expected inflation and an adverse supply shock

10. If a decrease in the money supply growth rate reduced inflation by 3 percentage points but also
reduced output by 4 percentage points in each of two years, then the sacrifice ratio would be
a.
b.
c.
d.

8/3
3/4
4/3
3/8

11. The cost of the Volcker deflation was

a.
b.
c.
d.

well above zero and greater than what many economists had predicted.
well above zero, but less than many economists had predicted.
well above zero and about what many economists had predicted.
near zero.

12. During the financial crisis and recession of 2008-2009

a.
b.
c.
d.

unemployment and inflation were high

unemployment was low and inflation was high
unemployment was high and inflation was low
unemployment and inflation were low

Ans.
Ch. 31
Ch. 33
Ch. 34
Ch. 35

Q1
A
A
A
A

Q2
A
B
B
B

Q3
B
A
A
B

Q4
B
B
B
A

Q5
D
C
D
A

Q6
B
A
A
C

Q7
C
D
B
B

Q8
A
C
C
D

Q9
C
D
D
D

Q10
D
C
A
A

Q11
C
D
B
B

Q12
B
C
C
C