Final Macro 2

Chapter 22
Measuring a Nation’s Income

Test A
i. Macroeconomics is the study of
a. market regulation.
b. money and financial markets.
c. economy-wide phenomena.
d. how households and firms make decisions and how they interact.
ANSWER: c. economy-wide phenomena.
TYPE: M SECTION: INT OBJECTIVE: RANDOM: Y
ii.For the economy as a whole

a. expenditure exceeds income because of taxes.
b. income must equal expenditure.
c. income exceeds expenditure because of saving.
d. expenditure exceeds income because of the government budget deficit.
ANSWER: b. income must equal expenditure.
TYPE: M SECTION: 1 OBJECTIVE: 1 RANDOM: Y
iii.
A circular-flow diagram is used to describe
a. how banks create money.
b. how weather patterns affect the economy.
c. the most efficient organization of the work process.
d. the flow of income and expenditures in an economy.
ANSWER: d. the flow of income and expenditures in an economy.
iv.Gross Domestic Product is defined as the market value of

a. all final goods and services produced by a country’s citizens in a given period of time.
b. every good and service produced within a country in a given period of time.
c. all final goods and services produced within a country in a given period of time.
d. all goods and services produced by a country’s citizens in a given period of time.
ANSWER: c. all final goods and services produced within a country in a given period of time.
v. Goods and services produced and sold illegally are

a. excluded from GDP.
b. included in GDP.
c. included in GDP only if income from the sales is reported on income tax returns.
d. included in GDP to the extent that they can be measured.
ANSWER: a. excluded from GDP.
vi.Latrell decides to hire Cynthia to mow his lawn, instead of mowing it himself, as he is
accustomed to doing. As a result of this transaction, GDP
a. will decrease.
b. will increase.
c. will be unaffected because the same service would be performed in either case.
d. could increase or decrease, depending on whether Cynthia mows Latrell’s lawn as well as
Latrell could mow it himself.
ANSWER: b. will increase.
vii. The value of intermediate goods that are sold is
a. not added to GDP.
b. added to GDP if they were produced in a previous year.
c. added to GDP if they were produced and sold in the current year.
d. added to GDP unless they are sold at a loss.
ANSWER: a. not added to GDP.
viii. An American company owns a fast-food store in Lima, Peru. The value of the goods and services
produced in the store are included
a. in both Peruvian GDP and U.S. GDP.
b. in Peruvian GDP, but not U.S. GDP.
c. in U.S. GDP, but not Peruvian GDP.
d. partly in Peruvian GDP and partly in U.S. GDP.
ANSWER: b. in Peruvian GDP, but not U.S. GDP.
ix.National income is defined as

a. all income produced within a country.
b. the income received by the national government.
c. the total income earned by a nation’s residents from the production of goods and services
within the borders of the country.
d. the total income earned by a nation’s residents in the production of goods and services.
ANSWER: d. the total income earned by a nation’s residents in the production of goods and services.
x. The government reports that GDP “increased by 2 percent in the last quarter.”
a. GDP increased by 10 percent for the year.
b. GDP increased at an annual rate of 2 percent during the last quarter.
c. GDP increased at an annual rate of 8 percent during the last quarter.
d. GDP increased at an annual rate of .5 percent during the last quarter.
ANSWER: c. GDP increased at an annual rate of 8 percent during the last quarter.
xi.The four components of GDP are consumption,

a. money supply, government purchases, and exports.
b. investment, transfer payments, and imports.
c. investment, government purchases, and net exports.
d. investment, government purchases, and foreign exchange.
ANSWER: c. investment, government purchases, and net exports.
xii. In macroeconomics, investment is spending on

a. real estate and financial assets.
b. capital equipment, inventories, and structures, including new housing.
c. stocks, bonds, and other financial assets.
d. capital equipment, inventories, and structures, excluding household purchases of new
housing.
ANSWER: b. capital equipment, inventories, and structures, including new housing.
xiii. Government purchases include spending on goods and services by
a. local, state and federal governments.
b. the federal government only.
c. local and state governments, but not the federal government.
d. state and federal governments only.
ANSWER: a. local, state, and federal governments.
xiv. If exports are smaller than imports, net exports

a. are positive.
b. are negative.
c. will increase GDP.
d. are larger than imports.
ANSWER: b. are negative.
xv. Transfer payments are

a. included in GDP because they represent income to individuals.
b. not included in GDP unless they represent unemployment compensation.
c. included in GDP because the income will be spent for consumption.
d. not included in GDP because they do not represent payments for currently produced goods
or services.
ANSWER: d. not included in GDP because they do not represent payments for currently produced
goods or services.
xvi. In 1998, U.S. GDP was about

a. $85 trillion.
b. $8.5 trillion.
c. $850 billion.
d. $85 billion.
ANSWER: b. $8.5 trillion.
xvii. If total spending rises from one year to the next, then
a. net exports must be falling.
b. prices at which goods and services are sold must be higher.
c. the economy must be producing a larger output of goods and services.
d. 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.
ANSWER: d. 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.
xviii. The best measure of a country’s production of goods and services is

a. real GDP.
b. real NNP.
c. nominal GDP.
d. nominal GNP.
ANSWER: a. real GDP.
xix. Real GDP is the production of goods and services valued at
a. current year prices.
b. future year prices.
c. constant prices.
d. the ratio of current year prices to constant year prices.
ANSWER: c. constant prices.
xx. The GDP deflator is the ratio of

a. nominal GDP to real GDP.
b. real GDP to nominal GDP.
c. nominal GDP to real GDP multiplied by 100.
d. real GDP to nominal GDP multiplied by 100.
ANSWER: c. nominal GDP to real GDP multiplied by 100.
xxi. If the GDP deflator is 150 and nominal GDP is $9,000 billion, then real GDP is
a. $135 billion.
b. $1,350 billion.
c. $600 billion.
d. $6,000 billion.
ANSWER: d. $6,000 billion.
xxii. If the GDP deflator was 100 in the base year of 2000, and was 105 in 2002, we can say that
a. the price level increased by 5 percent from 2000 to 2002.
b. the price level increased by 105 percent from 2000 to 2002.
c. the price level increased by 205 percent from 2000 to 2002.
d. we cannot judge price increases from changes in the GDP deflator.
ANSWER: a. the price level increased by 5 percent from 2000 to 2002.
xxiii.GDP is used as the basic measure of a society’s economic well-being. A better measure of the
economic well-being of individuals in society is
a. the consumption component of GDP.
b. GDP per person.
c. government expenditures per person.
d. the level of business investment.
ANSWER: b. GDP per person.
xxiv.GDP per person is not a perfect measure of the well-being of individuals in society because it
excludes
a. the role of government.
b. the value of investment in real capital.
c. the value of money.
d. things like leisure time, the value of goods and services produced at home, and
environmental quality.
ANSWER: d. things like leisure time, the value of goods and services produced at home, and
xxv. International studies of the relationship between GDP per person and quality of life measures,
such as life expectancy and literacy rates show that larger GDP per person is associated with
a. longer life expectancy and higher levels of illiteracy.
b. shorter life expectancy and higher levels of illiteracy.
c. longer life expectancy and lower levels of illiteracy.
d. shorter life expectancy and lower levels of illiteracy.
ANSWER: c. longer life expectancy and lower levels of illiteracy.
i ANSWER: c. economy-wide phenomena.

ii ANSWER: b. income must equal expenditure.

iii ANSWER: d. the flow of income and expenditures in an economy.

iv ANSWER: c. all final goods and services produced within a country in a given period of time.
v ANSWER: a. excluded from GDP.

vi ANSWER: b. will increase.

vii ANSWER: a. not added to GDP.

viii ANSWER: b. in Peruvian GDP, but not U.S. GDP.

ix ANSWER: d. the total income earned by a nation’s residents in the production of goods and
services.
x ANSWER: c. GDP increased at an annual rate of 8 percent during the last quarter.
xi ANSWER: c. investment, government purchases, and net exports.

xii ANSWER: b. capital equipment, inventories, and structures, including new housing.
xiii ANSWER: a. local, state, and federal governments.

xiv ANSWER: b. are negative.

xv ANSWER: d. not included in GDP because they do not represent payments for currently
produced goods or services.
xvi ANSWER: b. $8.5 trillion.

xvii ANSWER: d. 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.
xviii ANSWER: a. real GDP.

xix ANSWER: c. constant prices.

xx ANSWER: c. nominal GDP to real GDP multiplied by 100.

xxi ANSWER: d. $6,000 billion.

xxii ANSWER: a. the price level increased by 5 percent from 2000 to 2002.
xxiii ANSWER: b. GDP per person.

xxiv ANSWER: d. things like leisure time, the value of goods and services produced at home, and
xxv ANSWER: c. longer life expectancy and lower levels of illiteracy.
Chapter 22
Measuring a Nation’s Income
Test B
xxv. Microeconomics is the study of
a. the government and its role in the economy.
b. how households and firms make decisions, and how they interact in markets.
c. economy-wide topics such as inflation, unemployment and economic growth.
d. economics as if you were looking at the economy with a telescope to get the big picture.
ANSWER: b. how households and firms make decisions, and how they interact in markets.
xxv. GDP can measures both an economy’s total income and total expenditure because they are
a. always equal because rules in accounting always make things equal.
b. equal only when all goods and services produced are sold.
c. equal because only households purchase goods and services.
d. always equal since every transaction has both a buyer and a seller.
ANSWER: d. always equal since every transaction has both a buyer and a seller.
xxv. Which of the following represents GDP?

a. C + I + G
b. G + I + NX
c. I + C + NX
d. C + I + G + NX
ANSWER: d. C + I + G + NX
NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON-LINE QUIZZES. YOUR
STUDENTS MAY HAVE ALREADY SEEN THIS QUESTION AND ITS ANSWER.
xxv. Which of the following would be counted in the calculation of GDP?

a. the sale of a rare coin to a coin collector
b. homes that are rebuilt after being completely destroyed by a hurricane
c. the sale of a 1966 Ford Fairmont.
d. the sale of cocaine in the black market.
ANSWER: b. homes that are rebuilt after being completely destroyed by a hurricane
xxv. Aaron and Adam, who are both full-time students, have each been doing work on their own
cars. Then Adam decides to hire Aaron to do his oil changes, and in turn, Aaron hires Adam to
keep his car clean. As a result of this change, GDP
a. rises.
b. falls.
c. is unaffected because the same work is being done as before.
d. is unaffected because Adam and Aaron are full-time students.
ANSWER: a. rises.
xxv. The largest component of GDP is

a. net exports.
b. consumption.
c. government purchases.
d. investment.
ANSWER: b. consumption.
xxv. If the value of intermediate goods were used to calculate GDP instead of final goods, then GDP
would be
a. over-estimated, because of double counting.
b. under-estimated because of all the goods and services missed in the calculations.
c. too difficult to measure because of all the goods and services produced in the economy each
year.
d. the same, since it doesn’t matter whether intermediate goods or final goods are used in the
calculations.
ANSWER: a. over-estimated, because of double counting.
xxv. Jim buys a new Mustang in August 1999 and then sells it to John in June 2001. As a result,
a. the value of the car will be included in 2001 GDP only, since that was the year of the last
sale.
b. 1999 GDP will include the value of the car, and 2001 GDP will include the value of the car
minus depreciation.
c. 1999 GDP will include the value of the car, but 2001 GDP will not.
d. both 1999 GDP and 2001 GDP will include the value of the car since it was sold in both
years.
ANSWER: c. 1999 GDP will include the value of the car, but 2001 GDP will not.
xxv. Which two of the following are considered measures of income for an economy?
a. gross national product and net national product
b. net national profits and personal income
c. gross national product and net national investment
d. disposable personal income and personal profits
ANSWER: a. gross national product and net national product
xxv. Personal income is defined as
a. after-tax proprietors’ income.
b. the total income earned by a nation’s permanent residents.
c. the income that households and non-corporate businesses receive.
d. the total income earned by a nation’s residents minus depreciation.
ANSWER: b. the total income earned by a nation’s permanent residents.
xxv.
Retained earnings are the part of income that
a. households retain after paying taxes.
b. business retain after paying taxes.
c. corporations pay to their owners in the form of dividends.
d. corporations do not pay to their owners in the form of dividends.
ANSWER: d. corporations do not pay to their owners in the form of dividends.
xxv. If the government reports that “GDP increased at an annual rate of 4.0 percent for the fourth
quarter of 2000,” then GDP increased by
a. 1.0 percent during 2000.
b. 16.0 percent during 2000.
c. 4.0 percent during the fourth quarter of 2000.
d. 1.0 percent during the fourth quarter of 2000.
ANSWER: d. 1.0 percent during the fourth quarter of 2000.
xxv. If you buy a carton of chocolate chip cookie dough ice cream in your favorite grocery store
a. both GDP and consumption spending will be higher.
b. GDP will be higher, but consumption spending will be unchanged.
c. GDP will be unchanged, but consumption spending will be higher.
d. since your spending on the ice cream became the store’s income, GDP would not change.
ANSWER: a. both GDP and consumption spending will be higher.
xxv. Net exports will be positive when

a. imports are larger than exports.
b. exports are larger than imports.
c. imports are equal to exports.
d. GDP increases.
ANSWER: b. exports are larger than imports.
xxv. Transfer payments are

a. paychecks which are automatically deposited in bank accounts.
b. on-line bill payment services offered by many large banks.
c. moving expenses when a worker is transferred by an employer to a new location.
d. government spending that does not reflect payment for currently produced goods or
services.
ANSWER: d. government spending that does not reflect payment for currently produced goods or
services.
xxv. If Hallmark builds a plant in Mexico, the production from that plant would be
a. included in U.S. GNP but not GDP.
b. included in U.S. GDP but not GNP.
c. included in both U.S. GDP and GNP.
d. not included in either U.S. GDP or GNP but only in Mexico’s production.
ANSWER: a. included in U.S. GNP but not GDP.
xxv. If a construction company in Japan purchases a U.S. built bulldozer from Caterpillar, U.S. GDP
a. is the same but U.S. GNP increases.
b. increases since exports are included in GDP.
c. is unaffected since exports are not included in GDP.
d. decreases since the bulldozer could have been purchased by a U.S. company.
ANSWER: b. increases since exports are included in GDP.
xxv. In 1998, U.S. GDP was

a. $850 billion.
b. $1,367 billion.
c. $5,808 billion.
d. $8,511 billion.
ANSWER: d. $8,511 billion.
xxv. Real GDP

a. evaluates current production at current prices.
b. evaluates current production at prices in some base year.
c. is not a valid measure of the economy’s performance.
d. is a measure of the value of goods only, but not services.
ANSWER: b. evaluates current production at prices in some base year.
2000 (Base Year) 2001 (Current Year)

PRICE QUANTITY PRICE QUANTITY
CORN $2 30 CORN $4 50
RICE $2 20 RICE $3 40
xxv. Using the information in the table, what is the nominal GDP and the real GDP for 2001?
a. The nominal GDP is $100 and real GDP is $100.
b. The nominal GDP is $180 and real GDP is $100.
c. The nominal GDP is $240 and real GDP is $180.
d. The nominal GDP is $320 and real GDP is $180.
ANSWER: d. The nominal GDP is $320 and real GDP is $180.
xxv. Using the information in the table, the GDP deflator would be
a. 100.
b. 152.
c. 178.
d. 194.
ANSWER: c. 178.
xxv. GDP is a good but not perfect measure of economic well-being because it leaves out each of the
following EXCEPT
a. leisure.
b. volunteer work.
c. medical services.
d. the quality of the environment.
ANSWER: c. medical services.
xxv. If nominal GDP is $10 trillion and the GDP deflator is 125, real GDP is
a. $6 trillion.
b. $8 trillion.
c. $10 trillion.
d. $12.5 trillion.
ANSWER: b. $8 trillion.
xxv. If we want to know the amount of expenditures for an average individual in a country, we
should look at
a. real GDP.
b. nominal GDP.
c. GDP per person.
d. current GDP.
ANSWER: c. GDP per person.
xxv. International GDP data show that

a. a nation’s GDP is closely associated with its citizens’ standard of living.
b. there is no relationship between GDP and the economic well-being of citizens.
c. poor nations actually might enjoy a higher standard of living than do rich nations.
d. there are few real differences in living standards around the world, in spite of the large
differences in GDP among nations.
ANSWER: a. a nation’s GDP is closely associated with its citizens’ standard of living.
xxv. It is especially difficult to measure GDP in Russia because

a. no consistent national income accounting standards exist.
b. the statisticians believe that producers are exaggerating the size of output.
c. a large part of the economy is underground and hidden from the statisticians.
d. only government officials are allowed access to statistics on the economy.
ANSWER: c. a large part of the economy is underground and hidden from the statisticians.
Chapter 23
Measuring the Cost of Living
Test A
xxv. When the consumer price index rises, a typical family
a. can spend fewer dollars to maintain the same standard of living.
b. finds that its standard of living is not affected.
c. has to spend more dollars to maintain the same standard of living.
d. None of the above answers is necessarily correct.
ANSWER: c. has to spend more dollars to maintain the same standard of living.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
xxv. The inflation rate is defined as the

a. cost of inflation.
b. cost of borrowing.
c. percentage change in real GDP from the previous period.
d. percentage change in the price level from the previous period.
ANSWER: d. percentage change in the price level from the previous period.
TYPE: M KEY1: D SECTION: INT OBJECTIVE: RANDOM: Y
xxv. The CPI is a measure of the overall cost of

a. producer inputs.
b. personal imports.
c. goods and services bought by a typical consumer.
d. goods and services produced in the economy.
ANSWER: c. goods and services bought by a typical consumer.
xxv. The CPI is computed using all goods and services

a. produced in the economy.
b. used to produce other goods.
c. that typical producers buy.
d. that typical consumers buy.
ANSWER: d. that typical consumers buy.
xxv. In computing the CPI, the base year is the

a. year against which this years price index is compared to find the inflation rate during the
year.
b. benchmark against which other years are compared.
c. current year.
d. year with the lowest prices.
ANSWER: b. benchmark against which other years are compared.
xxv. For any given year, the CPI is the price of the basket of goods and services in the
a. given year divided by the price of the basket in the base year, then multiplied by 100.
b. base year divided by the price of the basket in the base year, then divided by 100.
c. base year divided by the price of the basket in the given year, then divided by 100.
d. base year divided by the price of the basket in the given year, then multiplied by 100.
ANSWER: a. given year divided by the price of the basket in the base year, then multiplied by 100.
xxv. Categories of U.S. consumer spending used in the CPI, ranked from largest to smallest are:
a. food and beverages, housing, and medical care.
b. food and beverages, medical care, and housing.
c. housing, food and beverages, and medical care.
d. housing, medical care, and food and beverages.
ANSWER: c. housing, food and beverages, and medical care.
xxv. Substitution causes the increase in the cost of living from one year to the next to be
a. neither overstated or understated by the CPI because the CPI is based on the price of all
goods.
b. overstated by the CPI because the basket of goods used to compute the CPI changes from
year to year and so does not take into account the fact that as prices rise people purchase
more of the goods they like less.
c. understated by the CPI because the CPI changes from year to year and so does not take into
account the fact that people substitute higher quality goods for lower quality ones as
income increases.
d. overstated by the CPI because the CPI is based on a fixed basket of goods that does not
reflect increases in the purchases of goods that become relatively cheap.
ANSWER: d. overstated by the CPI because the CPI is based on a fixed basket of goods that does not
reflect increases in the purchases of goods that become relatively cheap.
xxv. Unmeasured quality change is a problem in the CPI because

a. if the quality of a good deteriorates, the purchasing power of a dollar increases even if the
price of the good remains the same.
b. the Bureau of Labor Statistics does not attempt to account for any quality changes that affect
the standard of living.
c. if the quality of a good improves, the purchasing power of a dollar increases even if the
d. Both a and b are correct.
ANSWER: c. if the quality of a good improves, the purchasing power of a dollar increases even if the
xxv. Which of the following statements best represents economists’ beliefs about the bias in the CPI as
a measure of the cost of living?
a. Economists agree on the severity of the CPI bias, but there is still debate on what to do
about it.
b. Economists debate both the severity of the CPI bias and what to do about it.
c. Economists agree that the bias in the CPI is a very serious problem.
d. Economists agree that the bias in the CPI is not a serious problem.
ANSWER: b. Economists debate both the severity of the CPI bias and what to do about it.
xxv. Most, but not all, soccer balls used in the United States are imported from other nations. If the
price of soccer balls increases, the GDP deflator will
a. increase, but the consumer price index will not increase.
b. increase less than will the consumer price index.
c. increase more than will the consumer price index.
d. not increase, but the consumer price index will increase.
ANSWER: b. increase less than will the consumer price index.
xxv. An Egyptian company produces sweaters in the United States and exports all of them to
Lithuania. Other things the same, if the price of these sweaters increases, the GDP deflator
a. increases and the CPI is unchanged.
b. and the CPI are unchanged.
c. and the CPI both increase.
d. is unchanged and the CPI increases.
ANSWER: a. increases and the CPI is unchanged.
xxv. The basket of goods in the consumer price index changes
a. occasionally, while the basket of goods in the GDP deflator changes each time it is
computed.
b. each time it is computed, while the basket of goods in the GDP deflator changes
occasionally.
c. occasionally, as does the basket of goods in the GDP deflator.
d. each time it is computed, as does the basket of goods in the GDP deflator.
ANSWER: a. occasionally, while the basket of goods in the GDP deflator changes each time it is
computed.
xxv. What is the purpose of measuring the overall level of prices in the economy?
a. to allow consumers to know what kinds of prices to expect in the future
b. to allow the measurement of GDP
c. to allow comparison between dollar figures from different points in time
d. All of the above are correct.
ANSWER: c. to allow comparison between dollar figures from different points in time
xxv. Babe Ruth’s 1931 salary was $80,000. The price index for 1931 is 15.2 and the price index for 1999
is 166. Ruth’s 1931 salary was equivalent to a 1999 salary of about
a. $8,700.
b. $87,000.
c. $870,000.
d. $8,700,000.
ANSWER: c. $870,000.
xxv. Craig is offered a $120,000 per year job in Los Angeles, and a $90,000 per year job in Akron. The
CPI for Los Angeles is 160 and the CPI for Akron is 120. What is the Los Angeles job’s
purchasing power in “Akron dollars”?
a. $160,000
b. $120,000
c. $90,000
d. $65,000
ANSWER: c. $90,000
xxv. A COLA automatically raises the wage rate when

a. real GDP increases.
b. the labor force increases.
c. taxes increase.
d. the consumer price index increases.
ANSWER: d. the consumer price index increases.
xxv. The nominal interest rate is

a. the interest rate paid or charged by a bank.
b. the interest rate as usually reported without a correction for the effects of inflation.
c. both a and b above.
d. None of the above is correct.
ANSWER: c. both a and b above.
xxv. Which of the following is the most accurate statement about the relationship between the
nominal interest rate and the real interest rate?
a. The real interest rate is the nominal interest rate minus the rate of inflation.
b. The real interest rate is the nominal interest rate divided by the price level.
c. The real interest rate is the nominal interest rate times the price level.
d. The real interest rate is the nominal interest rate times the expected price level divided by
the current price level.
ANSWER: a. The real interest rate is the nominal interest rate minus the rate of inflation.
xxv.
If the nominal interest rate is 8% and rate of inflation is 2%, the real interest rate is
a. 16%.
b. 10%.
c. 6%.
d. 4%.
ANSWER: c. 6%.
xxv. The nominal interest rate tells you

a. how fast the purchasing power of your bank account rises over time.
b. how fast the number of dollars in your bank account rises over time.
c. the number of dollars in your bank account.
d. the purchasing power of your bank account.
ANSWER: b. how fast the number of dollars in your bank account rises over time.
xxv. The real interest rate tells you

a. the number of dollars in your bank account.
b. the purchasing power of your bank account.
c. how fast the number of dollars in your bank account rises over time.
d. how fast the purchasing power of your bank account rises over time.
ANSWER: d. how fast the purchasing power of your bank account rises over time.
xxv. Which of the following is the most accurate statement about nominal and real interest rates?
a. Nominal and real interest rates often do not move together.
b. Nominal and real interest rates always move together.
c. Nominal and real interest rates never move together.
d. Nominal and real interest rates are identical.
ANSWER: a Nominal and real interest rates often do not move together.
xxv. Samantha deposits $1,000 in a saving account that pays an annual interest rate of 4%. Over the
course of a year the inflation rate is 1%. At the end of the year Samantha has
a. $40 more in her account, and her purchasing power has increased $30.
b. $30 more in her account and her purchasing power has increased $50.
c. $50 more in her account, and her purchasing power has increased $30.
d. $40 more in her account, and her purchasing power has increased $40.
ANSWER: a. $40 more in her account, and her purchasing power has increased $30.
xxv. In the late 1970s, nominal interest rates were high and inflation rates were very high. As a result,
real interest rates were
a. very high.
b. moderately high.
c. low, but never negative.
d. low, and in some years they were negative.
ANSWER: d. low, and in some years they were negative.
Chapter 23
Measuring the Cost of Living
Test B
Price of
Year Parchment Price of Robes
1100 20 denerie 20 denerie
1101 20 denerie 30 denerie
xxv. Suppose that the basket of goods in the CPI consisted of 3 roles of parchment and 2 robes. Based
on the information in the table, what is the consumer price index for 1101 if the base year is 1100?
a. 100
b. 105
c. 115
d. 120
ANSWER: d. 120
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: N INSTRUCTION: 1
xxv. Suppose that the basket of goods in the CPI consisted of 3 roles of parchment and 2 robes. Based
on the information in the table, what is the inflation rate for 1101?
a. 33.3%
b. 25%
c. 20%
d. 15%.
ANSWER: c. 20%
Year Peaches Pecans

2000 $11 per bushel $6 per bushel
2001 $10 per bushel $12 per bushel
xxv. Suppose that the typical consumer basket consists of 10 bushels of peaches and 15 bushels of
pecans and that the base year is 2000. Based on the information in the table, what is the
consumer price index for 2001?
a. $120
b. $140
c. $240
d. $280
ANSWER: b. $140
xxv. Suppose that the typical consumer basket consists of 10 bushels of peaches and 15 bushels of
pecans. Based on the information in the table, what was the inflation rate for 2001?
a. 40%
b. 25%
c. 20%
ANSWER: a. 40%
xxv. Suppose the CPI in 1990 is 125. The CPI in 1999 is 155. What is the rate of inflation over the
period?
a. 24 percent
b. 25 percent
c. 30 percent
d. 52 percent
ANSWER: a. 24 percent
xxv. Which of the following has the greatest weight in the CPI?
a. food and beverages
b. housing
c. medical care
d. All of the above have equal weights in the CPI.
ANSWER: b. housing
xxv. The consumer price index is based on

a. 100,000s of prices.
b. 10,000s of prices.
c. 1,000s of prices.
d. 100s of prices.
ANSWER: b. 10,000s of prices.
xxv. Consider the following two sentences. The producer price index measures the cost of a basket of
goods and services purchased by firms. Changes in the producer price index are thought to be
useful in predicting consumer prices.
a. Both sentences are true.
b. Only the first sentence is true.
c. Only the second sentence is true.
d. Neither sentence is true.
ANSWER: a. Both sentences are true.
xxv. Which of the following is true considering substitution bias?

a. When prices change from one year to the next, they do not all change proportionately.
b. Substitution bias tends to make the CPI overstate the cost of living from one year to the
next.
c. When the price of a good rises, its weight in the consumer price index will be higher than its
weight in the basket of goods people actually buy.
d. All of the above are true.
ANSWER: d. All of the above are true.
xxv. Consider the following two sentences. The creation of new goods makes each dollar more
valuable. Yet because the CPI is based on a fixed basket of goods and services, it does not reflect
this decrease in the cost of living.
xxv. Which of the following is correct?

a. The CPI makes no adjustment for quality changes.
b. Research by the Bureau of Labor Statistics shows that over the last 18 years the elderly have
experienced more rapid increases in the cost-of-living than the general population.
c. Although there are problems measuring the cost-of-living accurately, there is no reason to
believe that on net the CPI either overstates or understates the true inflation rate.
ANSWER: b. Research by the Bureau of Labor Statistics shows that over the last 18 years the elderly
have experienced more rapid increases in the cost-of-living than the general
population.
xxv. If the price of apples increases more than the price of other goods, the weight of the apples in the
CPI
a. increases.
b. decreases.
c. stays the same, but should increase to accurately reflect the change in the cost-of-living.
d. stays the same, but should decrease to accurately reflect the change in the cost-of-living.
ANSWER: d. stays the same, but should decrease to accurately reflect the change in the cost-of-
living.
xxv. Suppose that the price of French wine imported to the US increases, other things the same this
a. increases both the CPI and the GDP in the United States.
b. increases the CPI but does not change the GDP deflator in the U.S.
c. increases the GDP deflator, but does not change the CPI in the U.S.
d. changes neither the CPI nor the GDP deflator in the U.S.
ANSWER: b. increases the CPI but does not change the GDP deflator in the U.S.
xxv. If the price of oil decreases, the CPI

a. decreases more than the GDP deflator decreases.
b. decreases less than the GDP deflator decreases.
c. decreases, but the GDP deflator does not change.
d. does not change, but the GDP deflator decreases.
ANSWER: a. decreases more than the GDP deflator decreases.

a. Both the CPI and GDP deflator use fixed weights.
b. Neither the CPI nor GDP deflator use fixed weights.
c. The CPI, but not the GDP deflator uses fixed weights.
d. The GDP deflator, but not the CPI uses fixed weights.
ANSWER: c. The CPI, but not the GDP deflator uses fixed weights.
xxv. The inflation rate computed from the CPI is
a. always somewhat greater than that computed from the GDP deflator.
b. always somewhat less than that computed from the GDP deflator.
c. sometimes greater and sometimes less, but generally moves in the opposite direction as the
rate computed from the GDP deflator.
d. sometimes greater and sometimes less, but generally moves with the rate computed from
the GDP deflator.
ANSWER: d. sometimes greater and sometimes less, but generally moves with the rate computed
from the GDP deflator.
xxv. In the late 1970s

a. both the GDP deflator and CPI showed high rates of inflation; in the 1990s both showed low
inflation rates.
b. both the GDP deflator and CPI showed low rates of inflation; in the 1990s both showed high
inflation rates.
c. and the 1990s both the GDP deflator and CPI showed high rates of inflation.
d. and the 1990s both the GDP deflator and CPI showed low rates of inflation.
ANSWER: a. both the GDP deflator and CPI showed high rates of inflation, in the 1990s both
showed low inflation rates.
xxv. In 1949 Sycamore, Illinois built a hospital for about $500,000. In 1987 the county restored the
courthouse for about $2.4 million. A price index for nonresidential construction was 14 in 1949,
92 in 1987, and 114.5 in 2000. According to these numbers the hospital cost about
a. $3.6 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000
dollars.
b. $3.6 million in 2000 dollars, which is more than the cost of the courthouse restoration in
2000 dollars.
c. $4.1 million in 2000 dollars, which is less than the cost of the courthouse restoration in 2000
dollars.
d. $4.1 million in 2000 dollars, which is more than the cost of the courthouse restoration in
2000 dollars.
ANSWER: d. $4.1 million in 2000 dollars, which is more than the cost of the courthouse restoration
in 2000 dollars.
TYPE: M KEY1: E SECTION: 2 OBJECTIVE: 4 RANDOM: Y
xxv.
Your grandparents tell you that in 1960 they paid $0.35 for admission to a movie. The price index
in 1960 was 30. The price index in today is 171. What is the price your grandparents paid in
today’s dollars?
a. $1.05
b. $1.99
c. $3.01
d. $5.98
ANSWER: b. $1.99
xxv. In 1970 Professor Fellswoop made $12,000, in 1980 he earned $24,000, in 1990 he earned $36,000.
If the CPI was 40 in 1970, 60 in 1980, 100 in 1990 in terms of 1999 dollars, Professor Fellswoop’s
salary was highest in
a. 1970, and lowest in 1980.
b. 1990, and lowest in 1980.
c. 1980, and lowest in 1970.
d. 1990, and lowest in 1970.
ANSWER: c. 1980, and lowest in 1970.
xxv. Indexation refers to

a. a process of adjusting the nominal interest rate so that it is equal to the real interest rate.
b. using a law or contract to automatically correct a dollar amount for the effects of inflation.
c. using a price index to deflate dollar values.
d. an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line
with the GDP deflator.
ANSWER: b. using a law or contract to automatically correct a dollar amount for the effects of
inflation.
xxv. Mavis Corporation has an agreement with its workers to completely index the wage of their
employees to inflation in the CPI. Mavis currently pays its production line workers $7.50 an hour
and is scheduled to index their wages today. If the CPI is currently about 130 and was 120 a year
ago Mavis should increase the hourly wages of its workers by about
a. 7.5 cents
b. 10 cents
c. 58 cents
d. 62.5 cents
ANSWER: d. 62.5 cents
xxv. Suppose that the real interest rate is 3% and the inflation rate is 1%.
a. The dollar value of savings increases at 3%, and the value of savings in goods increases at
1%.
b. The dollar value of savings increases at 1%, and the value of savings in goods increases at
2%.
c. The dollar value of savings increases at 2%, and the value of savings in goods increases at
3%.
d. The dollar value of savings increases at 4%, and the value of savings in goods increases at
3%.
ANSWER: d. The dollar value of savings increases at 4%, and the value of savings in goods increases
at 3%.
xxv. Sluggo puts money in the bank and earns a 5% nominal interest rate, if the inflation rate is 3%, in
one year Sluggo will have
a. 3% more money that will purchase 2% more goods.
b. 3% more money that will purchase 8% more goods.
c. 5% more money that will purchase 2% more goods.
d. 5% more money that will purchase 8% more goods.
ANSWER: c. 5% more money that will purchase 2% more goods.
xxv. In Japan in 2000 nominal interest rates were 1.5% and the inflation rate was –.5%. The real
interest rate was
a. –2%.
b. –1%.
c. 1%.
d. 2%.
ANSWER: d. 2%.
Chapter 24
Production and Growth
Test A
xxv. A nation’s standard of living is measured by its
a. real GDP.
b. real GDP per person.
c. nominal GDP.
d. nominal GDP per person.
ANSWER: b. real GDP per person.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
xxv. Over the past century in the United States, average income as measured by real GDP per person
has grown about
a. 4 percent per year, which implies a doubling about every 20 years.
b. 3 percent per year, which implies a doubling about every 25 years.
c. 2 percent per year, which implies a doubling about every 35 years.
d. 1 percent per year, which implies a doubling about every 65 years.
ANSWER: c. 2 percent per year, which implies a doubling about every 35 years.
xxv. In the length of one generation, which of the following countries has gone from being among the
poorest countries in the world to being among the richest?
a. Chad
b. Ethiopia
c. Ghana
d. Singapore
ANSWER: d. Singapore
xxv. In comparison to other countries, Japan had a high growth rate over the last 100 years. Japan’s
average annual growth rate of real GDP per person was a bit less than
a. 0.5 percent.
b. 1.0 percent.
c. 2.0 percent
d. 3.0 percent.
ANSWER: d. 3.0 percent.
xxv. Compounding refers to the
a. geometric smoothing of productivity data.
b. accumulation of a growth rate over a period of time.
c. increase in a growth rate over a period of time.
d. adjustment made to GDP meant to take out the effects of inflation.
ANSWER: b. accumulation of a growth rate over a period of time.
xxv. When Ben Franklin died he left $5,000 to be invested for a period of 200 years to benefit medical
students and scientific research. According to the “rule of 70,” how often would this money have
doubled if it grew 7 percent per year every year?
a. about every 10 years
b. about every 7 years
c. about every 5 years
d. about every 3.5 years
ANSWER: a. about every 10 years
xxv. According to the rule of 70, if some variable grows at a rate of g percent per year, then that
variable doubles in approximately
a. 70/g years.
b. 70g years.
c. 70/2g years.
d. 2g/70 years.
ANSWER: a. 70/g years.
xxv. Both Elmo and Anna work eight hours a day. Elmo can produce four baskets of goods per hour
while Anna can produce three baskets of the same goods per hour. It follows that Elmo’s
a. productivity is greater than Anna’s.
b. output is greater than Anna’s.
c. standard of living is higher than Anna’s.
ANSWER: d. All of the above are correct.
xxv. Which of the following would be considered physical capital?

a. paper used to make cardboard for boxes of chocolate
b. the skills and knowledge of a film director
c. boats owned by a shrimp company
ANSWER: c. boats owned by a shrimp company
xxv. Which of the following is human capital?

a. a company’s cafeteria
b. employees’ knowledge of the production process
c. the exercise equipment in a company’s gym
ANSWER: b. employees’ knowledge of the production process
xxv. In a market economy, scarcity of resources is reflected in
a. supply only.
b. demand only.
c. prices.
d. the quantity traded.
ANSWER: c. prices.
xxv. Your company discovers a better way to produce DVDs, but how you do this is not apparent
from the DVDs themselves. Your knowledge of how to more efficiently produce DVDs is
a. common technological knowledge.
b. common, but not technological knowledge.
c. proprietary technological knowledge.
d. proprietary, but not technological knowledge.
ANSWER: c. proprietary technological knowledge.
xxv. If there are constant returns to scale, the production function can be written as
a. xY = 2xAF(L, K, H, N).
b. Y/L = A F(xL, xK, xH, xN).
c. L = AF(Y, K, H, N).
d. Y/L = A F( 1, K/L, H/L, N/L).
ANSWER: d. Y/L = A F( 1, K/L, H/L, N/L).
xxv. Which of the following would increase productivity?

a. an increase in the amount of equipment per-worker
b. an increase in the knowledge and skills of workers
c. the discovery of new raw materials
xxv. Across countries, investment and growth rates are

a. unrelated.
b. negatively related.
c. negatively related for rich countries, but positively related for poor countries.
d. positively related.
ANSWER: d. positively related.
xxv. If there are diminishing returns to capital,

a. capital produces fewer goods as it ages.
b. increases in the capital stock eventually decrease output.
c. the smaller the capital stock, the less an increase in the capital stock increases output.
d. the larger the capital stock, the less an increase in the capital stock increases output.
ANSWER: d. the larger the capital stock, the less an increase in the capital stock increases output.
xxv. The logic behind the catch-up effect is that
a. workers in countries with low income will work harder than workers in countries with high
incomes.
b. new capital adds more to production in a country that doesn’t have much capital than in a
country that already has much capital.
c. the capital stock in rich countries deteriorates more rapidly than the capital stock in poor
countries.
ANSWER: b. new capital adds more to production in a country that doesn’t have much capital than
in a country that already has much capital.
xxv. In the 1800s, Europeans purchased stock in American companies that used the funds to build
railroads and factories. The Europeans made
a. foreign portfolio investments.
b. indirect domestic investments.
c. bilateral domestic investments.
d. foreign indirect investments.
ANSWER: a. foreign portfolio investments.
xxv. Which of the following is generally an opportunity cost of investment in human capital?
a. forgone wages at present
b. increased earning potential
c. future job security
ANSWER: a. forgone wages at present
xxv. Generally, the main cause of famine is

a. a shortage of food.
b. excessive population.
c. an inadequate distribution of food.
ANSWER: c. an inadequate distribution of food.
xxv. Outward-oriented policies

a. have led to high growth rates for the countries that pursued them.
b. prevent countries from taking advantage of gains from trade.
c. seem good in theory, but have not increased economic growth in practice.
ANSWER: a. have led to high growth rates for the countries that pursued them.
xxv. A large and sudden increase in the number of workers is likely to

a. raise real GDP per person, but decrease real GDP.
b. decrease both real GDP and real GDP per person.
c. raise both real GDP and real GDP per person.
d. raise real GDP, but decrease real GDP per person.
ANSWER: d. raise real GDP, but decrease real GDP per person.
xxv. The primary reason that U.S. living standards are higher today than they were a century ago is
that
a. human capital has increased.
b. physical capital per worker has increased.
c. technological knowledge has increased.
d. more productive natural resources have been discovered.
ANSWER: c. technological knowledge has increased.
xxv. From 1973 to 1998, U.S. productivity growth was slower than from 1959 to 1973. Which of the
following is correct?
a. This continues a downward trend as output growth was higher in periods before 1959.
b. It appears that this may be attributed to a slowdown in technological progress.
c. This slowdown is unique to the United States.
ANSWER: b. It appears that this may be attributed to a slowdown in technological progress.
xxv. Typically, countries in Africa

a. have high tax rates.
b. have laws and geography that make international trade easy.
c. had low but positive growth of real GDP per person between 1978 and 1994.
ANSWER: a. have high tax rates.
Chapter 24
Production and Growth
Test B
xxv. In the last 100 years U.S. per-capita real GDP grew about
a. 2% per year, so that it is about two times as high.
b. 2% per year, so that it is about eight times as high.
c. 4% per year, so that it is about two times as high.
d. 4% per year, so that it is about eight times as high.
ANSWER: b. 2% per year, so that it is about eight times as high.
xxv. Per-capita real GDP in China is about equal to per-capita real GDP in the United States in
a. 1870, and 1/2 that in the United States today.
b. 1870, and 1/8 that in the United States today.
c. 1920, and 1/2 that in the United States today.
d. 1920, and 1/8 that in the United States today.
ANSWER: b. 1870, and 1/8 that in the United States today.
xxv. Of countries listed in the text, the per-capita real GDP growth rates over the last 100 years
ranged from about
a. 0%-5%.
b. 1%-3%.
c. 2%-5%.
d. 3%-6%.
ANSWER: b. 1%-3%.
xxv. Suppose an economy that was roughly the size of Australia had a population of 19 million and
real GDP of about 380,000 million U.S. dollars in 1998. Suppose further that in 1999 population
was about 19.5 million and real GDP was about 401,500 million dollars. What are the
approximate growth rates of real GDP and of real GDP per-capita?
a. 5.7%, 5.3%
b. 5.7%, 3%
c. 3%, 5.7%
d. 5.3%, 3%
ANSWER: b. 5.7%, 3%

a. If a country has a per-capita real GDP growth rate of 7%, its per-capita real GDP will double
about every 14 years.
b. The current level of per-capita real GDP in the United States is about $19,450.
c. Although 100 years ago the United Kingdom had greater per-capita real GDP than the
United States and Canada, it now has lower per-capita real GDP than both of them.
ANSWER: c. Although 100 years ago the United Kingdom had greater per-capita real GDP than the
United States and Canada, it now has lower per-capita real GDP than both of them.
xxv. Productivity is the

a. growth rate of real GDP.
b. average amount a worker produces per hour.
c. level of real GDP.
ANSWER: b. average amount a worker produces per hour.
xxv.
Suppose that factory output rose from 50,000 units to 55,000 units while labor hours rose from
1100 to 1200. Which of the following is true?
a. Labor productivity remained unchanged.
b. Labor productivity increased slightly.
c. Labor productivity decreased slightly.
d. Labor productivity increased sharply.
ANSWER: b. Labor productivity increased slightly.
xxv. The productivity of U.S. workers is higher than that of workers in many countries that have less
capital. Which of the following arguments concerning these facts is logically consistent?
a. This contradicts the idea of diminishing marginal product. If U.S. workers have more
capital, they should have lower productivity.
b. Productivity in the United States is higher because the United States has more workers than
those countries having low productivity.
c. The United States could have greater productivity because its workers have both more
human capital and physical capital per worker.
d. None of the above is logically consistent.
ANSWER: c. The United States could have greater productivity because its workers have both more
human capital and physical capital per worker.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
xxv. Engineering students learn long-established methods for constructing bridges, in and of itself
this learning increases
a. human capital.
b. physical capital.
c. technological knowledge.
ANSWER: a. human capital.
xxv. If there are constant returns to scale then

a. a doubling of all inputs doubles real GDP.
b. technological progress does not affect per-capita real GDP.
c. doubling labor would leave per-capita real GDP unchanged.
d. an increase in capital per worker would leave per-capita real GDP unchanged.
ANSWER: a. a doubling of all inputs doubles real GDP.
xxv. Which of the following is incorrect?

a. Bulldozers are an example of physical capital.
b. Students can be viewed as workers who have the important job of producing human capital
that will be used in future production.
c. A forest is a non-renewable resource.
d. Technological progress may reduce our dependence on nonrenewable resources.
ANSWER: c. A forest is a non-renewable resource.
xxv. Human capital is

a. the number of workers in the economy.
b. the number of workers divided by the population.
c. the amount of physical capital per worker.
d. society’s understanding of the best way to produce output.
ANSWER: d. society’s understanding of the best way to produce output.
xxv. Consider the following two sentences. The wealth of some countries derives primarily from the
natural resources they own. However, countries with few natural resources can be highly
productive.
xxv. Once adjusted for inflation the price of most natural resources
a. rose because of increasing demand from a growing population.
b. rose because their supply is declining.
c. were stable or falling because of government price controls.
ANSWER: d. None of the above is correct.
xxv. In the long run a higher savings rate leads to

a. a higher level of per-capita income.
b. a higher level of productivity.
c. an increase in the growth rate of income.
d. A and B, but not C.
ANSWER: d. A and B, but not C.
xxv. Consider the following two sentences. According to the data, countries with higher investment
relative to GDP, tend to have higher growth rates of real GDP per person. This relation is not
perfect though, because an increase in the physical capital stock increases output per person
more in a country with much capital than in a similar country with less capital.
b. Both sentences are false.
c. Only the first sentence is true.
d. Only the second sentence is true.
ANSWER: c. Only the first sentence is true.
xxv. The catch-up effect is the

a. tendency for countries that start off poor to grow more rapidly than countries that start off
rich.
b. property whereby the benefits of an extra unit of an input declines as the quantity of the
input increases.
c. tendency for the growth rate of the capital stock of a country to match its population
growth rate.
d. property whereby the benefits of different inputs move toward each other over time.
ANSWER: a. tendency for countries that start off poor to grow more rapidly than countries that start
off rich.

a. Controlling for other variables such as the percentage of GDP devoted to investment, poor
countries tend to grow faster than rich countries.
b. The growth that arises from capital accumulation is not a free lunch.
c. Countries such as Singapore and Japan, that devoted a large share of GDP to investment
from 1960-1991 tended to have higher growth rates over this period.
d. The United States and Korea devoted similar shares of real GDP to investment from 1960-
1991, but the United States had a higher growth rate.
ANSWER: d. The United States and Korea devoted similar shares of real GDP to investment from
1960-1991, but the United States had a higher growth rate.
xxv. Which would increase the capital stock of El Salvador and provide returns to U.S. investors?
a. U.S. foreign direct investment in El Salvador.
b. U.S. foreign portfolio investment in El Salvador.
c. Both of the above are correct.
d. Neither of the above is correct.
ANSWER: c. Both of the above are correct.
xxv. U.S. foreign direct investment

a. raises both U.S. GDP and U.S. GNP.
b. raises neither U.S. GDP nor U.S. GNP.
c. raises U.S. GDP, but not U.S. GNP.
d. raises U.S. GNP, but not U.S. GDP.
ANSWER: d. raises U.S. GNP, but not U.S. GDP.
xxv. Which of the following is NOT correct?

a. Many economists would advise governments in less-developed economies to implement
policies that encourage investment from abroad.
b. Lowering population growth rates can increase per-capita real GDP.
c. Some economists argue that education is particularly important because human capital has
positive externalities.
d. In the long run, increases in the savings rate lead to increases in real GDP growth.
ANSWER: d. In the long run, increases in the savings rate lead to increases in real GDP growth.
xxv. Which of the following statements is correct?

a. In general, a given level of investment in a poor country will lead to greater economic
growth than the same level of investment in a rich country.
b. If a nation invests more, its economic growth rate will be permanently higher.
c. A nation must have abundant natural resources if it is to experience rapid economic
growth.
d. Increased economic growth through increased investment does not have an opportunity
cost.
ANSWER: a. In general, a given level of investment in a poor country will lead to greater economic
growth than the same level of investment in a rich country.
xxv.
Generally speaking from society’s viewpoint, the returns to research and development
undertaken by firms
a. is a public good.
b. is a private good.
c. should never be supported by government.
d. will never occur if a system of patents is not put into place.
ANSWER: a. is a public good.
xxv. Suppose a German-owned automobile company opens a new car plant in Wayne, Nebraska.
a. This foreign direct investment increases U.S. real GDP more than it increases U.S. real GNP.
b. This foreign direct investment increases U.S. real GNP more than it increases U.S. real GDP.
c. This foreign portfolio investment increases U.S. real GDP more than it increases U.S. real
GNP.
d. The foreign portfolio investment increases U.S. real GNP more than it increases U.S. real
GDP.
ANSWER: a. This foreign direct investment increases U.S. real GDP more than it increases U.S. real
GNP.
xxv. Which of the following can increase real GDP per person?
a. a decrease in population growth
b. foreign investment from abroad
c. policies to encourage international trade
Chapter 25
Saving, Investment, and the Financial
System
Test A
xxv. When a country saves a smaller portion of its GDP, it will have
a. more investment, and so have more capital and higher productivity.
b. more investment, and so have less capital and lower productivity.
c. less investment, and so have more capital and higher productivity.
d. less investment, and so have less capital and lower productivity.
ANSWER: d. less investment, and so have less capital and lower productivity.
xxv. What are the two basic categories of financial institutions?

a. the foreign exchange markets and the stock markets
b. the financial markets and financial intermediaries
c. the market for loanable funds and the market for capital
d. the lending market and the deposit market
ANSWER: b. the financial markets and financial intermediaries
xxv. Which of the following is not a nonsensical headline?

a. British perpetuities about to mature.
b. Disney issues new bonds with term of $1,000 each.
c. Government bonds currently pay less interest than corporate bonds.
d. Standard and Poor’s judges new junk bond to have very low credit risk.
ANSWER: c. Government bonds currently pay less interest than corporate bonds.
xxv. A certificate of indebtedness that specifies the obligations of the borrower to the holder is called
a
a. stock.
b. mutual fund.
c. bond.
ANSWER: c. bond.
xxv. Rudolph has the choice of two bonds, one that pays 5 percent interest and the other that pays 10
percent interest. Which of the following is most likely?
a. The 10 percent bond is less risky than the 5 percent bond
b. The 10 percent bond has a shorter term than the 5 percent bond
c. The 10 percent bond is a U.S. government bond, and the 5 percent bond is a junk bond
d. The 10 percent bond is a corporate bond, and the 5 percent bond is a municipal bond
ANSWER: d. The 10 percent bond is a corporate bond, and the 5 percent bond is a municipal bond.
xxv. People who buy stock in a corporation such as Maytag become

a. creditors of Maytag, so the benefits of holding the stock depend on Maytag’s profits.
b. creditors of Maytag, but the benefits of holding the stock do not depend on Maytag’s
profits.
c. part owners of Maytag, so the benefits of holding the stock depend on Maytag’s profits.
d. part owners of Maytag, but the benefits of holding the stock do not depend on Maytag’s
profits.
ANSWER: c. part owners of Maytag, so the benefits of holding the stock depend on Maytag’s
profits.
xxv. Stock indexes are

a. reports in the newspapers that report on the price of the stock and earnings of individual
corporations over time.
b. the average of a group of stock prices.
c. measures of the risk relative to the profitability of corporations.
d. measures of the price of a stock relative to its risk.
ANSWER: b. the average of a group of stock prices.
xxv. A corporation has a price of $25, a dividend of $.50, and retained earnings of $.30 per share. The
dividend yield on this stock is
a. 3.2 percent.
b. 2 percent.
c. 1.7 percent.
d. 1 percent.
ANSWER: b. 2 percent.
xxv. A mutual fund
a. is a financial market where small firms sell stocks and bonds to raise funds.
b. is money set aside by local governments to lend to small firms who want to invest in
projects that are mutually beneficial to the firm and community.
c. sells stocks and bonds on behalf of small and not-very-well-known firms who would
otherwise have to pay high interest to obtain credit.
d. sells shares to the public and uses the proceeds to buy a selection of various types of stocks,
bonds, or both stocks and bonds.
ANSWER: d. sells shares to the public and uses the proceeds to buy a selection of various types of
stocks, bonds, or both stocks and bonds.
xxv. Which of the following equations represents national saving in a closed economy?
a. Y – I – G – NX
b. Y – C – G
c. Y – I – C
d. G + C – Y
ANSWER: b. Y – C – G
xxv. In a closed economy, national saving equals

a. income minus private consumption.
b. private saving minus public saving.
c. investment.
ANSWER: c. investment.
TYPE: M DIFFICUTLY: 3 KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
xxv. Suppose that in a closed economy GDP is equal to 9,000, taxes are equal to 1,000, Consumption
equals 6,000, and government expenditures equal 2,000. What are private saving and public
saving?
a. 2000 and –1000
b. 2000 and 1000
c. 1000 and –1000
d. 1000 and 2000
ANSWER: a. 2000 and –1000
xxv. A budget surplus is created when the government

a. sells more bonds than it buys back.
b. spends more than it receives in tax revenue.
c. receives more tax revenue than it spends.
ANSWER: c. receives more tax revenue than it spends.
xxv. The source of the demand for loanable funds

a. and the supply of loanable funds is saving.
b. and the supply of loanable funds is investment.
c. is saving and the source of the supply of loanable funds is investment.
d. is investment and the source of the supply of loanable funds is saving.
ANSWER: d. is investment and the source of the supply of loanable funds is saving.
xxv. The supply of loanable funds slopes
a. downward because an increase in the interest rate induces people to save less.
b. downward because an increase in the interest rate induces people to invest less.
c. upward because an increase in the interest rate induces people to save more.
d. upward because an increase in the interest rate induces people to invest more.
ANSWER: c. upward because an increase in the interest rate induces people to save more.
xxv. A lower interest rate induces people to

a. save less, so the demand for loanable funds slopes upward.
b. save less, so the demand for loanable funds slopes downward.
c. invest more, so the demand for loanable funds slopes upward.
d. invest more, so the demand for loanable funds slopes downward.
ANSWER: d. invest more, so the demand for loanable funds slopes downward.
xxv. If the current market interest rate for loanable funds is below the equilibrium level, then the
quantity of loanable funds
a. demanded exceeds the quantity of loanable funds supplied and the interest rate will fall.
b. demanded exceeds the quantity of loanable funds supplied and the interest rate will rise.
c. supplied exceeds the quantity of loanable funds demanded and the interest rate will fall.
d. supplied exceeds the quantity of loanable funds demanded and the interest rate will rise.
ANSWER: b. demanded exceeds the quantity of loanable funds supplied and the interest rate will
rise.
xxv. If the inflation rate is 3 percent and the real interest rate is 9 percent, then the nominal interest
rate is
a. 12 percent.
b. 6 percent.
c. 3 percent.
d. 1/3 percent.
ANSWER: a. 12 percent.
xxv. Promises of future payments have the largest present value when interest rates are
a. high and the time until the future payment is received is long.
b. high and the time until the future payment is received is short.
c. low and the time until the future payment is received is long.
d. low and the time until the future payment is received is short.
ANSWER: d. low and the time until the future payment is received is short.
xxv. What would happen in the market for loanable funds if the government were to decrease the tax
on interest income?
a. The supply of loanable funds would shift right.
b. The supply of loanable funds would shift left.
c. The demand for loanable funds would shift right.
d. The demand for loanable funds would shift left.
ANSWER: a. The supply of loanable funds would shift right.
xxv. If Congress raised the tax on interest income, investment
a. and saving would increase.
b. and saving would decrease.
c. would increase and saving would decrease.
d. would decrease and saving would increase.
ANSWER: b. and saving would decrease.

a. Taxes on interest income do not substantially decrease future payments from current
saving.
b. American families save a smaller fraction of their incomes than their counterparts in many
other countries such as Germany and Japan.
c. Saving is an important long-run determinant of a nation’s standard of living.
d. A change in the tax law that encouraged greater saving would reduce interest rates.
ANSWER: a. Taxes on interest income do not substantially decrease future payments from current
saving.
xxv. Suppose that Congress were to institute an investment tax credit. What would happen in the
market for loanable funds?
a. The supply of loanable funds would shift left.
b. The supply of loanable funds would shift right.
c. The demand for loanable funds would shift left.
d. The demand for loanable funds would shift right.
ANSWER: d. The demand for loanable funds would shift right.
xxv. An increase in the budget deficit shifts the

a. demand for loanable funds left.
b. demand for loanable funds right.
c. supply of loanable funds left.
d. supply of loanable funds right.
ANSWER: c. supply of loanable funds left.
xxv. Which of the following beliefs would make someone less likely to oppose government deficits?
a. The return on private investment is higher than the return on public investment.
b. Taxes considerably distort private decision making.
c. The demand for loanable funds curve is very steep.
d. All of the above would make someone less likely to oppose government deficits.
ANSWER: c. The demand for loanable funds curve is very steep.
Chapter 25
Saving, Investment, and the Financial
System
Test B
xxv.
If Microsoft sells a bond they are
a. borrowing directly from the public.
b. borrowing indirectly from the public.
c. lending directly to the public.
d. lending indirectly to the public.
ANSWER: a. borrowing directly from the public.
xxv. You buy a bond issued by Dole Corporation. Which of the following feature(s) of this bond
refers to its term?
a. It pays an interest rate of 12%.
b. It matures in five years.
c. It is selling for $8,750.
ANSWER: b. It matures in five years.

a. Differences in credit risk mean that corporate bonds tend to have higher interest rates than
U.S. government bonds.
b. Differences in tax treatment mean that U.S. government bonds tend to have a higher
interest rate than municipal bonds.
d. Neither of the above is correct.
xxv. Papa Mario’s Pizza Company sells stock.

a. They are using equity financing and the return shareholders earn depends on how
profitable the company is.
b. They are using debt financing and the return shareholders earn depends on how profitable
the company is.
c. They are using equity financing and the return shareholders earn is fixed.
d. They are using debt financing and the return shareholders earn is fixed.
ANSWER: a. They are using equity financing and the return shareholders earn depends on how
profitable the company is.
xxv. Worldwide Delivery Service Corporation develops a way to speed up their deliveries and reduce
their costs. We expect the
a. demand for existing shares of this stock to rise causing its price to rise.
b. demand for existing shares of this stock to rise causing its price to fall.
c. supply of the existing shares of this stock to rise causing its price to rise.
d. supply of the existing shares of this stock to fall casing its price to fall.
ANSWER: a. demand for existing shares of this stock to rise causing its price to rise.
xxv. Suppose Sarah Lee Corporation stock has a P/E ratio of 8. This P/E ratio is relatively
a. high, indicating buyers may expect earnings to rise.
b. high indicating buyers may expect earnings to fall.
c. low, indicating buyers may expect earnings to rise.
d. low, indicating buyers may expect earnings to fall.
ANSWER: d. low, indicating buyers may expect earnings to fall.
xxv. Retained earnings are
a. paid out as dividends.
b. the amount of revenues a firm receives for the sale of its products minus its costs of
production as measured by its accountants.
c. are the single most important piece of information about a stock.

a. Smaller local firms borrow relatively more from banks than larger well-known corporations
do.
b. Banks charge borrowers a slightly lower interest rate than they pay to depositors.
c. Stocks, bonds, and deposits are all similar in that each provides a medium of exchange.
ANSWER: a. Smaller local firms borrow relatively more from banks than larger well-known
corporations do.
xxv. Other things the same, an increase in taxes necessarily means

a. the government has a surplus.
b. public savings increases.
c. private savings increases.
ANSWER: b. public savings increases.
xxv. In a closed economy national savings minus the government surplus is equal to
a. investment.
b. public saving.
c. private saving.
d. real GDP minus consumption minus government expenditures.
ANSWER: c. private saving.
xxv.
GDP last year was $4000, taxes were $300, government spending was $200, and
consumption was $3000. What was national saving?
a. $1000
b. $800
c. $700
d. $600
ANSWER: b. $800
xxv. If people wanted to borrow more for mortgages, perhaps because of changes in tax laws that
make home ownership more desirable, then the
a. demand for loanable funds shifts right, making the interest rate rise.
b. demand for loanable funds shifts right, making the interest rate fall.
c. supply of loanable funds shifts right, making the interest rate rise.
d. supply of loanable funds shifts right, making the interest rate fall.
ANSWER: a. demand for loanable funds shifts right, making the interest rate rise.
xxv. Other things the same, a fall in the interest rate induces borrowers to borrow
a. less and savers to save less.
b. more and savers to save less.
c. less and savers to save more.
d. more and savers to save more.
ANSWER: b. more and savers to save less.
xxv. If the demand for loanable funds shifts right, the interest rate
a. and lending increase.
b. and lending decrease.
c. increases and lending decreases.
d. decreases and lending increases.
ANSWER: a. and lending increase.
xxv. An increase in the supply of loanable funds will (other things constant):
a. increase the equilibrium interest rate and decrease investment.
b. increase the equilibrium interest rate and increase investment.
c. decrease the equilibrium interest rate and increase investment.
d. decrease the equilibrium interest rate and decrease investment.
ANSWER: c. decrease the equilibrium interest rate and increase investment.
xxv. Oksana put money in the bank one year ago at an interest rate of 5%; during that time prices rose
by 2%. The dollar value of Oksana’s account has increased
a. 7% and the real value increased 5%.
b. 7% and the real value increased 2%.
c. 5% and the real value increased 7%.
d. 5% and the real value increased 3%.
ANSWER: d. 5% and the real value increased 3%.
xxv. Your boss promises to pay you a retirement bonus of $40,000 when you retire six years from
today. If the interest rate is 5%, the present value of this payment is
a. $40,000/(6  1.05).
b. $40,000/(1.05)6.
c. $40,0000/(6)1.05.
d. $40,000  (1.05)6.
ANSWER: b. $40,000/(1.05)6.
xxv. Roth Individual Retirement Accounts allow people to save a limited amount of money without
paying taxes on the interest when funds are withdrawn. Government programs like these should
increase the
a. demand for loanable funds and lower the interest rate.
b. demand for loanable funds and raise the interest rate.
c. supply of loanable funds and lower the interest rate.
d. supply of loanable funds and raise the interest rate.
ANSWER: c. supply of loanable funds and lower the interest rate.
xxv. During the Presidencies of Kennedy and Reagan tax changes were made that reduced taxes on
investment. Government programs like these should increase the
a. demand for loanable funds and lower the interest rate.
b. demand for loanable funds and raise the interest rate.
c. supply of loanable funds and lower the interest rate.
d. supply of loanable funds and raise the interest rate.
ANSWER: b. demand for loanable funds and raise the interest rate.
xxv. If the government wanted to decrease interest rates and increase investment it could
a. raise the government deficit.
b. reduce taxes on interest income.
c. provide investment tax credits.
ANSWER: b. reduce taxes on interest income.
xxv. Which of the following will shift the demand for loanable funds?
a. a decrease in the market rate of interest
b. a law passed by Congress granting special tax breaks for savers
c. a law passed by Congress granting special tax breaks for borrowers
d. an increase in the market rate of interest
ANSWER: c. a law passed by Congress granting special tax breaks for borrowers
xxv. Replacing the income tax with a consumption tax would

a. increase interest rates and saving.
b. decrease interest rates and saving.
c. increase interest rates and decrease saving.
d. decrease interest rates and increase saving.
ANSWER: d. decrease interest rates and increase saving.
xxv. Between 1814 and 1829 the national debt of the U.S. government fell from about $128 million to
about $50 million. The model of the market for loanable funds suggests that this reduction of the
debt should have
a. increased the interest rate and investment.
b. increased the interest rate and decreased investment.
c. decreased the interest rate and increased investment.
d. decreased the interest rate and investment.
ANSWER: c. decreased the interest rate and increased investment.
xxv. An increase in the budget deficit is represented by shifting the

a. demand for loanable funds right.
b. demand for loanable funds left.
c. supply of loanable funds right.
d. supply of loanable funds left.
ANSWER: d. supply of loanable funds left.
xxv. Suppose the government reduced the tax rate on interest income and used a current budget
surplus to finance this tax cut.
a. The reduction in tax rates and the reduction in the surplus would both shift the supply of
loanable funds right.
b. The reduction in tax rates would shift the supply of loanable funds right. The reduction in
the surplus would shift the supply of loanable funds left.
c. The reduction in tax rates would shift the supply of loanable funds left. The reduction in the
surplus would shift the supply of loanable funds right.
ANSWER: b. The reduction in tax rates would shift the supply of loanable funds right. The reduction
in the surplus would shift the supply of loanable funds left.
Chapter 26
Unemployment and Its Natural Rate
Test A
xxv. The natural rate of unemployment is
a. zero percent.
b. the rate associated with the highest possible level of GDP.
c. created primarily by short-run fluctuations in real GDP.
d. the amount of unemployment that the economy normally experiences.
ANSWER: d. the amount of unemployment that the economy normally experiences.
TYPE: M KEY1: D SECTION: INT OBJECTIVE: 1 RANDOM: Y
xxv. Unemployment data is collected

a. from firms and unemployment insurance claims.
b. through a regular survey of about 60,000 households.
c. from payroll data received for tax purposes.
ANSWER: b. through a regular survey of about 60,000 households.
xxv. Which of the following people is counted as unemployed according to official statistics?
a. Nancy, who is on temporary layoff
b. Gary, who has retired and is not looking for work
c. Brian, a full-time student who is not looking for work
ANSWER: a. Nancy, who is on temporary layoff
xxv. Who would be included in the labor force?

a. Holly, an unpaid homemaker
b. Dave, who does not have a job, but is looking for work
c. Bruce, a full-time student not looking for work
d. None of the above are included in the labor force.
ANSWER: b. Dave, who does not have a job, but is looking for work
xxv.
The BLS recently reported that there were 45.38 million college graduates over age 16. Of this
number 36.08 million were in the labor force and 35.48 were employed. What was the labor-force
participation rate and the unemployment rate for this group?
a. about 78 percent and 1.3 percent
b. about 79.5 percent and 1.7 percent
c. about 92 percent and 1.3 percent
d. about 98 percent and 1.7 percent
ANSWER: b. about 79.5 percent and 1.7 percent.
xxv. Kay loses her job and decides to sit around home for a few months. Ceteris paribus, the
unemployment rate
a. increases, and the labor-force participation rate decreases.
b. increases, and the labor-force participation rate is unaffected.
c. increases, and the labor-force participation rate increases.
d. is unaffected, and the labor-force participation rate increases.
ANSWER: a. increases, and the labor-force participation rate decreases.

a. Teenagers have lower labor-force participation rates and lower unemployment rates than
do adults.
b. Teenagers have lower labor-force participation rates and higher unemployment rates than
do adults.
c. Teenagers have higher labor-force participation rates and higher unemployment rates than
do adults.
d. Teenagers have higher labor-force participation rates and lower unemployment rates than
do adults.
ANSWER: b. Teenagers have lower labor-force participation rates and higher unemployment rates
than do adults.
xxv.
Just after World War II, the labor-force participation rate of women was
a. about 3/5 and currently is 1/2.
b. about 1/2 and currently is about 3/5.
c. about 1/3 and currently is about 3/5.
d. about 1/4 and currently is about 2/3.
ANSWER: c. about 1/3 and currently is about 3/5.
TYPE: M DIFFICULTY: 3 KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
xxv. Suppose that some people report themselves as unemployed when, in fact, they are working in
the underground economy. If these persons were counted as employed,
a. both the unemployment rate and labor-force participation rate would be higher.
b. the unemployment rate would be higher and the labor-force participation rate would be
unchanged.
c. the unemployment rate would be lower and the labor-force participation rate would be
unchanged.
d. both the unemployment rate and labor-force participation rate would be lower.
ANSWER: c. the unemployment rate would be lower and the labor-force participation rate would be
unchanged.
xxv. Christine is looking for work as a financial analyst. Although her prospects are good, she hasn’t
yet taken a job. Pam is looking for work in a furniture factory, but there aren’t many furniture
companies looking for workers and every time she shows up for an interview, there are many
more people than openings.
a. Christine is frictionally unemployed and Pam is structurally unemployed.
b. Christine is structurally unemployed and Pam is frictionally unemployed.
c. Christine and Pam are both frictionally unemployed.
d. Christine and Pam are both structurally unemployed.
ANSWER: a. Christine is frictionally unemployed and Pam is structurally unemployed.
xxv. People who are unemployed because of job search are best classified as
a. cyclically unemployed.
b. discouraged workers.
c. frictionally unemployed.
d. structurally unemployed.
ANSWER: c. frictionally unemployed.
xxv. Sectoral shifts in the economy

a. create structural unemployment.
b. immediately reduce unemployment.
c. on net leave unemployment unchanged.
d. increase unemployment due to job search.
ANSWER: d. increase unemployment due to job search.
xxv. Unemployment insurance

a. reduces job search unemployment.
b. decreases the natural rate of unemployment.
c. increases frictional unemployment.
ANSWER: c. increases frictional unemployment.
xxv. A typical American worker covered by unemployment insurance receives

a. 100 percent of their former wages for 26 weeks.
b. 75 percent of their former wages for 50 weeks.
c. 50 percent of their former wages for 26 weeks.
d. 25 percent of their former wages for 50 weeks.
ANSWER: c. 50 percent of their former wages for 26 weeks.
xxv. An increase in the world price of oil creates a sectoral shift that probably
a. decreases unemployment, and the decrease would be greater in a country with
unemployment insurance than in one without.
b. decreases unemployment, but the decrease would be smaller in a country with
c. increases unemployment, and the increase would be greater in a country with
d. increases unemployment, but the increase would be smaller in a country with
ANSWER: c. increases unemployment, and the increase would be greater in a country with
xxv. Minimum wage laws
a. probably reduce teenage employment.
b. are probably the major cause of natural unemployment.
c. probably most adversely affect skilled workers.
ANSWER: a. probably reduce teenage employment.
xxv. Between the 1940s and today, union membership

a. fell from about 1/2 to 1/3 of the labor force.
b. fell from about 1/3 to 1/6 of the labor force.
c. rose from about 1/6 to 1/3 of the labor force.
d. rose from about 1/3 to 1/2 of the labor force.
ANSWER: b. fell from about 1/3 to 1/6 of the labor force.
xxv. When a union bargains successfully with an employer,

a. the quantity of labor supplied increases but the quantity of labor demanded decreases.
b. the quantity of labor supplied increases but the quantity of labor demanded increases.
c. both the quantity of labor supplied and the quantity of labor demanded increase.
d. both the quantity of labor supplied and the quantity of labor demanded decrease.
ANSWER: a. the quantity of labor supplied increases but the quantity of labor demanded decreases.
xxv. When unions raise wages in one sector of the economy, the supply of labor in other sectors of the
economy
a. decreases, raising wages in industries that are not unionized.
b. decreases, reducing wages in industries that are not unionized.
c. increases, raising wages in industries that are not unionized.
d. increases, reducing wages in industries that are not unionized.
ANSWER: d. increases, reducing wages in industries that are not unionized.
xxv. Right-to-work laws

a. prevent employers from hiring permanent replacements for workers who are on strike.
b. allows employers to replace workers who are on strike.
c. guarantee workers the right to form unions.
d. give workers in a unionized firm the right to choose whether or not to join the union.
ANSWER: d. give workers in a unionized firm the right to choose whether to join the union.
xxv. Angela is the newly appointed CEO of a company that manufactures computer chips on an
assembly line. Her staff has told her that given productivity numbers, they suspect some
workers may be shirking. According to efficiency wage theory, what should she do?
a. Pay all workers more than the equilibrium wage rate.
b. Reward those who shirk with higher wages.
c. Pay below the equilibrium wage rate to make up for the loss from shirking.
d. Make sure that workers are getting paid exactly the equilibrium wage rate.
ANSWER: a. Pay all workers more than the equilibrium wage rate.
xxv. Efficiency wages reduce
a. the average quality of job applicants.
b. labor-force participation rates.
c. the natural rate of unemployment.
d. the incentive to shirk.
ANSWER: d. the incentive to shirk.
xxv. An efficient wage designed to ensure that quality workers are hired is designed principally to
reduce a problem created by
a. adverse selection, but it also increases unemployment.
b. adverse selection, but it also decreases unemployment.
c. moral hazard, but it also increases unemployment.
d. moral hazard, but it also decreases unemployment.
ANSWER: a. adverse selection, but it also increases unemployment.
xxv. Which of the following explanations of the natural rate of unemployment is most important for
the U.S. economy?
a. job search
b. minimum wage laws
c. unions
d. Economists have not determined the answer to this question.
ANSWER: d. Economists have not determined the answer to this question.
xxv. Henry Ford paid his workers $5.00 per day to

a. meet union demands.
b. prevent his workers from unionizing.
c. protest minimum wage laws.
d. increase worker productivity.
ANSWER: d. increase worker productivity.
Chapter 26
Unemployment and Its Natural Rate
Test B
xxv.
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 decreases
real GDP.
c. Cyclical unemployment is inversely related to short-run economic fluctuations.
xxv. According to the BLS, a homemaker is
a. employed.
b. unemployed.
c. not in the labor force.
d. Both b and c are correct.
ANSWER: c. not in the labor force.
xxv. The labor force equals the

a. adult population minus the number of people unemployed.
b. number of people employed plus the number of people unemployed.
c. number of people who are employed.
d. number of people who are unemployed.
ANSWER: b. number of people employed plus the number of people unemployed.
xxv. The unemployment rate is computed as the number of unemployed times 100
a. divided by the labor force.
b. divided by the number of people employed.
c. divided by the adult population.
d. times the participation rate.
ANSWER: a. divided by the labor force.
xxv.
The total population (age 16 and over) of Pageland is 48 million. Of this total, 4 million are
unemployed and 36 million currently hold jobs. What are the rates of unemployment and labor
force participation of Pageland?
a. The rate of unemployment is 11 percent, and the rate of labor force participation is 83
percent.
b. The rate of unemployment is 10 percent, and the rate of labor force participation is 75
percent.
c. The rate of unemployment is 10 percent, and the rate of labor force participation is 83
percent.
d. The rate of unemployment is 11 percent, and the rate of labor force participation is 90
percent.
ANSWER: c. The rate of unemployment is 10 percent, and the rate of labor force participation is 83
percent.
xxv. According to recent statistics from Spain, the unemployment rate was about 16.97% and the
number of people employed was about 13.5 million. About how many people were
unemployed?
a. 1.82 million
b. 2.29 million
c. 2.76 million
d. The answer cannot be determined from the information provided.
ANSWER: c. 2.76 million
xxv.
Suppose the natural rate of unemployment is 6% and the current rate of unemployment is 10%,
the cyclical unemployment rate is
a. –4%.
b. 4%.
c. 9.6%.
d. 16%.
e. None of the above is correct.
ANSWER: b. 4%.
xxv. Since 1950, the participation rate in the United States

a. increased for both men and women.
b. decreased for both men and women.
c. increased for men, but decreased for women.
d. decreased for men, but increased for women.
ANSWER: d. decreased for men, but increased for women.
xxv. Studies have found that most

a. unemployment at a given point in time is short term.
b. spells of unemployment are long.
c. spells of unemployment are caused by discouraged workers.
d. unemployment at any given point in time is long term.
ANSWER: d. unemployment at any given point in time is long term.
xxv. Consider the following sentences. Most spells of unemployment are short. Most unemployment
observed at any given time is long-term.
xxv. Consider the following sentences. Frictional unemployment results because it takes time for
workers to search for the jobs that best suit their taste and skills. Structural unemployment
results because the number of jobs available in some labor markets is insufficient to provide the
jobs for everyone who wants one.
xxv. Unemployment insurance

a. reduces search effort and lowers unemployment.
b. reduces search efforts and raises unemployment.
c. increases search effort and raises unemployment.
d. increases search effort and decreases unemployment.
ANSWER: b. reduces search effort and raises unemployment.
xxv. Higher unemployment insurance benefits tend to increase the level of unemployment because
the higher benefits
a. reduce the opportunity cost of job search and hence increase the search time.
b. increase the opportunity cost of job search and hence increase the search time.
c. reduce the opportunity cost of job search and hence decrease the search time.
d. increase the opportunity cost of job search and hence decrease the search time.
ANSWER: b. increase the opportunity cost of job search and hence increase the search time.
xxv. Which of the following would increase frictional unemployment?

a. a reduction in unemployment insurance
b. increases in the world price of oil
c. increased information about job openings and worker ability
d. All the above are correct.
ANSWER: b. increases in the world price of oil
xxv. Increasing the minimum wage would increase

a. both frictional and structural unemployment.
b. frictional unemployment, but not structural unemployment.
c. structural unemployment, but not frictional unemployment.
d. neither frictional nor structural unemployment.
ANSWER: c. structural unemployment, but not frictional unemployment.
xxv. An increase in the minimum wage would

a. increase both the quantity demanded and the quantity supplied of labor.
b. decrease both the quantity demanded and the quantity supplied of labor.
c. increase the quantity demanded of labor and decrease the quantity supplied of labor.
d. increase the quantity supplied of labor and decrease the quantity demanded of labor.
ANSWER: d. increase the quantity supplied of labor and decrease the quantity demanded of labor.
xxv. If an industry becomes unionized,

a. both employment and wages in that industry tend to rise.
b. wages in that industry tend to rise, while employment in that industry tends to fall.
c. wages in that industry tend to fall, while employment in that industry tends to rise.
d. both employment and wages in that industry tend to fall.
ANSWER: b. wages in that industry tend to rise, while employment in that industry tends to fall.
xxv. In Sweden and Denmark

a. about 1/3 of the workers belong to unions, which is less than in the United States.
b. about 1/3 of the workers belong to unions, which is more than in the United States.
c. about 3/4 of the workers belong to unions, which is less than in the United States.
d. about 3/4 of the workers belong to unions, which is more than in the United States.
ANSWER: d. about 3/4 of the workers belong to unions, which is more than in the United States.
xxv. Efficiency wages
a. increase both productivity and unemployment.
b. decrease both productivity and unemployment.
c. increase productivity and decrease unemployment.
d. decrease productivity and increase unemployment.
ANSWER: a. increase both productivity and unemployment.
xxv. Tom Crown operates a company that produces paintings for motels. Tom decides that if he pays
his workers more that his profits will increase. Which of the following is a likely and logical
explanation for his decision?
a. By paying higher wages, he will be able to charge more for the paintings his workers
produce.
b. By paying higher wages, incompetent workers are less likely to apply.
c. By paying higher wages, workers are less likely to shirk.
ANSWER: c. By paying higher wages, workers are less likely to shirk.
xxv. The theory of efficiency wages implies that if it became easier to accurately evaluate the workers’
abilities, wages
a. and unemployment would rise.
b. would rise and unemployment would fall.
c. would fall and unemployment would rise.
d. and unemployment would fall.
ANSWER: d. and unemployment would fall.
xxv. Anything that makes the efficiency wage rise relative to the market-clearing wage will
a. increase both the quantity demanded and the quantity of labor supplied.
b. decrease both the quantity demanded and the quantity of labor supplied.
c. increase the quantity demanded and decrease the quantity of labor supplied.
d. decrease the quantity demanded and increase the quantity of labor supplied.
ANSWER: d. decrease the quantity demanded and increase the quantity of labor supplied.
xxv. Among experienced professors the ones with the least skills are most likely to be searching for
jobs and as a result schools are likely to be skeptical of applications from all experienced
professors. If workers have much say in who gets hired, they may find it in their best interest to
avoid suggesting the hire of workers that may be superior to them.
a. Both examples illustrate adverse selection.
b. Both examples illustrate moral hazard.
c. The first example illustrates adverse selection, the second illustrates moral hazard.
d. The first example illustrates moral hazard, the second illustrates adverse selection.
ANSWER: c. The first example illustrates adverse selection, the second illustrates moral hazard.
xxv. Which of the following would reduce the natural rate of unemployment?
a. The Internet provides more readily available information about available jobs.
b. Congress increases the minimum wage.
c. Union membership increases.
ANSWER: a. The Internet provides more readily available information about available jobs.
xxv. Which of the following laws would increase the natural rate of unemployment?
a. Congress abolishes the minimum wage.
b. Congress passes laws that make it harder to find out about job candidates’ past job history.
c. Congress passes a law that makes all states adopt right-to-work laws.
ANSWER: b. Congress passes laws that make it harder to find out about job candidates’ past job
history.
Chapter 27
The Monetary System
Test A
xxv. Barter
a. is more efficient than money.
b. makes trading easier than money.
c. allows greater specialization than money.
xxv. Which of the following best illustrates the unit of account function of money?
a. You list prices for candy sold on your Web site, sweet-treats.com, in dollars.
b. You pay for tickets to a WNBA game with dollars.
c. You keep $10 in your backpack for emergencies.
ANSWER: a. You list prices for candy sold on your Web site, sweet-treats.com, in dollars.
xxv. U.S. currency is currently

a. commodity money with no intrinsic value.
b. fiat money with no intrinsic value.
c. commodity money with intrinsic value.
d. fiat money with intrinsic value.
ANSWER: b. fiat money with no intrinsic value.
xxv. Since the U.S. government has decreed that U.S. currency is legal tender,
a. people may not legally make trades with anything else.
b. people are more likely to accept the dollar as a medium of exchange.
c. the government must hold enough gold to redeem all currency.
ANSWER: b. people are more likely to accept the dollar as a medium of exchange.
xxv. M1 includes
a. savings deposits.
b. money market deposit accounts.
c. currency.
ANSWER: c. currency.
xxv. Credit cards are
a. a method of deferring payment.
b. used as a medium of exchange.
c. part of the M2 money supply.
d. equivalent to debit cards.
ANSWER: a. a method of deferring payment.
xxv. Which of the following might explain why the United States has so much currency per person?
a. Currency may be a preferable store of wealth for criminals.
b. U.S. citizens are holding a lot of foreign currency.
c. People use credit and debit cards more frequently.
d. All of the above help explain the abundance of currency.
ANSWER: a. Currency may be a preferable store of wealth for criminals.
xxv. Which Federal Reserve Bank president is always a voting member of the FOMC?
a. Boston
b. New York
c. Chicago
ANSWER: b. New York
xxv. The Federal Open-market Committee is made up of

a. 5 of the 12 presidents of the Federal Reserve Regional banks, and the 7 members of the
Board of Governors.
b. the 12 presidents of the Federal Reserve Regional banks, and the Chair of the Board of
Governors.
c. the 12 presidents of the Federal Reserve Regional banks, and the 7 members of the Board of
Governors.
d. 7 of the 12 presidents of the Federal Reserve Regional banks, and the 5 members of the
Board of Governors.
ANSWER: a. 5 of the 12 presidents of the Federal Reserve Regional banks, and the 7 members of the
Board of Governors.
xxv. The Fed can influence unemployment in

a. the short run, but not the long run.
b. the short and long run.
c. the long run, but not the short run.
d. neither the short nor long run.
ANSWER: a. the short run, but not the long run.
xxv. On a bank’s T-account,

a. deposits are assets, reserves are liabilities.
b. reserves are assets, deposits are liabilities.
c. both deposits and reserves are assets.
d. both deposits and reserves are liabilities.
ANSWER: b. reserves are assets, deposits are liabilities.
xxv. If the reserve ratio is 5 percent and a bank receives a new deposit of $500, this bank
a. must increase its required reserves by $500.
b. will initially see its total reserves increase by $25.
c. will be able to make a new loan of $475.
ANSWER: c. will be able to make a new loan of $475.
TYPE: M DIFFICULTY: 3 KEY1: E SECTION: 3 OBJECTIVE: 3 RANDOM: Y
Last Bank of Hope

Assets Liabilities
Reserves $2,000 Deposits $10,000
Loans $8,000
xxv. If the reserve requirement is 10 percent, the Last Bank of Hope

a. is holding excess reserves of $1,000.
b. is in a position to make a new loan of $2000.
c. has required reserves of $2,000.
d. has less reserves than required.
ANSWER: a. is holding excess reserves of $1,000
TYPE: M DIFFICULTY: 3 KEY1: E SECTION: 3 OBJECTIVE: 3 INSTRUCTION: 2 RANDOM: N
xxv. If the Last Bank of Hope is holding only the amount of reserves required, the reserve
requirement is
a. 100 percent.
b. 80 percent.
c. 20 percent.
d. 12.5 percent.
ANSWER: c. 20 percent.
TYPE: M KEY1: E SECTION: 3 OBJECTIVE: 3 INSTRUCTION: 2 RANDOM: N
xxv. If the reserve ratio is 25 percent, the money multiplier is

a. 2.
b. 4.
c. 5.
d. 8.
ANSWER: b. 4.
xxv. If the reserve ratio is 15 percent, an additional $2,000 of reserves will increase the money supply
by
a. $1,500.
b. $3,000.
c. $13,150.
d. $13,333.
ANSWER: d. $13,333.
xxv. Which list contains only actions that decrease the money supply?
a. lower the discount rate, make open-market purchases
b. lower the discount rate, make open-market sales
c. raise the discount rate, make open-market purchases
d. raise the discount rate, make open-market sales
ANSWER: d. raise the discount rate, make open-market sales
xxv. To increase the money supply, the Fed could
a. sell government bonds.
b. decrease the discount rate.
c. increase the reserve requirement.
ANSWER: b. decrease the discount rate.
xxv. In a fractional reserve banking system, an increase in reserve requirements

a. increases both the money multiplier and the money supply.
b. increases the money multiplier, but decreases the money supply.
c. decreases both the money multiplier and the money supply.
d. decreases the money multiplier, but increases the money supply.
ANSWER: c. decreases both the money multiplier and the money supply.
xxv. When the Fed increases the discount rate, banks will borrow
a. less, banks will lend more, and the money supply will decrease.
b. less, banks will lend less, and the money supply will decrease.
c. more, banks will lend more, and the money supply will increase.
d. more, banks will lend less, and the money supply will decrease.
ANSWER: b. less, banks will lend less, and the money supply will decrease.
xxv. The interest rate the Fed charges on loans it makes to banks is called the
a. discount rate.
b. federal funds rate.
c. prime rate.
d. FOMC rate.
ANSWER: a. discount rate.
xxv. During the stock market crash of October 1987, the Fed
a. nearly created a financial panic by not acting as a lender of last resort.
b. nearly created a financial panic by raising the discount rate.
c. prevented a financial panic by providing liquidity to the financial system.
d. prevented a financial panic by raising reserve requirements.
ANSWER: c. prevented a financial panic by providing liquidity to the financial system.
xxv. If the reserve ratio is 10 percent, and banks do not hold excess reserves, when the Fed purchases
$10 million of government bonds, bank reserves
a. decrease by $10 million and the money supply eventually decreases by $100 million.
b. decrease by $10 million and the money supply eventually increases by $100 million.
c. increase by $10 million and the money supply eventually decreases by $100 million.
d. increase by $10 million and the money supply eventually increases by $100 million.
ANSWER: d. increase by $10 million and the money supply eventually increases by $100 million.
TYPE: M DIFFICULTY: 3 KEY1: E SECTION: 3 OBJECTIVE: 4 RANDOM: Y
xxv. If banks choose to hold more excess reserves,

a. required reserves in the banking system increase.
b. the money multiplier will increase.
c. the discount rate will increase.
d. the money supply falls.
ANSWER: d. the money supply falls.
TYPE: M KEY1: C DIFFICULTLY: 3 SECTION: 3 OBJECTIVE: 4 RANDOM: Y
xxv. The Fed can directly protect a bank during a bank run by
a. increasing reserve requirements.
b. selling government bonds to the bank.
c. lending reserves to the bank.
d. doing any of the above.
ANSWER: c. lending reserves to the bank.
Chapter 27
The Monetary System
Test B
xxv. Giving up a dollar bill to purchase an ice cream cone best illustrates money’s function as a
a. store of wealth.
b. unit of account.
c. medium of exchange.
d. standard of value.
ANSWER: c. medium of exchange.
xxv. Which of the following provides a store of value?

a. U.S. currency
b. stocks in Microsoft Corporation
c. bonds issued by Mrs. Paul’s Corporation
d. All the above are correct.
xxv. Of the following assets which is the most liquid?

a. stocks in Intel Corporation
b. a painting by van Gogh
c. a used car
d. fine jewelry
ANSWER: a. stocks in Intel Corporation
xxv. Which of the following types of currency has intrinsic value?

a. commodity money
b. fiat money
c. both commodity money and fiat money
d. neither commodity money nor fiat money
ANSWER: a. commodity money
xxv. Which of the following is not contained in M1?
a. currency
b. demand deposits
c. savings deposits
d. traveler’s checks
ANSWER: c. savings deposits
xxv. M2 is
a. smaller and less liquid than M1.
b. smaller but more liquid than M1.
c. larger but less liquid than M1.
d. larger than and more liquid than M1.
ANSWER: c. larger but less liquid than M1.
xxv. Credit cards are a

a. store of value.
b. method of deferring payments.
c. medium of exchange included in both M1 and M2.
ANSWER: b. method of deferring payments.
xxv. Which of the following pairs correctly list a function of the Fed and the part of the Fed directly
responsible for the function.
a. income tax policy—Board of Governors
b. conduct open-market operations—The Chair of the Board of Governors
c. lender of last resort—New York Federal Reserve Bank
d. check clearing—regional Federal Reserve Banks
ANSWER: d. check clearing—regional Federal Reserve Banks
xxv. Which part of the Fed meets about every six weeks to discuss the economy and make changes in
monetary policy?
a. the Board of Governors
b. the FOMC
c. the regional Federal Reserve Banks
d. the Central Bank Policy Commission
ANSWER: b. the FOMC
xxv. If the Fed makes open-market purchases it will

a. increase the money supply which will increase the price level.
b. increase the money supply which will decrease the price level.
c. decrease the money supply which will increase the price level.
d. decrease the money supply which will decrease the price level.
ANSWER: a. increase the money supply which will increase the price level.
xxv. FOMC policy decisions have an important influence on the economy’s
a. rate of inflation in the long run and level of employment in the short run.
b. rate of inflation and level of employment in the long run.
c. rate of inflation in the short run and level of employment and long run.
d. employment in the short run, but have no influence on inflation in either the short or long
run.
ANSWER: a. rate of inflation in the long run and level of employment in the short run.
xxv. The First National Bank of Tinyville has $10,000 of reserves. If it is holding no excess reserves,
and the reserve ratio is 10%, its deposits are
a. $90,000.
b. $99,000.
c. $100,000.
d. $110,000.
ANSWER: c. $100,000.
xxv. Which of the following items is a liability to a bank?

a. loans
b. reserves
c. deposits
d. an interest-bearing asset owned by the bank
ANSWER: c. deposits
xxv. If R is the reserve ratio, which of the following is the correct way to find the money multiplier?
a. 1 – R
b. 1/R
c. 1/(1 – R)
d. (1+R)/R
ANSWER: b. 1/R
xxv. The higher the reserve requirement ratio the

a. more of each deposit banks may lend out, and the larger the multiplier.
b. more of each deposit banks may lend out, and the smaller the multiplier.
c. less of each deposit banks may lend out, and the larger the multiplier.
d. less of each deposit banks may lend out, and the smaller the multiplier.
ANSWER: d. less of each deposit banks many lend out, and the smaller the multiplier.
xxv.
Suppose the reserve ratio is 10%. There are $100,000 of excess reserves in the banking
system. The maximum amount by which the money supply can expand is
a. $10,000.
b. $100,000.
c. $900,000.
d. $1,000,000.
ANSWER: d. $1,000,000.
xxv. The Fed’s most frequently used tool of monetary control is
a. open-market operations.
b. changes in reserve requirements.
c. changes in the discount rate.
d. bank runs.
ANSWER: a. open-market operations.
xxv. In 1991 the Federal Reserve lowered the reserve requirement ratio from 12% to 10%. This should
have
a. increased both the money multiplier and the money supply.
b. increased both the money multiplier and the money supply.
c. decreased the money multiplier and increased the money supply.
d. increased the money multiplier and decreased the money supply.
ANSWER: a. increased both the money multiplier and the money supply.
xxv. Suppose the Federal Reserve System purchases one-hundred thousand dollars of government
bonds. If the reserve requirement is 10%, the Fed’s purchase
a. increases the money supply by 90 thousand dollars.
b. increases the money supply by one million dollars.
c. decreases the money supply 90 thousand dollars.
d. decreases the money supply by one million dollars.
ANSWER: b. increases the money supply by one million dollars.
xxv. An increase in the discount rate

a. increases the money supply, while an increase in the reserve ratio decreases the money
supply.
b. or an increase in the reserve ratio increases the money supply.
c. or an increase in the reserve ratio decreases the money supply.
d. decreases the money supply, while an increase in the reserve ratio increases the money
supply.
ANSWER: c. or an increase in the reserve ratio decreases the money supply.
xxv. If the Federal Reserve wished to increase the money supply it could make open-market
a. sales or raise the discount rate.
b. sales or decrease the discount rate.
c. purchases or increase the discount rate.
d. purchases or decrease the discount rate.
ANSWER: d. purchases or decrease the discount rate.
xxv. Which of the following will increase the money supply, but leave the money multiplier
unchanged?
a. an increase in the discount rate.
b. open-market sales.
c. an increase in the reserve ratio.
xxv. An increase in the discount rate encourages banks to borrow
a. more from the Fed and increases the money supply.
b. less from the Fed and reduces the money supply.
c. more from the Fed and reduces the money supply.
d. less from the Fed and increases the money supply.
ANSWER: b. less from the Fed and reduces the money supply.
xxv. During World War II people chose to hold relatively more currency and relatively fewer
checking deposits. This should have
a. increased the money multiplier and the money supply.
b. increased the money multiplier and decreased the money supply.
c. decreased the money multiplier and increased the money supply.
d. decreased the money multiplier and decreased the money supply.
ANSWER: d. decreased the money multiplier and decreased the money supply.
xxv. In the nineteenth century when there were bank runs, banks would make relatively fewer loans
and hold relatively more excess reserves. This should have
a. increased both the money multiplier and the money supply.
b. decreased both the money multiplier and the money supply.
c. increased the money multiplier and decreased the money supply.
d. decreased the multiplier and increased the money supply.
ANSWER: b. decreased both the money multiplier and the money supply.
Chapter 28
Money Growth and Inflation
Test A
xxv. Which of the following concerning U.S. inflation is false?
a. Low inflation was viewed as a triumph of President Carter’s economic policy.
b. There were long periods in the nineteenth century during which prices fell.
c. The U.S. public has viewed inflation of even 7 percent as a major economic problem.
d. U.S. inflation has varied over time, but international data shows even more variation.
ANSWER: a. Low inflation was viewed as a triumph of President Carter’s economic policy.
xxv. There was hyperinflation during

a. 1880 to 1896 in the United States.
b. post World War I Germany.
c. the 1970s in the United States.
ANSWER: b. post World War I Germany.
xxv. When the price level rises, the number of dollars needed to buy a representative basket of goods
a. decreases, so the value of money rises.
b. decreases, so the value of money falls.
c. increases, so the value of money rises.
d. increases, so the value of money falls.
ANSWER: d. increases, so the value of money falls.
xxv. When the money market is drawn with the value of money on the vertical axis, the money
demand curve slopes
a. upward, because at higher prices people want to hold less money.
b. upward, because open-market purchases make more money available.
c. downward, because at higher prices people want to hold more money.
d. downward, because at higher prices people want to hold less money.
ANSWER: c. downward, because at higher prices people want to hold more money.
xxv. When the money market is drawn with the value of money on the vertical axis, the value of
money increases if
a. money demand shifts right or money supply shifts left.
b. money demand shifts left or money supply shifts right.
c. either money demand or money supply shifts right.
d. either money demand or money supply shifts left.
ANSWER: a. money demand shifts right or money supply shifts left.
xxv. When the money market is drawn with the value of money on the vertical axis, the price level
increases if
a. money demand shifts right or money supply shifts left.
b. money demand shifts left or money supply shifts right.
c. either money demand or money supply shifts right.
d. either money demand or money supply shifts left.
ANSWER: b. money demand shifts left or money supply shifts right.
xxv. A decrease in the money supply creates an excess

a. demand for money that is eliminated by rising prices.
b. demand for money that is eliminated by falling prices.
c. supply of money that is eliminated by rising prices.
d. supply of money that is eliminated by falling prices.
ANSWER: b. demand for money that is eliminated by falling prices.
xxv. Hubert spends $60 on a portable CD player.

a. Both the $60 and the CD player are real variables.
b. Both the $60 and the CD player are nominal variables.
c. The $60 is a nominal variable and the CD player is a real variable.
d. The $60 is a real variable and the CD player is a real variable.
ANSWER: c. The $60 is a nominal variable and the CD player is a real variable.
xxv. Steve lowers the hourly wage he pays his employees $1. The employees figure that, even
accounting for the decrease, they can purchase more goods with what they earn in an hour than
they could a year ago. It follows that
a. the workers’ real and nominal wages have risen.
b. the workers’ real wage rose and their nominal wage fell.
c. the workers’ real wage fell and their nominal wage rose.
d. both the real and nominal wages fell.
ANSWER: b. the workers’ real wage rose and their nominal wage fell.
xxv. According to the classical dichotomy, which of the following is influenced by monetary factors?
a. nominal interest rates
b. real GDP
c. employment
ANSWER: a. nominal interest rates
xxv. According to the classical dichotomy, when the money supply doubles, which of the following
also double?
a. the price level
b. nominal wages
c. nominal GDP
xxv. Monetary neutrality implies that an increase in the quantity of money will increase
a. the price level.
b. employment.
c. the percentage of their income people save.
ANSWER: a. the price level.
xxv. Velocity is computed as

a. (P  M)/Y.
b. (Y  M)/P.
c. (P  Y)/M.
d. (Y  M)/V.
ANSWER: c. (P  Y)/M.
xxv. The equation of exchange alone implies that an increase in M could result in
a. an increase in the price level.
b. an increase in real GDP.
c. an increase in nominal GDP.
xxv. If velocity and output were nearly constant,
a. the inflation rate would be much higher than the money supply growth rate.
b. the inflation rate would be much lower than the money supply growth rate.
c. the inflation rate would be about the same as the money supply growth rate.
d. Any of the above could be correct, more information is needed.
ANSWER: c. the inflation rate would be about the same as the money supply growth rate.
xxv. The inflation tax

a. is an alternative to income taxes and government borrowing.
b. taxes those who hold the least amount of money most.
c. is the cost to the government of printing currency.
ANSWER: a. is an alternative to income taxes and government borrowing.
xxv. If the money supply growth rate permanently increased from 10 percent to 20 percent we would
expect that inflation and nominal interest rates would both increase
a. by more than 10 percentage points.
b. by 10 percentage points.
c. but by less than 10 percentage points.
ANSWER: b. by 10 percentage points.
TYPE: M DIFFICULTY: 3 KEY1: C SECTION: 1 OBJECTIVE: 4 RANDOM: Y
xxv. An increase in the money supply growth rate increases

a. inflation, nominal interest rates, and real interest rates.
b. inflation and real interest rates, but does not change nominal interest rates.
c. inflation and nominal interest rates, but does not change real interest rates.
d. nominal and real interest rates, but does not change inflation.
ANSWER: c. inflation and nominal interest rates, but does not change real interest rates.
xxv. Shoeleather costs refer to

a. the cost of more frequent price changes induced by higher inflation.
b. resources used to maintain lower money holdings when inflation is high.
c. the distortion in resource allocation created by distortions in relative prices due to inflation.
d. the distortion in incentives, created by inflation, by taxes that do not adjust for inflation.
ANSWER: b. resources used to maintain lower money holdings when inflation is high.
xxv. Menu costs refer to

a. the distortion in incentives created by inflation when taxes do not adjust for inflation.
b. the cost of more frequent price changes induced by higher inflation.
c. resources used by people to maintain lower money holdings when inflation is high.
d. the distortion in resource allocation created by distortions in relative prices due to inflation.
ANSWER: b. the cost of more frequent price changes induced by higher inflation.
TYPE: M KEYle1: D SECTION: 2 OBJECTIVE: 5 RANDOM: Y
xxv. You buy stock and its price rises more than the price level; before taxes you made a nominal
a. and real gain, and you pay taxes on the nominal gain.
b. and real gain, and you pay taxes only on the real gain.
c. gain and real loss, yet you pay taxes on the nominal gain.
d. gain and real loss, the real loss means you pay less tax.
ANSWER: a. and real gain, and you pay taxes on the nominal gain.
xxv. Given a nominal interest rate of 20 percent, in which case would you earn the highest after-tax
real interest rate?
a. Inflation is 5 percent; the tax rate is 20 percent.
b. Inflation is 4 percent; the tax rate is 30 percent.
c. Inflation is 3 percent; the tax rate is 40 percent.
d. The after-tax real interest rate is the same for all of the above.
ANSWER: a. Inflation is 5 percent; the tax rate is 20 percent.
xxv. Which of the following inflation costs matter even when actual and expected inflation are the
same?
a. menu costs
b. inflation induced tax distortions
c. relative price variability
TYPE: M KEY1: D DIFFICULTY: 3 SECTION: 2 OBJECTIVE: 5 RANDOM: Y
xxv. In 1898, prospectors on the Klondike River discovered gold. This discovery caused an
unexpected price level
a. decrease, which helped creditors at the expense of debtors.
b. decrease, which helped debtors at the expense of creditors.
c. increase, which helped creditors at the expense of debtors.
d. increase, which helped debtors at the expense of creditors.
ANSWER: d. increase, which helped debtors at the expense of creditors.
xxv. In order to maintain stable prices, the central bank must

a. tightly control the money supply.
b. keep unemployment low.
c. sell indexed bonds.
ANSWER: a. tightly control the money supply.
Chapter 28
Money Growth and Inflation
Test B
xxv.
Which of the following concerning U.S. inflation is incorrect?
a. Over the last 60 years the average inflation rate was about 5%.
b. In the nineteenth century there were periods of deflation.
c. Inflation was relatively low in the 1990s.
d. Farmers were especially hurt by the high inflation of the late 1800s.
ANSWER: d. Farmers were especially hurt by the high inflation of the late 1800s.
xxv. The quantity theory of money is helpful for explaining
a. hyperinflation only.
b. moderate inflation only.
c. Both moderate inflation and hyperinflation.
d. Neither moderate inflation nor hyperinflation.
ANSWER: c. Both moderate inflation and hyperinflation.
xxv. When the price level falls, 1/P

a. increases and the value of money increases.
b. increases and the value of money decreases.
c. decreases and the value of money increases.
d. decreases and the value of money decreases.
ANSWER: a. increases and the value of money increases.
xxv. The money supply curve shifts right if

a. the Fed sells bonds in the open market.
b. 1/P rises.
c. the Fed buys bonds in the open market.
ANSWER: c. the Fed buys bonds in the open market.
xxv. As the price level increases, people want to hold a

a. larger quantity of money as shown by moving along the money demand curve.
b. larger quantity of money as shown by shifting the money demand curve.
c. smaller quantity of money as shown by moving along the money demand curve.
d. smaller quantity of money as shown by shifting money demand curve.
ANSWER: a. larger quantity of money as shown by moving along the money demand curve.
xxv. The quantity of money supplied is balanced with the quantity of money demanded by
adjustments in the
a. interest rate in both the long run and the short run.
b. price level in both the long run and the short run.
c. interest rate in the long run and adjustments in the price level in the short run.
d. price level in the long run and adjustments in the interest rate in the long run.
ANSWER: d. price level in the long run and adjustments in the interest rate in the long run.
xxv. A decrease in the equilibrium quality of money and an increase in the equilibrium value of
money could be created by
a. an increase in money demand.
b. an increase in money supply.
c. a decrease in money supply.
d. a decrease in money demand.
ANSWER: c. a decrease in money supply.
xxv. Suppose the economy is initially in monetary equilibrium. The Federal Reserve then increases
the money supply. As a result the quantity of money demanded will
a. exceed the quantity of money supplied, and the price level will fall.
b. exceed the quantity of money supplied, and the price level will increase.
c. be less than the quantity of money supplied, and the price level will fall.
d. be less than the quantity of money supplied, and the price level will increase.
ANSWER: d. be less than the quantity of money supplied, and the price level will increase.
xxv. Which of the following both cause the price level to decrease?
a. an increase in money supply and an increase in money demand.
b. an increase in money supply and a decrease in money demand.
c. a decrease in money supply and an increase in money demand.
d. a decrease in money supply and a decrease in money demand.
ANSWER: b. an increase in money supply and a decrease in money demand.
xxv. Which of the following is an example of a real variable?

a. the income of your economics professor
b. the dollar value of the economy’s output
c. the quantity of rice produced by a rice farmer
d. the profits earned by Ford Motor Company in 2000
ANSWER: c. the quantity of rice produced by a rice farmer
xxv. If there is monetary neutrality which of the following change when the money supply changes?
a. real interest rates
b. the price level
c. employment
d. building and modernizing of factories.
ANSWER: b. the price level
xxv. Today most economists accept Hume’s conclusion of monetary neutrality as an accurate
description of the economy in
a. both the long run and the short run.
b. neither the short run nor the long run.
c. the short run only.
d. the long run only.
ANSWER: d. the long run only.
xxv. The economy of Empe produces only compact discs. In a recent year they produced 6,000
compact discs at a price of $12 each. They had a money supply of $6,000. For that year the
velocity of money in Empe
a. was 1/12.
b. was 1.
c. was 12.
d. cannot be determined from the information given.
ANSWER: c. was 12.
xxv. According to the quantity equation, other things the same, the price level would increase if either
the money supply
a. or the velocity of money increased.
b. or the velocity of money decreased.
c. increased or the velocity of money decreased.
d. decreased or the velocity of money increased.
ANSWER: a. or the velocity of money increased.
xxv. Consider the following two assumptions. The velocity of money is stable over time. Factory
supplies and production technology primarily determine the economy’s output of goods and
services.
a. Both assumptions are important to the quantity theory of money.
b. Neither assumption is important to the quantity theory of money.
c. Only the first assumption is important to the quantity theory of money.
d. Only the second assumption is important to the quantity theory of money.
ANSWER: a. Both assumptions are important to the quantity theory of money.
xxv. Data on hyperinflation indicates,

a. that money supply growth was much greater than inflation.
b. that money supply growth was about the same as inflation.
c. that money supply growth was much less than inflation.
d. no close relationship between money supply growth and inflation.
ANSWER: b. that the money supply growth was about the same as inflation.
xxv. An analysis of countries experiencing rapid rates of inflation indicates that inflation is generally:
a. caused by strong labor unions.
b. the result of restrictive macropolicy, which pushes up interest rates.
c. caused by the impulse buying of consumers, who continue to purchase the same goods
even when prices go up.
d. the result of allowing the money supply to grow too rapidly.
ANSWER: d. the result of allowing the money supply to grow too rapidly.
xxv. The inflation tax refers to the tendency

a. of real interest rates to rise when money supply growth rises.
b. for the value of dollars people hold to fall as the government prints more money.
c. for people to pay more income tax as prices rise.
ANSWER: b. for the value of dollars people hold to fall as the government prints more money.
xxv. According to the Fisher effect, when the rate of money supply growth increases
a. both real and nominal interest rates should increase.
b. both real and nominal interest rates should decrease.
c. real interest rates should increase and nominal interest rates should be unchanged.
xxv. Inflation was higher in Argentina in the 1980s than in the 1990s. If the Fisher effect is correct, we
would expect to observe that in Argentina
a. nominal interest rates were higher in the 1980s than in the 1990s.
b. nominal interest rates were higher in the 1990s than in the 1980s.
c. real interest rates were higher in the 1980s than in the 1990s.
d. real interest rates were higher in the 1990s than in the 1980s.
ANSWER: a. nominal interest rates were higher in the 1980s than in the 1990s.
xxv. If wages and prices both rose by 5%, workers’

a. real wages would rise so they would be better-off.
b. real wages would be unchanged, so they would be neither better-off nor worse-off.
c. nominal wage would fall, so they would be worse-off.
ANSWER: b. real wages would be unchanged, so they would be neither better-off nor worse-off.
xxv. Shoeleather costs refer to

a. resources people use to reduce their money holdings when inflation is high.
b. the tendency of some costs to rise more than others when inflation rises.
c. the costs incurred by people looking for better-paying jobs when inflation rises.
ANSWER: a. resources people use to reduce their money holdings when inflation is high.
xxv. Menu costs refer to the costs of

a. comparing prices.
b. changing prices.
c. comparing alternative investments.
ANSWER: b. changing prices.
xxv. If the nominal interest rate is 10%, the inflation rate is 6%, and the tax rate is 20%, what is the
after-tax real rate of interest?
a. 4%
b. 3.2%
c. 2.8%
d. 2%
ANSWER: d. 2%
xxv. If a country suddenly and unexpectedly reduces monetary growth inflation will be unexpectedly
a. low and wealth is redistributed from borrowers to lenders.
b. low and wealth is redistributed from lenders to borrowers.
c. high and wealth is redistributed from lenders to borrowers.
ANSWER: a. low and wealth is redistributed from borrowers to lenders.
Chapter 29
Open-Economy Macroeconomics: Basic
Concepts
Test A
xxv. Who is worse-off when countries trade?
a. both the exporting and importing county
b. only the exporting country
c. only the importing country
d. neither the exporting nor importing country
ANSWER: d. neither the exporting nor importing country
xxv. International trade is of major importance for understanding

a. the nature of inflation.
b. the basics of the natural unemployment rate.
c. macroeconomics in closed economies.
xxv. Net exports of a country are the value of goods

a. exported minus the value of goods imported.
b. imported minus the value of goods exported.
c. and services imported minus the value of goods and services exported.
d. and services exported minus the value of goods and services imported.
ANSWER: d. and services exported minus the value of goods and services imported.
xxv. Peter, a Canadian citizen, sells several hundred cases of smoked salmon to a restaurant chain in
the United States. By itself this sale
a. decreases U.S. net exports and has no effect on Canadian net exports.
b. decreases U.S. net exports and increases Canadian net exports.
c. increases U.S. net exports and has no effect on Canadian net exports.
d. increases U.S. net exports and decreases Canadian net exports.
ANSWER: b. decreases U.S. net exports and increases Canadian net exports.
xxv. U.S. imports account for about what percentage of GDP?

a. less than 1 percent
b. about 4 percent
c. about 7 percent
d. over 10 percent
ANSWER: d. over 10 percent
xxv. If a resident of the United States buys stock in a Japanese corporation, this is an example of U.S.
a. foreign portfolio investment.
b. foreign direct investment.
c. exports.
d. imports.
ANSWER: a. foreign portfolio investment.
xxv. Brad, a U.S. resident, builds and operates a boxing gym in Thailand. The purchase represents
a. U.S. foreign direct investment and U.S. domestic investment.
b. U.S. foreign portfolio investment and U.S. domestic investment.
c. investment for Brad and U.S. foreign direct investment.
d. investment for Brad and U.S. foreign portfolio investment.
ANSWER: c. investment for Brad and U.S. foreign direct investment.
xxv. Paul, a U.S. citizen, opens a textbook company in Brazil. His expenditures
a. decrease U.S. and Brazilian net foreign investment.
b. increase U.S. and Brazilian net foreign investment.
c. increase U.S. net foreign investment, but decrease Brazilian net foreign investment.
d. decrease U.S. net foreign investment, but increase Brazilian net foreign investment.
ANSWER: c. increase U.S. net foreign investment, but decrease Brazilian net foreign investment.
xxv. While making investment decisions, investors

a. compare the nominal, but not the real, interest rates offered on different bonds.
b. compare the real interest rates offered on different bonds.
c. purchase the highest-priced bond available.
ANSWER: b. compare the real interest rates offered on different bonds.

a. In many countries, the government finances a much larger share of investment projects than
they used to.
b. Foreign stock markets make up an increasing share of the value of stock worldwide.
c. The U.S. stock market accounts for less than 1/3 of the value of stocks worldwide.
ANSWER: b. Foreign stock markets make up an increasing share of the value of stock worldwide.
xxv. Which of the following is true?

a. NX + NFI = Y
b. Y = NFI – NX
c. NFI = NX
d. NFI + I = NX
ANSWER: c. NFI = NX
xxv. If a U.S. shirtmaker purchases cotton from Egypt, U.S. net exports
a. decrease, and U.S. net foreign investment increases.
b. decrease, and U.S. net foreign investment decreases.
c. increase, and U.S. net foreign investment increases.
d. increase, and U.S. net foreign investment decreases.
ANSWER: b. decrease, and U.S. net foreign investment decreases.
a. The total movement of capital from advanced to developing nations is a large fraction of the
world’s total investment.
b. Growing exports of manufactured goods from South to North will lead to a net loss of
northern industrial jobs only if they are not matched by growth in exports from North to
South.
c. Exports from Third World countries of manufactured goods equal about 1 percent of First
World income.
d. Growing exports to the newly industrialized countries have created about as many jobs as
growing imports have displaced.
ANSWER: a. The total movement of capital from advanced to developing nations is a large fraction
of the world’s total investment.
xxv. Which of the following equations is correct?

a. S = I + C
b. S = I + NFI
c. S = I – NX
ANSWER: b. S = I + NFI
xxv. After 1980, U.S. Net Foreign Investment fell dramatically, but the U.S. economy did not
experience a similar fall in domestic investment. Hence, saving in the United States must
a. have decreased dramatically.
b. have increased dramatically.
c. have been about unchanged.
d. not necessarily have done any of the above.
ANSWER: a. have decreased dramatically.
xxv. If the exchange rate changes from 30 Thai bhat per dollar to 45 Thai bhat per dollar, the dollar
has
a. depreciated and so buys more Thai goods.
b. depreciated and so buys fewer Thai goods.
c. appreciated and so buys fewer Thai goods.
d. appreciated and so buys more Thai goods.
ANSWER: d. appreciated and so buys more Thai goods.
xxv. Suppose that a ton of coal costs 1500 British pounds in the UK and $2000 in the United States. If
the nominal exchange rate is .75 British pounds per dollar, the real exchange rate is
a. 4/3 tons of British coal per ton of U.S. coal.
b. 1 ton of British coal per ton of U.S. coal.
c. 4/3 tons of U.S. coal per ton of British coal.
d. None of the above are correct.
ANSWER: b. 1 ton of British coal per ton of U.S. coal.
xxv. If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the
foreign price is P*, the real exchange rate is defined as
a. e(P/P*).
b. e(P*/P).
c. e + P/P.
d. e – P/P*.
ANSWER: a. e(P/P*).
xxv. A depreciation of the U.S. real exchange rate induces U.S. consumers to buy
a. fewer domestic goods and fewer foreign goods.
b. fewer domestic goods and more foreign goods.
c. more domestic goods and fewer foreign goods.
d. more domestic goods and more foreign goods.
ANSWER: c. more domestic goods and fewer foreign goods.
xxv. If the U.S. real exchange rate appreciates relative to the French franc, U.S. exports to France
a. rise, and French exports to the United States fall.
b. fall, and French exports to the United States rise.
c. and French exports to the United States rise.
d. and French exports to the United States fall.
ANSWER: b. fall, and French exports to the United States rise.
xxv. Suppose that the dollar buys more coffee in Kenya than in Brazil. Traders could make a profit by
buying coffee in
a. Kenya and selling it in Brazil, which would tend to raise the price of coffee in Kenya.
b. Kenya and selling it in Brazil, which would tend to raise the price of coffee in Brazil.
c. Brazil and selling it in Kenya, which would tend to raise the price of coffee in Brazil.
d. Brazil and selling it in Kenya, which would tend to raise the price of coffee in Kenya.
ANSWER: a. Kenya and selling it in Brazil, which would tend to raise the price of coffee in Kenya.
xxv. If P = domestic prices, P* = foreign prices, and e is the exchange rate, which of the following is
implied by purchasing-power parity?
a. P = e/P*
b. e = P*/P
c. 1 = e/P*
ANSWER: b. e = P*/P
xxv. When a country’s central bank decreases the money supply, its price level
a. rises and its currency depreciates relative to other currencies in the world.
b. falls and its currency depreciates relative to other currencies in the world.
c. rises and its currency appreciates relative to other currencies in the world.
d. falls and its currency appreciates relative to other currencies in the world.
ANSWER: d. falls and its currency appreciates relative to other currencies in the world.
xxv.
When a country’s central bank increases the money supply, a unit of money
a. loses value in terms of the domestic goods and services it can buy, but gains value in terms
of the foreign currency it can buy.
b. loses value both in terms of the domestic goods and services it can buy and in terms of the
foreign currency it can buy.
c. gains value both in terms of the domestic goods and services it can buy and in terms of the
foreign currency it can buy.
d. gains value in terms of the domestic goods and services it can buy, but loses value in terms
of the foreign currency it can buy.
ANSWER: b. loses value both in terms of the domestic goods and services it can buy and in terms of
the foreign currency it can buy.
xxv. On behalf of your firm, you make frequent trips to Liberia. You notice that you always have to
pay fewer dollars to get the local currency to have your hair styled than you have to pay for
similar styling in the United States. This is
a. inconsistent with purchasing-power parity, but might be explained by limited opportunities
for arbitrage in hair styling across international borders.
b. consistent with purchasing-power parity if prices in Liberia are rising more rapidly than
prices in the United States.
c. consistent with purchasing-power parity if prices in Liberia are rising less rapidly than
prices in the United States.
ANSWER: a. inconsistent with purchasing-power parity, but might be explained by limited
opportunities for arbitrage in hair styling across international borders.
Chapter 29
Open-Economy Macroeconomics: Basic
Concepts
Test B
xxv. In 1999 Morocco exported $5.9 billion of goods and services and imported $8.4 billion. Morocco
had a trade balance of about
a. $14.3 billion.
b. $2.5 billion.
c. $0.
d. –$2.5 billion.
ANSWER: d. –$2.5 billion.
xxv. Which of the following would be consistent with a trade balance of $5 billion?
a. exports and imports each equal $2.5 billion.
b. exports equal $15 billion and imports equal $10 billion.
c. imports equal $12 billion and imports equal $17 billion.
ANSWER: b. exports equal $15 billion and imports equal $10 billion.
TYPE: M KEY1: D SECTION: OBJECTIVE: RANDOM: Y
xxv. A Swiss firm opens a watch factory in the United States.
a. This is Swiss foreign direct investment and by itself increases Swiss net foreign investment.
b. This is Swiss foreign direct investment and by itself decreases Swiss net foreign investment.
c. This is Swiss foreign portfolio investment and by itself increases Swiss net foreign
investment.
d. This is Swiss foreign portfolio investment and by itself decreases Swiss net foreign
investment.
ANSWER: a. This is Swiss foreign direct investment and by itself increases Swiss net foreign
investment.
xxv. A U.S. firm opens a factory that produces camping equipment in Albania, by itself
a. this increases U.S. net foreign investment and decreases Albanian net foreign investment.
b. this decreases U.S. net foreign investment and increases Albanian net foreign investment.
c. increases only U.S. net foreign investment.
d. increases only Albanian net foreign investment.
ANSWER: a. this increases U.S. net foreign investment and decreases Albanian net foreign
investment.
xxv. Suppose that the real return from operating factories in Ghana decreases relative to the real rate
of return in the United States. Other things the same,
a. this increases U.S. net foreign investment and decreases Ghanan net foreign investment.
b. this decreases U.S. net foreign investment and increases Ghanan net foreign investment.
c. increases only U.S. net foreign investment.
d. increases only Ghanan net foreign investment.
ANSWER: b. this decreases U.S. net foreign investment and increases Ghanan net foreign
investment.
xxv. A U.S. computer maker sells computers to a German firm. The U.S. company uses all of the
revenues from this sale to purchase automobiles from German firms. These transactions
a. increase both U.S. net exports and U.S. net foreign investment.
b. decrease both U.S. net exports and U.S. net foreign investment.
c. increase U.S. net exports but do not affect U.S. net foreign investment.
xxv. Brazil buys railroad engines from a U.S. firm and pays for them with bolivianos (Bolivian
currency). By itself this transaction
a. increases both U.S. net exports and U.S. net foreign investment.
b. decreases both U.S. net exports and U.S. net foreign investment.
c. increases U.S. net exports but does not affect U.S. net foreign investment.
ANSWER: a. increases both U.S. net exports and U.S. net foreign investment.
xxv. In which of the following situations must national saving rise?

a. domestic investment increases and net foreign investment decreases.
b. domestic investment decreases and net foreign investment increases.
c. both domestic investment and net foreign investment increase.
d. net exports decrease and domestic investment is unchanged.
ANSWER: c. both domestic investment and net foreign investment increase.
xxv. The difference between savings in an open and closed economy equals
a. net exports.
b. net foreign investment.
xxv. Consider the following two actions. 1. Kohl’s, a U.S. department store chain, builds new stores in
Sweden. 2. Rudy, a U.S. citizen, buys newly issued bonds from Campmore.com who uses the
money to build additional warehouse space in the United States.
a. Both 1. and 2. increase U.S. savings.
b. Neither 1. nor 2. increase U.S savings.
c. 1. increases U.S. savings, but 2. does not.
d. 2. increases U.S. savings, but 1. does not.
ANSWER: a. Both 1. and 2. increase U.S. savings.
xxv. During the twenty years or so before this text was written the United States had
a. both positive net exports and net foreign investment.
b. both negative net exports and net foreign investment.
c. positive net exports and negative net foreign investment.
d. negative net exports and positive net foreign investment.
ANSWER: b. both negative net exports and net foreign investment.
xxv. Which of the following is a true statement?

a. Net foreign investment always equals a nation’s net exports.
b. Net foreign investment equals a nation’s exports plus national saving.
c. National saving equals net foreign investment minus domestic investment.
d. National saving equals domestic investment minus net foreign investment.
ANSWER: a. Net foreign investment always equals a nation’s net exports.
xxv. If a country has business opportunities that are relatively attractive compared to other countries,
we would expect it to have
a. both positive net exports and positive net foreign investment.
b. both negative net exports and negative net foreign investment.
c. positive net exports and negative net foreign investment.
d. negative net exports and positive net foreign investment.
ANSWER: b. both negative net exports and negative net foreign investment.
xxv. In late 1999 you could purchase about 325 Greek drachma (Greek currency) for a dollar. In late
2000 you could purchase about 400 drachma for a dollar. These exchange rates are given in
a. real terms, and over this period the dollar appreciated.
b. real terms, and over this period the dollar depreciated.
c. nominal terms, and over this period the dollar appreciated.
d. nominal terms, and over this period the dollar depreciated.
ANSWER: c. nominal terms, and over this period the dollar appreciated.
xxv. In January 2000 the exchange rate was 5.6 new kwanza (Angolan currency) per dollar. In January
2001 it was 6 new kwanza per dollar.
a. The dollar appreciated and so other things the same was worth more Angolan goods.
b. The dollar appreciated and so other things the same was worth fewer Angolan goods.
c. The dollar depreciated and so other things the same was worth more Angolan goods.
d. The dollar depreciated and so other things the same was worth fewer Angolan goods.
ANSWER: a. The dollar appreciated and so other things the same was worth more Angolan goods.
xxv. In the United States a three-pound can of coffee costs about $6. Suppose the exchange rate is
about 50 Belgian francs per dollar and that a three-pound can of coffee in Belgium costs about
400 francs. What is the real exchange rate?
a. 4/3 cans of Belgian coffee per can of U.S. coffee.
b. 3/2 cans of Belgian coffee per can of U.S. coffee.
c. 3/4 cans of Belgian coffee per can of U.S. coffee.
d. 2/3 cans of Belgian coffee per can of U.S. coffee.
ANSWER: c. 3/4 cans of Belgian coffee per can of U.S. coffee.
xxv. Suppose the nominal exchange rate is 100, the domestic price index is 50, and the foreign price
index is 10. The real exchange rate is:
a. 1,000.
b. 500.
c. 100.
d. 50.
ANSWER: b. 500.
xxv. Suppose that the exchange rate is 50 Bangladesh taka per dollar, that a bushel of rice costs 200
taka in Bangladesh and $3 in the United States. Then the real exchange rate is
a. greater than one and arbitragers could profit by buying rice in the United States and selling
it in Bangladesh.
b. greater than one and arbitragers could profit by buying rice in Bangladesh and selling it in
the United States.
c. less than one and arbitragers could profit by buying rice in the United States and selling it
in Bangladesh.
d. less than one and arbitragers could profit by buying rice in Bangladesh and selling it in the
United States.
ANSWER: c. less than one and arbitragers could profit by buying rice in the United States and
selling it in Bangladesh.
xxv. Which of the following does purchasing-power parity imply?

a. the purchasing power of the dollar is the same in the United States as in foreign countries.
b. the price of domestic goods relative to foreign goods cannot change.
c. the nominal exchange rate is the ratio of U.S. prices to foreign prices.
ANSWER: a. the purchasing power of the dollar is the same in the United States as in foreign
countries.
TYPE: M KEY1: C DIFFICULTY: 3 SECTION: 3 OBJECTIVE: 6 RANDOM: Y
xxv. The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United
States costs $40, how many florins must a basket of goods in Aruba cost for purchasing-power
parity to hold?
a. 20 florin.
b. 40 florin.
c. 80 florin.
d. 100 florin.
ANSWER: c. 80 florin.
xxv. The exchange rate is about 200 Kazakhstan tenge per dollar. According to purchasing power
parity this exchange rate would rise if the price level in
a. either the United States or Kazakhstan rose.
b. either the United States or Kazakhstan fell.
c. the United States rose or the price level in Kazakhstan fell.
d. the United States fell or the price level in Kazakhstan rose.
ANSWER: d. the United States fell or the price level in Kazakhstan rose.
xxv. If inflation in other countries is higher than inflation in the United States over the next few
months and exchange rates are given in terms of how much foreign currency a dollar buys and
how many foreign goods U.S. goods buy, according to purchasing-power parity we should
expect to see
a. both the real and nominal exchange rate appreciate.
b. both the real and nominal exchange rate depreciate.
c. only the real exchange rate depreciate.
d. only the nominal exchange rate appreciate.
ANSWER: d. only the nominal exchange rate appreciate.
xxv. Suppose the dollar depreciates relative to the British pound. We know that:
a. prices in the United States are falling.
b. prices in the United States are rising.
c. prices in Great Britain are rising.
d. United States dollars will buy more British pounds.
ANSWER: b. prices in the United States are rising.
xxv. If exchange rates are given in terms of how much foreign currency a dollar buys and how many
foreign goods U.S. goods buy, then if the Fed increased the U.S. money supply other things the
same, purchasing-power parity implies
a. both the real and nominal exchange rate depreciate.
b. only the real exchange rate depreciates.
c. only the nominal exchange rate depreciates.
ANSWER: c. only the nominal exchange rate depreciates.
xxv. Which of the following would be inconsistent with purchasing-power parity?
a. Tom is traveling in Europe; he notices that he will have to give up the same amount of U.S.
currency to obtain foreign currency to eat breakfast whether he eats in London or Paris.
b. You observe that the exchange rate is 40 French francs per dollar. Over the next year
inflation is higher in France than in the United States and the exchange rate is still 40 French
francs per dollar.
c. Both of the above are inconsistent with purchasing-power parity.
d. Neither of the above is inconsistent with purchasing-power parity.
ANSWER: b. You observe that the exchange rate is 40 French francs per dollar. Over the next year
inflation is higher in France than in the United States and the exchange rate is still 40
French francs per dollar.
Chapter 30
A Macroeconomic Theory of the Open
Economy
Test A
xxv.
Over the past decade, the United States has
a. usually been very near to a trade balance.
b. persistently had a trade deficit.
c. persistently had a trade surplus.
d. had trade deficits about as often as trade surpluses.
ANSWER: b. persistently had a trade deficit.
xxv. In an open economy, the market for loanable funds equates national saving with
a. domestic investment.
c. the sum of domestic investment and net foreign investment.
d. the supply of foreign currency.
ANSWER: c. the sum of domestic investment and net foreign investment.
xxv. A rise in the real interest rate

a. encourages investment and so increases the quantity of loanable funds supplied.
b. encourages investment and so decreases the quantity of loanable funds demanded.
c. discourages investment and so increases the quantity of loanable funds supplied.
d. discourages investment and so decreases the quantity of loanable funds demanded.
ANSWER: d. discourages investment and so decreases the quantity of loanable funds demanded.
xxv. If the interest rate were above the equilibrium level, the
a. shortage of loanable funds would drive the interest rate downward.
b. surplus of loanable funds would drive the interest rate downward.
c. shortage of loanable funds would drive the interest rate upward.
d. surplus of loanable funds would drive the interest rate upward.
ANSWER: b. surplus of loanable funds would drive the interest rate downward.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 RANDOM: Y
xxv.
In the figure shown, if the real interest rate is 5 percent, there will be
a. equilibrium.
b. a shortage of 25.
c. a surplus of 50.
ANSWER: c. a surplus of 50.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 1 GRAPH FORMAT: M RANDOM: Y GRAPH: 1

a. When U.S. net exports are negative, the purchase of capital assets abroad exceeds the sale of
capital assets abroad.
b. When U.S. net exports are positive, Americans must be selling foreign assets.
c. The imbalance between exports and imports of goods and services equals the imbalance
between the purchase and sale of capital assets abroad.
ANSWER: c. The imbalance between exports and imports of goods and services equals the
imbalance between the purchase and sale of capital assets abroad.
xxv. In the market for foreign currency exchange, the amount of net foreign investment desired at
each real interest rate represents the quantity of dollars
a. supplied for the purpose of buying assets abroad.
b. supplied for the purpose of selling assets domestically.
c. demanded for the purpose of buying U.S. net exports of goods and services.
d. demanded for the purpose of importing foreign goods and services.
ANSWER: a. supplied for the purpose of buying assets abroad.
xxv. Net foreign investment = net exports implies that

a. national saving equals domestic investment.
b. the supply of dollars equals the demand for dollars in the foreign-currency exchange
market.
c. the supply of loanable funds equals the demand for foreign funds in the open-economy
macroeconomic model.
ANSWER: b. the supply of dollars equals the demand for dollars in the foreign-currency exchange
market.
xxv. An appreciation of the real exchange rate for the dollar
a. decreases the quantity of dollars demanded in the market for foreign-currency exchange.
b. increases the quantity of dollars demanded in the market for foreign-currency exchange.
c. shifts the demand for dollars in the market for foreign-currency exchange to the right.
d. shifts the demand for dollars in the market for foreign-currency exchange to the left.
ANSWER: a. decreases the quantity of dollars demanded in the market for foreign-currency
exchange.
xxv. The variable that links the market for loanable funds and the foreign-currency exchange market
is
a. national saving.
b. net exports.
c. net foreign investment.
d. domestic investment.
ANSWER: c. net foreign investment.
xxv. Ceteris paribus, if the Italian real interest rate were to decrease, Italian net foreign investment
a. would rise, while net foreign investment of other countries would fall.
b. would fall, while net foreign investment of other countries would rise.
c. and net foreign investment of other countries would rise.
d. and net foreign investment of other countries would fall.
ANSWER: a . would rise, while net foreign investment of other countries would fall.
xxv. Between 1995 and 1998 Sweden decreased their budget deficit. This change shifted Sweden’s
a. demand for loanable funds left.
b. demand for loanable funds right.
c. supply of loanable funds left.
d. supply of loanable funds right.
ANSWER: d. supply of loanable funds right.
xxv. Which of the following increases when the budget deficit of the United States increases?
a. U.S. supply of loanable funds.
c. the real exchange rate.
ANSWER: c. the real exchange rate.
xxv. In the 1980s the U.S. budget deficit rose. At the same time the U.S. trade deficit grew larger, the
real exchange rate of the dollar appreciated, and U.S. net foreign investment decreased. Which of
these events is consistent with what the open-economy macroeconomic model predicts
concerning the effects of an increase in the budget deficit?
a. The U.S. trade deficit grew.
b. The real exchange rate of the dollar appreciated.
c. U.S. net foreign investment fell.
d. All of the above are consistent with the predictions of the model.
ANSWER: d. All of the above are consistent with the predictions of the model.
xxv. Suppose that the United States imposes an import quota on farm machinery. This shifts the
a. demand for dollars in the foreign-currency exchange market right.
b. demand for dollars in the foreign-currency exchange market left.
c. supply of dollars in the foreign-currency exchange market right.
d. supply of dollars in the foreign-currency exchange market left.
ANSWER: a. demand for dollars in the foreign-currency exchange market right.
xxv. Suppose that the United States imposes an import quota on furniture. The quota makes the real
exchange rate of U.S. dollars
a. appreciate and the real interest rate in the United States increase.
b. appreciate but does not change the real interest rate in the United States.
c. depreciate and the real interest rate in the United States decrease.
d. depreciate but does not change the real interest rate in the United States.
ANSWER: b. appreciate but does not change the real interest rate in the United States.
xxv. If U.S. citizens decide to save a larger fraction of their incomes, the real interest rate
a. decreases, the real exchange rate of the dollar depreciates, and U.S. net foreign investment
increases.
b. decreases, the real exchange rate of the dollar appreciates, and U.S. net foreign investment
decreases.
c. increases, the real exchange rate of the dollar appreciates, and U.S. net foreign investment
decreases.
d. increases, the real exchange rate of the dollar depreciates, and U.S. net foreign investment
increases.
ANSWER: a. decreases, the real exchange rate of the dollar depreciates, and U.S. net foreign
investment increases.
xxv. If U.S. firms decide to invest more domestically at each interest rate, the real interest rate in the
U.S.
a. decreases, the real exchange rate of the dollar depreciates, and U.S. net foreign investment
decreases.
b. decreases, the real exchange rate of the dollar appreciates, and U.S. net foreign investment
increases.
c. increases, the real exchange rate of the dollar depreciates, and U.S. net foreign investment
increases.
d. increases, the real exchange rate of the dollar appreciates, and U.S. net foreign investment
decreases.
ANSWER: d. increases, the real exchange rate of the dollar appreciates, and U.S. net foreign
investment decreases.
xxv. Trade policies

a. alter the trade balance because they alter imports of the country that implemented them.
b. alter the trade balance because they alter net foreign investment of the country that
implements them.
c. do not alter the trade balance because they cannot alter the national saving or domestic
investment of the country that implements them.
d. do not alter the trade balance because they cannot alter the real exchange rate of the
currency of the country that implements them.
ANSWER: c. do not alter the trade balance because they cannot alter the national saving or domestic
investment of the country that implements them.
xxv. When Mexico suffered from capital flight in 1994, Mexico’s real interest rate
a. fell and the peso appreciated.
b. fell and the peso depreciated.
c. rose and the peso appreciated.
d. rose and the peso depreciated.
ANSWER: d. rose and the peso depreciated.
xxv. When a country suffers from capital flight, the demand for loanable funds
a. and the supply of currency in the foreign-exchange market shifts left.
b. and the supply of currency in the foreign-exchange market shifts right.
c. shifts right while the supply of currency in the foreign-exchange market shifts left.
d. shifts left while the supply of currency in the foreign-exchange market shifts right.
ANSWER: b. and the supply of currency in the foreign-exchange market shifts right.
xxv. When Mexico suffered from capital flight in 1994, the U.S. real interest rate
a. fell and the real exchange rate of the dollar appreciated.
b. fell and the real exchange rate of the dollar depreciated.
c. rose and the real exchange rate of the dollar appreciated.
d. rose and the real exchange rate of the dollar depreciated.
ANSWER: a. fell and the real exchange rate of the dollar appreciated.
xxv.
Refer to the figure shown. Suppose the Turkish economy starts at r 0 and E0. If there is capital
flight, the economy ends up at
a. r0 and E0.
b. r0 and E1.
c. r1 and E0.
d. r1 and E1.
ANSWER: d. r1 and E1.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 4 GRAPH FORMAT: M RANDOM: Y GRAPH: 2
xxv. Which of the following would cause the real exchange rate of the U.S. dollar to appreciate?
a. capital flight from the United States
b. if the U.S. government increases the budget surplus
c. if the U.S. government imposes import quotas
ANSWER: c. the U.S. government imposes import quotas
xxv. Which of the following will increase U.S. net foreign investment?
a. if the government increases the budget surplus
b. capital flight from other countries
c. if the United States removes import quotas
ANSWER: a. if the government increases the budget surplus
Chapter 30
A Macroeconomic Theory of the Open
Economy
Test B
xxv. Which of the following concerning the open-economy macro model is correct?
a. It assumes that real GDP is fixed.
b. It assumes that the interest rate adjusts to bring the supply of and demand for money into
balance.
c. It considers what happens simultaneously in the money market and the market for foreign
currency.
ANSWER: a. It assumes that real GDP is fixed.
xxv. The supply of loanable funds comes from

a. national saving. Demand for loanable funds comes from only domestic investment.
b. national saving. Demand for loanable funds comes from domestic and net foreign
investment.
c. only net foreign investment. Demand for loanable funds comes from national saving.
d. domestic investment and net foreign investment. Demand for loanable funds comes from
national saving.
ANSWER: b. national saving. Demand for loanable funds comes from domestic and net foreign
investment.
xxv.
Jack and Jill are co-owners of the U.S. firm Wells Petroleum. Jack builds an oil well in Texas. Jill
builds an oil well in Venezuela.
a. Neither Jack’s nor Jill’s purchase of capital count as demand for loanable funds in the U.S.
market.
b. Jack’s purchase of capital counts as demand for loanable funds in the U.S. maket; Jill’s
purchase does not.
c. Jill’s purchase of capital counts as demand for loanable funds in the U.S. market; Jack’s
purchase does not.
d. Both Jack’s and Jill’s purchase of capital count as demand for loanable funds in the U.S.
market.
ANSWER: d. Both Jack’s and Jill’s purchase of capital count as demand for loanable funds in the U.S.
market.
xxv. Other things the same an increase in the U.S. real interest rate relative to real interest rates in
other countries
a. decreases the quantity of loanable funds supplied in the U.S. market.
b. decreases U.S. domestic investment.
c. increases U.S. net foreign investment.
ANSWER: b. decreases U.S. domestic investment.
xxv. Which of the following would increase both the real interest rate and the quantity of loanable
funds?
a. The supply of loanable funds shifts left.
b. The supply of loanable funds shifts right.
c. The demand for loanable funds shifts left.
d. The demand for loanable funds shifts right.
ANSWER: d. The demand for loanable funds shifts right.
xxv. Which of the following would be shown by shifting the supply of loanable funds right?
a. People want to save more at each interest rate.
b. People want to invest more domestically at each interest rate.
c. People want to purchase more foreign capital at each interest rate.
ANSWER: a. People want to save more at each interest rate.
xxv. In the open-economy macroeconomic model, which of the following happens in response to an
appreciation of the real exchange rate?
a. The quantity of dollars demanded in the foreign-exchange market increases.
b. The quantity of dollars demanded in the foreign-exchange market decreases.
c. The quantity of dollars supplied in the foreign-exchange market increases.
d. The quantity of dollars supplied in the foreign-exchange market decreases.
ANSWER: b. The quantity of dollars demanded in the foreign-exchange market decreases.
xxv. If the real interest rate in the United States falls relative to real interest rates in other countries,
U.S. net foreign investment
a. increases, the supply of dollars in the foreign exchange market shifts right, and the real
exchange rate of the dollar appreciates.
b. increases, the supply of dollars in the foreign exchange market shifts right, and the real
exchange rate of the dollar depreciates.
c. decreases, the supply of dollars in the foreign exchange market shifts left, and the real
exchange rate of the dollar appreciates.
d. decreases, the supply of dollars in the foreign exchange market shifts left, and the real
ANSWER: b. increases, the supply of dollars in the foreign exchange market shifts right, and the real
xxv. In the open-economy macroeconomic model, if the real exchange rate was above the equilibrium
level, which of the following would rise?
a. the real exchange rate
b. net exports
c. net foreign investment
ANSWER: b. net exports
xxv. When the supply of loanable funds shifts right, which of the following increases?
a. net foreign investment and the real exchange rate
b. net foreign investment, but not the real exchange rate
c. the real exchange rate, but not net foreign investment
d. neither the real exchange rate nor net foreign investment
ANSWER: b. net foreign investment, but not the real exchange rate
xxv. Which of the following would increase the real exchange rate?
a. the demand for loanable funds shifts left
b. the supply of loanable funds shifts right
c. an increase in the demand for dollars in the foreign-currency exchange market
ANSWER: c. an increase in the demand for dollars in the foreign-currency exchange market
xxv. In recent years the budget deficit of Thailand has increased. According to the open- economy
macroeconomic model this should have caused which curve to shift right?
a. the Thai supply of loanable funds
b. the Thai demand for loanable funds
c. the supply of Thai currency
d. None of the above shift right
ANSWER: d. None of the above shift right
xxv. Between 1814 and 1829 the U.S. government debt fell. This should have
a. increased interest rates and net foreign investment.
b. decreased interest rates and net foreign investment.
c. increased interest rates and decreased net foreign investment.
d. decreased interest rates and increased net foreign investment.
ANSWER: d. decreased interest rates and increased net foreign investment.
xxv.
Ara drew the effects of an increase in the government deficit in the diagram shown. What, if any,
mistake did Ara make?
a. Instead of drawing the supply curve in the loanable funds market shifting left, he should
have drawn the demand curve shifting right.
b. He should have also drawn the NFI curve shifting left.
c. He should have also drawn the demand for dollars shifting left.
d. Ara made no mistakes.
ANSWER: d. Ara made no mistakes.
TYPE: M KEY1: G SECTION: 3 OBJECTIVE: 2 RANDOM: Y GRAPH: 1
xxv. An increase in budget deficits will

a. increase the trade deficit.
b. decrease the trade deficit.
c. increase net foreign investment.
d. have no impact on the trade deficit.
ANSWER: a. increase the trade deficit.
xxv. Suppose sheep ranchers in Tiberius convince the government to prohibit the import of wool into
Tiberius. According to the open-economy macroeconomic model this will cause the Tiberian
currency to
a. appreciate and decrease net exports.
b. appreciate, but have no effect on net exports.
c. depreciate, but have no effect on net exports.
d. depreciate and increase net exports.
ANSWER: b. appreciate, but have no effect on net exports.
xxv. Suppose that conservationists in Sherwood convince the government to prohibit the export of
timber from Sherwood. According to the open-economy macroeconomic model this will
a. reduce Sherwood’s net exports, and cause their real exchange rate to appreciate.
b. reduce Sherwood’s net exports, and cause their real exchange rate to depreciate
c. have no effect on Sherwood’s net exports, and cause their real exchange rate to appreciate.
d. have no effect on Sherwood’s net exports, and cause their real exchange rate to depreicate.
ANSWER: d. have no effect on Sherwood’s net exports, and cause their real exchange rate to
depreicate.
xxv. The restriction on imports of Japanese vehicles into the United States has:
a. caused the real exchange rate to appreciate.
b. caused net exports in the United States to decline.
c. decreased the demand for loanable funds in the United States.
d. increased net foreign investment in the United States.
ANSWER: a. caused the real exchange rate to appreciate.
xxv. Molly Price, economic detective, meets a client who wants to know why interest rates have risen
and the real exchange rate appreciated. The client suspects four causes; which one is consistent
with the facts?
a. Import quotas were imposed.
b. Import quotas were removed.
c. The budget deficit increased.
d. The budget deficit decreased.
ANSWER: c. The budget deficit increased.
xxv.
Supposing that the economy starts at r1 and E1, which graph is the right one for showing the
effects of restrictive trade policies?
a. Diagram A
b. Diagram B
c. Diagram C
ANSWER: b. Diagram B
TYPE: G KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y GRAPH: 2
xxv. The country of Monac experiences a coup that causes capital flight from the country. As a result
a. net foreign investment in Monac will decrease.
b. the demand for loanable funds in Monac will increase.
c. the supply of loanable funds in Monac will increase.
d. the exchange rate in Monac will increase.
ANSWER: b. the demand for loanable funds in Monac will increase.
xxv. Between 1992 and 1999 it is estimated that Russia had capital flight of about $150 billion. Other
things the same, we would expect that this capital flight has resulted in
a. falling domestic interest rates and an appreciation of the Russian currency.
b. falling domestic interest rates and a depreciation of the Russian currency.
c. rising domestic interest rates and an appreciation of the Russian currency.
d. rising domestic interest rates and a depreciation of the Russian currency.
ANSWER: d. rising domestic interest rates and a depreciation of the Russian currency.
xxv. If people feel that it has become riskier to buy the capital assets of some country, perhaps
because of increased political instability, then interest rates
a. rise and the local currency depreciates.
b. rise and the local currency appreciates.
c. fall and the local currency appreciates.
d. fall and the local currency depreciates.
ANSWER: a. rise and the local currency depreciates.
xxv. If there is capital flight

a. both the supply of loanable funds and the supply of the local currency in the foreign
exchange market shift right.
b. both the supply of loanable funds and the demand for the local currency in the foreign
exchange market shift left.
c. both the demand for loanable funds and the supply of the local currency in the foreign
ANSWER: c. both the demand for loanable funds and the supply of the local currency in the foreign
xxv. Which of the following raises interest rates and causes appreciation of the local currency?
a. capital flight
b. restrictrive trade policies
c. an increase in the budget deficit
d. All of the above are correct
ANSWER: c. an increase in the budget deficit
Chapter 31
Aggregate Demand and Aggregate Supply
Test A
xxv. Business cycles
a. are explained mostly by fluctuations in corporate profits.
b. no longer are very important due to government policy.
c. are fluctuations in real GDP and related variables over time.
ANSWER: c. are fluctuations in real GDP and related variables over time.
xxv. Investment is a
a. large part of real GDP, so it accounts for a small share of the fluctuation in real GDP.
b. large part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.
c. small part of real GDP, so it accounts for a small share of the fluctuation in real GDP.
d. small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.
ANSWER: d. small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.
xxv. According to classical economic theory, changes in the money supply affect
a. nominal variables and real variables.
b. neither nominal nor real variables.
c. real variables, but not nominal variables.
d. nominal variables, but not real variables.
ANSWER: d. nominal variables, but not real variables.
xxv. Most economists believe that classical economic theory is a good description of the world in
a. the long run, but not in the short run.
b. the short run, but not in the long run.
c. the short run and in the long run.
ANSWER: a. the long run, but not in the short run.
xxv. The effect of an increase in the price level 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.
ANSWER: c. movement to the left along a given aggregate demand curve.
xxv.
People will spend less if the price level
a. rises, making the dollars they hold worth more.
b. rises, making the dollars they hold worth less.
c. falls, making the dollars they hold worth more.
d. falls, making the dollars they hold worth less.
ANSWER: b. rises, making the dollars they hold worth less.
xxv. A decrease in U.S. interest rates leads to

a. an appreciation of the dollar that leads to smaller exports.
b. an appreciation of the dollar that leads to greater net exports.
c. a depreciation of the dollar that leads to smaller net exports.
d. a depreciation of the dollar that leads to greater net exports.
ANSWER: d. a depreciation of the dollar that leads to greater net exports.
xxv. Suppose a stock market crash makes people feel poorer. This decrease in wealth would cause
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.
ANSWER: b. decrease consumption, which shifts aggregate demand left.
xxv. Aggregate demand shifts right when the government

a. institutes an investment tax credit.
b. raises personal income taxes.
c. decreases the money supply.
ANSWER: a. institutes an investment tax credit.
xxv. The long-run aggregate supply curve shifts right if
a. Congress raises the minimum wage substantially.
b. unemployment insurance benefits are made more generous.
c. immigration from abroad increases.
ANSWER: c. immigration from abroad increases.
xxv. In the long run, technological progress

a. makes the price level rise, while increases in the money supply make prices fall.
b. makes the price level fall, while increases in the money supply make prices rise.
c. and increases in the money supply both make the price level rise.
d. and increases in the money supply both make the price level fall.
ANSWER: b. makes the price level fall, while increases in the money supply make prices rise.
xxv. The misperceptions theory of the short-run aggregate supply curve says that output supplied
will decrease if the price level increases
a. more than expected so that firms believe the relative price of their output has increased.
b. more than expected so that firms believe the relative price of their output has decreased.
c. less than expected so that firms believe the relative price of their output has increased.
d. less than expected so that firms believe the relative price of their output has decreased.
ANSWER: d. less than expected so that firms believe the relative price of their output has decreased.
xxv. The sticky wage theory of the short-run aggregate supply curve says that when the price level
rises more than expected, the real wage
a. rises, so employment falls.
b. rises, so employment rises.
c. falls, so employment falls.
d. falls, so employment rises.
ANSWER: d. falls, so employment rises.
xxv. The sticky price theory of the short-run aggregate supply curve says that when the price level
rises more than expected, some firms will have
a. lower prices than they desire, which increases their sales.
b. lower prices than they desire, which depresses their sales.
c. higher prices than they desire, which increases their sales.
d. higher prices than they desire, which depresses their sales.
ANSWER: a. lower prices than they desire, which increases their sales.
xxv. Assuming that a is positive, theories of short-run aggregate supply are expressed mathematically
as quantity of output supplied =
a. natural rate of output + a(expected price level – actual price level).
b. a(actual price level – expected price level) – natural rate of output.
c. a(expected price level – actual price level) – natural rate of output.
d. natural rate of output + a(actual price level – expected price level).
ANSWER: d. natural rate of output + a(actual price level – expected price level).
xxv. An increase in the expected price level shifts short-run aggregate supply to the
a. left and an increase in the actual price level shifts short-run aggregate supply to the left.
b. left and an increase in the actual price level does not shift short-run aggregate supply.
c. right and an increase in the actual price level shifts short-run aggregate supply to the right.
d. right and an increase in the actual price level does not shift short-run aggregate supply.
ANSWER: b. left and an increase in the actual price level does not shift short-run aggregate supply.
xxv. According to the graph, a decrease in the money supply would move the economy from A
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.
ANSWER: c. to C in the long run.
TYPE: M KEY1: G SECTION: 5 OBJECTIVE: 4 RANDOM: N GRAPH: 1
xxv. According to the graph, if a change in aggregate supply shifts the economy from C to D, a
government concerned about employment might use fiscal policy to move the economy
a. to A.
b. to B.
c. back to C.
d. to D.
ANSWER: a. to A.
TYPE: M KEY1: G SECTION: 5 OBJECTIVE: 4 RANDOM: N GRAPH: 1
xxv. 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 aggregate
a. supply left.
b. supply right.
c. demand left.
d. demand right.
ANSWER: d. demand right.
xxv. Suppose the economy is initially in long-run equilibrium and aggregate demand rises.
Compared to where the economy was before the change in aggregate demand, in the long run
prices
a. and output are higher.
b. and output are lower.
c. are higher and output is the same.
d. are the same and output is lower.
ANSWER: c. are higher and output is the same.
xxv. Which of the following has been suggested as an important cause of the Great Depression?
a. a decline in the money supply
b. a large decline in government expenditures
c. an increase in the relative price of oil
ANSWER: a. a decline in the money supply
xxv. During World War II

a. government purchases of goods and services roughly doubled.
b. the economy’s production increased almost fivefold.
c. prices rose about 20 percent.
ANSWER: c. prices rose about 20 percent.
xxv. Suppose that there has been bad weather, a decrease in the availability of oil or some other
temporary increase in firms’ costs. In the short run prices
a. fall and output rises.
b. rise and output falls.
c. and output rise.
d. and output fall.
ANSWER: b. rise and output falls.
xxv. Which of the following would cause stagflation?

a. Aggregate supply shifts right.
b. Aggregate supply shifts left.
c. Aggregate demand shifts right.
d. Aggregate demand shifts left.
ANSWER: b. Aggregate supply shifts left.
xxv. Keynes believed that economies experiencing high unemployment should adopt policies to
a. increase aggregate demand.
b. increase aggregate supply.
c. reduce the money supply.
d. reduce government expenditures.
ANSWER: a. increase aggregate demand.
xxv. According to the crowding-out effect, an increase in government purchases causes interest rates
to
a. fall, which increases saving.
b. fall, which decreases investment.
c. rise, which increases saving.
d. rise, which decreases investment.
ANSWER: d. rise, which decreases investment.
Chapter 31
Aggregate Demand and Aggregate Supply
Test B
xxv. Recession refers principally to
a. below average real GDP growth.
b. negative real GDP growth.
c. below average inflation.
d. negative inflation.
ANSWER: b. negative real GDP growth.

a. On average over the past 50 years real GDP has grown about 3% per year.
b. Recessions occur at regular intervals.
ANSWER: a. On average over the past 50 years real GDP has grown about 3% per year.
xxv. During recessions investment

a. and unemployment rise.
b. and unemployment decline.
c. rises and unemployment declines.
d. declines and unemployment rises.
ANSWER: d. declines and unemployment rises.
xxv. Which of the following accounts for most of the decline in value of GDP during recessions?
a. consumption
b. investment
c. government expenditures
d. net exports
ANSWER: b. investment
xxv. Long-run analysis of the macroeconomy is based on

a. both the classical dichotomy and monetary neutrality.
b. neither the classical dichotomy nor monetary neutrality.
c. the classical dichotomy, but not monetary neutrality.
d. monetary neutrality but not the classical dichotomy.
ANSWER: a. both the classical dichotomy and monetary neutrality.
xxv. In the aggregate demand and aggregate supply model the price level is on the
a. horizontal axis and quantity of output is on the vertical axis.
b. vertical axis and quantity of output is on the horizontal axis.
c. horizontal axis and unemployment is on the vertical axis.
d. vertical axis and unemployment is on horizontal axis.
ANSWER: b. vertical axis and quantity of output is on the horizontal axis.
xxv. A fall in prices makes consumers feel more wealthy. As a result

a. aggregate demand shifts to the left.
b. aggregate demand shifts to the right.
c. there is a movement up a given aggregate demand curve.
d. there is a movement down a given aggregate demand curve.
ANSWER: d. there is a movement down a given aggregate demand curve.
xxv. When prices fall, dollars are worth

a. less, so consumers demand a larger quantity of goods.
b. less, so consumers demand a smaller quantity of goods.
c. more, so consumers demand a larger quantity of goods.
d. more, so consumers demand a smaller quantity of goods.
ANSWER: c. more, so consumers demand a larger quantity of goods.
xxv. When the price level rises, other things the same, people want to
a. increase money holdings, so the interest rate increases.
b. increase money holdings, so the interest rate decreases.
c. reduce money holdings, so the interest rate increases.
d. reduce money holdings, so the interest rate decreases.
ANSWER: a. increase money holdings, so the interest rate increases.
xxv. Other things the same, which of the following happens when the price level falls?
a. Households try to increase money holdings.
b. The real exchange rate appreciates.
c. U.S. net exports increase.
ANSWER: c. U.S. net exports increase.
xxv. Which of the following tends to increase the quantity of output demanded when the price level
decreases?
a. the wealth effect
b. the interest rate effect
c. the exchange rate effect
xxv. If people decide to save more for retirement
a. or the government raises taxes, aggregate demand will shift right.
b. or the government raises taxes, aggregate demand will shift left.
c. aggregate demand will shift right. If the government raises taxes, aggregate demand will
shift left.
d. aggregate demand will shift left. If the government raises taxes, aggregate demand will shift
right.
ANSWER: b. or the government raises taxes, aggregate demand will shift left.
xxv. Which of the following do we expect in the short run if the money supply increases?
a. The interest rate rises.
b. Investment falls.
c. The price level rises.
ANSWER: c. The price level rises.
xxv.
Suppose there is a broad increase in the price of stocks which causes an increase in the real
wealth of individuals. Consumption spending rises in response to the increase in wealth. This
will cause the
a. aggregate demand curve to shift to the left.
b. rate of unemployment to decrease.
c. general price level to fall.
d. aggregate supply curve to shift to the right.
ANSWER: b. rate of unemployment to decrease.
xxv. Which of the following shifts the long-run aggregate supply curve to the left?
a. an increase in the economy’s capital stock
b. an increase in the availability of natural resources from abroad
c. stricter environmental regulations
ANSWER: c. stricter environmental regulations
xxv. By itself technological progress tends to

a. raise real GDP and lower the price level.
b. raise both real GDP and the price level.
c. decrease both real GDP and the price level.
d. decrease real GDP and raise the price level.
ANSWER: a. raise real GDP and lower the price level.
xxv. According to the aggregate demand and aggregate supply model, in the long run an increase in
the money supply
a. increases the price level and real GDP.
b. increases the price level, but does not change real GDP.
c. increases real GDP, but does not change the price level.
d. decreases real GDP, but does not change the price level.
ANSWER: b. increases the price level, but does not change real GDP.
xxv. If the price level is less than expected, producers believe their relative price has
a. increased and so increase production.
b. increased and so decrease production.
c. decreased and so increase production.
d. decreased and so decrease production.
ANSWER: d. decreased and so decrease production.
xxv. If wages do not adjust immediately to the price level, a higher price level
a. reduces real wages and employment.
b. increases real wages and employment.
c. reduces real wages and increases employment.
d. increases real wages and reduces employment.
ANSWER: c. reduces real wages and increases employment.
xxv. An increase in the expected price level shifts aggregate

a. demand to the right.
b. demand to the left.
c. supply to the right.
d. supply to the left.
ANSWER: d. supply to the left.
xxv. A change in price expectations will shift

a. short-run aggregate supply, but not long-run aggregate supply.
b. long-run aggregate supply, but not short-run aggregate supply.
c. both long-run aggregate supply and short-run aggregate supply.
d. long-run aggregate supply and aggregate demand.
ANSWER: a. short-run aggregate supply, but not long-run aggregate supply.
xxv. Suppose consumers become more pessimistic concerning the future of an economy. In the short
run
a. both the price level and real GDP rise.
b. both the price level and real GDP fall.
c. the price level rises and real GDP falls.
d. the price level falls and real GDP rises.
ANSWER: b. both the price level and real GDP fall.
xxv. During the 1930s

a. and the 1940s U.S. aggregate demand appears to have shifted far to the left.
b. and the 1940s U.S. aggregate demand appears to have shifted far to the right.
c. U.S. aggregate demand appears to have shifted far to the right. During the 1940s aggregate
demand appears to have shifted far to the left.
d. U.S. aggregate demand appears to have shifted far to the left. During the 1940s aggregate
demand appears to have shifted far to the right.
ANSWER: d. U.S. aggregate demand appears to have shifted far to the left. During the 1940s
aggregate demand appears to have shifted far to the right.
xxv. Which of the following is associated primarily with aggregate supply shifting far to the left?
a. the Great Depression
b. the economic boom of the 1940s
c. stagflation of the 1970s
ANSWER: c. stagflation of the 1970s
xxv. If the economy is experiencing stagflation and the Fed increases the money supply in the short
run output
a. increases, in the long run the price level increases.
b. increases, in the long run the price level decreases.
c. decreases, in the long run the price level increases.
d. decreases, in the long run the price level decreases.
ANSWER: a. increases, in the long run the price level increases.
Chapter 32
The Influence of Monetary and Fiscal
Policy on Aggregate Demand
Test A
xxv. Shocks to the economy such as changes in the value of the stock market
a. affect aggregate demand, but changes in taxes and government expenditures do not.
b. and changes in taxes and government expenditures affect aggregate demand.
c. do not affect aggregate demand, but changes in taxes and government expenditures do.
d. and changes in taxes and government expenditures do not affect aggregate demand.
ANSWER: b. and changes in taxes and government expenditures affect aggregate demand.
xxv. Which of the following claims concerning the importance of effects that explain the slope of the
aggregate demand curve is correct?
a. The interest-rate effect is relatively large because investment spending is very responsive to
interest rate changes.
b. The wealth effect is relatively large because money holdings are a significant portion of
most households’ wealth.
c. The exchange rate effect is relatively large because exports and imports comprise a large
part of real GDP.
ANSWER: a. The interest-rate effect is relatively large because investment spending is very
responsive to interest rate changes.
xxv. When the interest rate decreases, the opportunity cost of holding money
a. increases, so the quantity of money demanded increases.
b. increases, so the quantity of money demanded decreases.
c. decreases, so the quantity of money demanded increases.
d. decreases, so the quantity of money demanded decreases.
ANSWER: c. decreases, so the quantity of money demanded increases.
xxv. According to liquidity preference theory, if there is an excess supply of money, people will
deposit
a. less into interest-bearing accounts, so the interest rate rises.
b. less into interest-bearing accounts, so the interest rate falls.
c. more into interest-bearing accounts, so the interest rate rises.
d. more into interest-bearing accounts, so the interest rate falls.
ANSWER: d. more into interest-bearing accounts, so the interest rate falls.
xxv. Which list contains only things that would make people want to hold more money?
a. Interest rates decrease, the price level increases.
b. Interest rates decrease, the price level decreases.
c. Interest rates increase, the price level increases.
d. Interest rates increase, the price level decreases.
ANSWER: a. Interest rates decrease, the price level increases.
xxv. Assume the money market is initially in equilibrium. If the price level increases, according to
liquidity preference theory there is an excess
a. supply of money until the interest rate decreases.
b. supply of money until the interest rate increases.
c. demand for money until the interest rate decreases.
d. demand for money until the interest rate increases.
ANSWER: d. demand for money until the interest rate increases.
xxv. According to liquidity preference theory, which of the following shifts the money demand curve
to the left?
a. a decrease in the price level
b. an increase in the price level
c. an increase in the interest rate
d. Both b and c are correct.
ANSWER: a. a decrease in the price level.
xxv. According to liquidity preference theory, an increase in the price level causes the interest rate to
a. increase, which makes investment demanded increase.
b. increase, which makes investment demanded decrease.
c. decrease, which makes investment demanded increase.
d. decrease, which makes investment demanded decrease.
ANSWER: b. increase, which makes investment demanded decrease.
xxv. In the short run, a decrease in the money supply causes interest rates to
a. decrease, and aggregate demand to shift right.
b. decrease, and aggregate demand to shift left.
c. increase, and aggregate demand to shift right.
d. increase, and aggregate demand to shift left.
ANSWER: d. increase, and aggregate demand to shift left.
xxv. If the interest rate is above the Fed’s target, the Fed should
a. sell bonds to increase the money supply.
b. sell bonds to decrease the money supply.
c. buy bonds to increase the money supply.
d. buy bonds to decrease the money supply.
ANSWER: c. buy bonds to increase the money supply.
xxv. If the stock market crashes, aggregate demand

a. increases, which the Fed could offset by selling bonds.
b. increases, which the Fed could offset by buying bonds.
c. decreases, which the Fed could offset by selling bonds.
d. decreases, which the Fed could offset by buying bonds.
ANSWER: d. decreases, which the Fed could offset by buying bonds.
xxv. An increase in government spending initially and primarily shifts aggregate

a. supply right.
b. demand right.
c. demand left.
d. supply left.
ANSWER: b. demand right.
xxv. The multiplier effect is the multiplied impact on

a. investment of a given increase in interest rates.
b. the money supply of a given increase in government purchases.
c. aggregate demand of a given increase in government purchases.
d. tax revenues of a given increase in government purchases.
ANSWER: c. aggregate demand of a given increase in government purchases.
xxv. Which of the following illustrates how the investment accelerator works?
a. An increase in government expenditures increases aggregate spending so that the Gas-and-
Go convenience store chain finds it profitable to build more new stores.
b. An increase in government expenditures increases the interest rate so that people buy fewer
stocks and bonds.
c. An increase in government expenditures decreases the interest rate so that the Gas-and-Go
convenience store chain decides to build more new stores.
d. An increase in government expenditures increases the interest rate so that the Gas-and-Go
convenience store chain decides to build fewer new stores.
ANSWER: a. An increase in government expenditures increases aggregate spending so that the Gas-
and-Go convenience store chain finds it profitable to build more new stores.
xxv. The government purchases multiplier is defined as

a. MPC.
b. 1 – MPC.
c. 1/(1 – MPC).
d. 1/MPC.
ANSWER: c. 1/(1 – MPC).
xxv. According to the crowding-out effect, an increase in government purchases causes interest rates
to
a. fall, which increases saving.
b. fall, which decreases investment.
c. rise, which increases saving.
d. rise, which decreases investment.
ANSWER: d. rise, which decreases investment.
xxv. If taxes
a. increase, consumption decreases, and aggregate demand shifts left.
b. increase, consumption increases, and aggregate demand shifts right.
c. decrease, consumption increases, and aggregate demand shifts left.
d. decrease, consumption decreases, and aggregate demand shifts right.
ANSWER: a. increase, consumption decreases, and aggregate demand shifts left.
xxv. An increase in government spending on goods to build or repair bridges and highways
a. shifts the aggregate demand curve to the left.
b. has no multiplier effect.
c. shifts the aggregate supply curve to the right in the long run.
ANSWER: c. shifts the aggregate supply curve to the right in the long run.
xxv. If Congress cuts spending to balance the federal budget, the Fed can act to prevent
unemployment and recession while maintaining the balanced budget by
a. raising taxes.
b. cutting expenditures.
c. increasing the money supply.
d. decreasing the money supply.
ANSWER: c. increasing the money supply.
xxv. Which of the following actions is inconsistent with the Employment Act of 1946?
a. When there is a recession, the government increases the money supply.
b. When unemployment is high, the government decreases expenditures.
c. When there is a recession, the government cuts taxes.
ANSWER: b. When unemployment is high, the government decreases expenditures.
xxv. Keynes argued that aggregate demand is

a. stable, because the economy returns to long-run equilibrium.
b. stable, because changes in consumption are mostly offset by changes in investment.
c. unstable, because seasonal variations create fluctuations in aggregate demand.
d. unstable, because waves of pessimism and optimism create fluctuations in aggregate
demand.
ANSWER: d. unstable, because waves of pessimism and optimism create fluctuations in aggregate
demand.
xxv. If the government wants to stabilize output, which of the following policy alternatives would be
an appropriate response to an increase in investment demand?
a. increase taxes
b. increase the money supply
c. increase government expenditures
ANSWER: a. increase taxes
xxv. Investment tax credits are designed to

a. increase aggregate demand in the short run and eventually increase long-run aggregate
supply.
b. increase aggregate demand in the short run, but eventually decrease long-run aggregate
supply.
c. increase aggregate demand in the short run and have no impact on aggregate supply.
ANSWER: a. increase aggregate demand in the short run and eventually increase long-run
aggregate supply.
xxv. During expansions, automatic stabilizers make the government’s budget move
a. toward deficit.
b. toward surplus.
c. toward balance.
d. in no particular direction.
ANSWER: b. towards surplus.
xxv. When the Fed lowers the growth rate of the money supply, it must take into account
a. only the short-run effect on production.
b. only the short-run effects on inflation and production.
c. the long-run effect on inflation as well as the short-run effect on production.
d. only the long-run effect on inflation.
ANSWER: c. the long-run effect on inflation as well as the short-run effect on production.
Chapter 32
The Influence of Monetary and Fiscal
Policy on Aggregate Demand
Test B
xxv. Of the effects that help explain why the U.S. aggregate demand curve slopes downward the
a. wealth effect is most important and the exchange rate effect is least important.
b. exchange-rate effect is most important and the interest rate effect is least important.
c. interest-rate effect is most important and the wealth effect is least important.
ANSWER: c. interest-rate effect is most important and the wealth effect is least important.
xxv. Liquidity preference theory is most relevant to the
a. short run and supposes that the interest rate adjusts to bring money supply and money
demand into balance.
b. short run and supposes that the price level adjusts to bring money supply and money
c. long run and supposes that the interest rate adjusts to bring money supply and money
d. long run and supposes that the price level adjusts to bring money supply and money
ANSWER: a. short run and supposes that the interest rate adjusts to bring money supply and money
xxv. An increase in interest rates

a. increases the cost of holding money and increases the quantity demanded.
b. increases the cost of holding money and decreases the quantity demanded.
c. decreases the cost of holding money and increases the quantity demanded.
d. decreases the cost of holding money and decreases the quantity demanded.
ANSWER: b. increases the cost of holding money and decreases the quantity demanded.
xxv. According to the theory of liquidity preference if there is a surplus of money, the interest rate
will
a. rise and the quantity of money demanded will increase.
b. rise and the quantity of money demanded will decrease.
c. fall and the quantity of money demanded will increase.
d. fall and the quantity of money demanded will decrease.
ANSWER: c. fall and the quantity of money demanded will increase.
xxv. With the interest rate on the vertical axis, an increase in the price level shifts money
a. supply right.
b. supply left.
c. demand right.
d. demand left.
ANSWER: c. demand right.
xxv.
Refer the graph. If we start at point A an increase in the price level results in a move to
a. B and investment rises.
b. B and investment falls.
c. C and investment rises.
d. C and investment falls.
ANSWER: b. B and investment falls.
xxv. Which of the following properly describes the interest-rate effect?

a. A higher price level leads to higher money demand, higher money demand leads to higher
interest rates, and a higher interest rate increases the quantity of goods and services
demanded.
b. A higher price level leads to higher money demand, higher money demand leads to lower
interest rates, and a lower interest rate reduces the quantity of goods and services
demanded.
c. A lower price level leads to lower money demand, lower money demand leads to lower
interest rates, and a lower interest rate reduces the quantity of goods and services
demanded.
d. A lower price level leads to lower money demand, lower money demand leads to lower
interest rates, and a lower interest rate increases the quantity of goods and services
demanded.
ANSWER: d. A lower price level leads to lower money demand, lower money demand leads to
lower interest rates, and a lower interest rate increases the quantity of goods and
services demanded.
xxv. When the money supply increases interest rates

a. rise and aggregate demand shifts right.
b. fall and aggregate demand shifts left.
c. rise and aggregate demand shifts left.
xxv. Which of the following shifts aggregate demand right?
a. The price level rises.
b. The price level falls.
c. The money supply rises.
ANSWER: c. The money supply rises.
xxv. Suppose the Federal Reserve decreases the money supply. As a result:
a. investment, real output, and the price level are all lower.
b. investment is higher, real output is lower, and the price level is unchanged.
c. investment, real output, and the price level are all higher.
d. investment is lower, real output is higher, and the price level is lower.
ANSWER: a. investment, real output, and the price level are all lower.
xxv. If the stock market booms household spending

a. increases. To offset the effects of this on the price level and real GDP, the Fed would
increase the money supply.
b. increases. To offset the effects of this on the price level and real GDP, the Fed would
decrease the money supply.
c. decreases. To offset the effects of this on the price level and real GDP, the Fed would
increase the money supply.
d. decreases. To offset the effects of this on the price level and real GDP, the Fed would
ANSWER: b. increases. To offset the effects of this on the price level and real GDP, the Fed would
xxv. In early January 2000 the Fed announced that it would cut interest rates one-half percentage
point. To do this requires the Fed to
a. increase the money supply and so increase aggregate demand.
b. increase the money supply and so decrease aggregate demand.
c. decrease the money supply and so increase aggregate demand.
d. decrease the money supply and so decrease aggregate demand.
ANSWER: a. increase the money supply and so increase aggregate demand.
xxv. In the last quarter of 1999 German real GDP grew at a very low rate. Some economists attributed
the low growth to monetary policy that by itself would have decreased real GDP. If they are
correct, we should observe that the German money supply
a. and interest rates had increased.
b. and interest rates had decreased.
c. had increased and interest rates had decreased.
d. had decreased and interest rates had increased.
ANSWER: d. had decreased and interest rates had increased.
xxv. When the Fed decreases the money supply we expect interest rates
a. and stock prices to rise.
b. and stock prices to fall.
c. to rise and stock prices to fall.
d. to fall and stock prices to rise.
ANSWER: c. to rise and stock prices to fall.
xxv. If the government increases its expenditures the price level

a. and real GDP both rise.
b. and real GDP both fall.
c. rises and real GDP falls.
d. falls and real GDP rises.
ANSWER: a. and real GDP both rise.
xxv. Suppose that the MPC is .60 and there is no investment accelerator or crowding out. Then if
government expenditures increase $10 billion, aggregate demand shifts right
a. $40 billion.
b. $25 billion.
c. $16 billion.
ANSWER: b. $25 billion.
xxv. The multiplier effect occurs because an increase in government purchases will
a. increase income which will result in further rounds of spending.
b. increase interest rates which will reduce further rounds of spending.
c. increase the government deficit which will decrease further rounds of spending.
d. stimulate monetary policy which will increase further rounds of spending.
ANSWER: a. increase income which will result in further rounds of spending.
xxv. Which of the following correctly explains the crowding-out effect?

a. An increase in government expenditures decreases the interest rate and so increases
investment spending.
b. An increase in government expenditures increases the interest rate and so reduces
c. A decrease in government expenditures increases the interest rate and so increases
d. A decrease in government expenditures decreases the interest rate and so reduces
ANSWER: b. An increase in government expenditures increases the interest rate and so reduces
xxv.
According to the graph, which of the following is correct?
a. An increase in government expenditures could initially move the economy from A to B and
then the crowding-out effect would move it out to C.
b. An increase in government expenditures could initially move the economy from A to C and
then the multiplier effect would move it back to B.
c. An increase in the price level would cause demand to shift so that the economy would
move from A to B.
xxv. When the government increases expenditures the money demand curve shifts
a. right and interest rates rise.
b. right and interest rates fall.
c. left and interest rates rise.
d. left and interest rates fall.
ANSWER: a. right and interest rates rise.
xxv. Permanent tax cuts shift the AD curve

a. farther to the right than temporary tax cuts.
b. less to the right than temporary tax cuts.
c. farther to the left than temporary tax cuts.
d. less to the left than temporary tax cuts.
ANSWER: a. farther to the right than temporary tax cuts.
xxv. Suppose that net exports fall. Which of the following policies is most likely to stabilize the
economy?
a. a decrease in the money supply
b. a tax increase
c. an increase in government expenditures
d. None of the above would be likely to stabilize the economy.
ANSWER: c. an increase in government expenditures
xxv. If the government wanted to stabilize the economy when it was in recession it would
a. raise interest rates and government expenditures.
b. decrease interest rates and government expenditures.
c. raise interest rates and decrease government expenditures.
d. decrease interest rates and increase government expenditures.
ANSWER: d. decrease interest rates and increase government expenditures.
xxv. Critics of using fiscal and monetary policies to solve economic problems believe that
a. it can take too long for monetary policy to have an impact on the economy.
b. the political process results in a lag when using fiscal policy.
c. economic forecasting is imprecise.
xxv. The most important automatic stabilizer is

a. open market transactions.
b. the tax system.
c. unemployment compensation.
d. welfare benefits.
ANSWER: b. the tax system.
Chapter 33
The Short-Run Tradeoff Between
Inflation and Unemployment
Test A
xxv.
The misery index is calculated as the
a. actual inflation rate minus the expected inflation rate.
b. natural unemployment rate plus the long-run inflation rate.
c. unemployment rate minus the inflation rate.
d. inflation rate plus the unemployment rate.
ANSWER: d. inflation rate plus the unemployment rate.
xxv. The short-run relationship between inflation and unemployment is often called
a. Samuelson’s dilemma.
b. Harrod’s knife edge.
c. the Phillips curve.
d. Barro’s conundrum.
ANSWER: c. the Phillips curve.
xxv. Phillips found a negative relation between

a. output and unemployment.
b. output and employment.
c. wage inflation and output.
d. wage inflation and unemployment.
ANSWER: d. wage inflation and unemployment.
xxv. Samuelson and Solow reasoned that when aggregate demand was high, unemployment was
a. low, so there was upward pressure on wages and prices.
b. low, so there was downward pressure on wages and prices.
c. high, so there was upward pressure on wages and prices.
d. high, so there was downward pressure on wages and prices.
ANSWER: a. low, so there was upward pressure on wages and prices.
xxv. Refer to the diagrams shown. If the economy starts at c and 1, then in the short run a decrease in
the money supply growth rate moves the economy to
a. a, 1.
b. b, 2.
c. d, 3.
ANSWER: c. d, 3.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M QUESTION
INSTRUCTION: 1 RANDOM: N GRAPH: 1
xxv. Refer to the diagrams shown. If the economy starts at c and 1, then in the short run an increase in
government expenditures moves the economy to
a. b, 3.
b. b, 2.
c. d, 3.
d. d, 2.
ANSWER: b. b, 2.
TYPE: M KEY1: G SECTION: 1 OBJECTIVE: 1 GRAPH FORMAT: M QUESTION INSTRUCTION: 1
RANDOM: N GRAPH: 1
xxv. According to Friedman and Phelps, no matter what the Fed does to the money supply, in the
long run, the
a. economy will have a zero inflation rate.
b. inflation rate will tend to its natural rate.
c. economy will have a zero unemployment rate.
d. unemployment rate will tend toward its natural rate.
ANSWER: d. unemployment rate will tend toward its natural rate.
xxv. Which of the following would shift the long-run Phillips curve right?
a. increases in unemployment compensation
b. an increase in the money supply
c. an increase in the expected inflation rate
ANSWER: a. increases in unemployment compensation
xxv. 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 higher output.
b. higher unemployment and lower output.
c. lower unemployment and higher output.
d. lower unemployment and lower output.
ANSWER: b. higher unemployment and lower output.
xxv. An increase in expected inflation shifts the

a. long-run Phillips curve right.
b. long-run Phillips curve left.
c. short-run Phillips curve right.
d. short-run Phillips curve left.
ANSWER: c. short-run Phillips curve right.
TYPE: M KEY1: G SECTION: 2 OBJECTIVE: 2 RANDOM: Y
xxv. The long-run and short-run Phillips curves intersect where

a. the quantity of goods and services demanded equals the quantity supplied.
b. the quantity of labor demanded equals the quantity supplied.
c. expected inflation is greater than actual inflation.
d. expected inflation equals actual inflation.
ANSWER: d. expected inflation equals actual inflation.
xxv. According to Friedman and Phelps, the unemployment rate is above the natural rate when actual
inflation
a. is greater than expected inflation.
b. equals expected inflation.
c. is less than expected inflation.
d. is high.
ANSWER: c. is less than expected inflation.
xxv. Faced with an adverse supply shock, policymakers can increase aggregate
a. supply, which increases prices and output.
b. supply, which decreases prices and increases output.
c. demand, which increases prices and output.
d. demand, which decreases prices and increases output.
ANSWER: c. demand, which increases prices and output.
xxv. A favorable supply shock will cause the short-run Phillips curve to shift
a. left, and unemployment to rise.
b. left, and unemployment to fall.
c. right, and unemployment to rise.
d. right, and unemployment to fall.
ANSWER: b. left, and unemployment to fall.
xxv. An adverse supply shock will cause the short-run Phillips curve to shift
a. right, and inflation to fall.
b. right, and inflation to rise.
c. left, and inflation to fall.
d. left, and inflation to rise.
ANSWER: b. right, and inflation to rise.
xxv. In the 1970s, the Fed accommodated

a. an adverse supply shock and so contributed to higher inflation.
b. an adverse supply shock and so contributed to lower inflation.
c. a favorable supply shock and so contributed to higher inflation.
d. a favorable supply shock and so contributed to lower inflation.
ANSWER: a. an adverse supply shock and so contributed to higher inflation.
xxv. In 1979, Fed Chair Paul Volcker decided to pursue a policy

a. that would lead to disinflation.
b. that would create falling prices.
c. to accommodate continuing adverse supply shocks.
ANSWER: a. that would lead to disinflation.
xxv. If the sacrifice ratio is 3, reducing the inflation rate from 5 percent to 2 percent would require
sacrificing
a. 6 percent of annual output.
b. 9 percent of annual output.
c. 10 percent of annual output.
d. 15 percent of annual output.
ANSWER: b. 9 percent of annual output.
xxv. In 1979, Fed Chair Paul Volcker

a. believed decreasing inflation would temporarily decrease output growth.
b. instituted an accommodating monetary policy.
c. believed that inflation had not yet reached unacceptable levels.
ANSWER: a. believed decreasing inflation would temporarily decrease output growth.
xxv. In the late 1970s proponents of rational expectations argued that
a. the short run might be long because people wouldn’t go to the trouble of computing
inflation expectations.
b. if people expected a decrease in the money supply growth rate and inflation, the decrease in
the money growth would have little or no affect on output.
c. Friedman and Phelps were wrong about the long run, because inflation expectations would
never adjust to return the economy to the natural rate of unemployment.
d. Friedman and Phelps were wrong because there was no short run since people always
anticipated inflation correctly.
ANSWER: b. if people expected a decrease in the money supply growth rate and inflation, the
decrease in the money growth would have little or no affect on output.
xxv. The restrictive monetary policy followed by the Fed in the early 1980s
a. reduced both unemployment and inflation.
b. reduced inflation significantly, but at the cost of a severe recession.
c. reduced unemployment significantly, but at the cost of higher inflation.
d. raised both unemployment and inflation.
ANSWER: b. reduced inflation significantly, but at the cost of a severe recession.
xxv. The experience of the Volcker disinflation of the early 1980s

a. generally increased estimates of the sacrifice ratio.
b. generally decreased estimates of the sacrifice ratio.
c. clearly refuted the predictions of the proponents of rational expectations.
d. clearly refuted the predictions of the opponents of rational expectations.
ANSWER: b. generally decreased estimates of the sacrifice ratio.
xxv. Since 1984, the economy has experienced

a. no unemployment rate above the natural rate.
b. a severe recession during 1991 and 1992.
c. uninterrupted economic growth.
d. relatively mild fluctuations in inflation and unemployment.
ANSWER: d. relatively mild fluctuations in inflation and unemployment.
xxv. In 1999, the Phillips curve was fairly far to the

a. right, partly because of lower inflation expectations.
b. right, partly because of adverse supply shocks.
c. left; partly because of lower inflation expectations.
d. left; partly because of adverse supply shocks.
ANSWER: c. left; partly because of lower inflation expectations.
xxv. In the late 1990s,

a. aggregate supply apparently shifted left.
b. the Phillips curve apparently shifted right.
c. Both a and b are correct.
d. Neither a nor b is correct.
ANSWER: d. Neither a nor b is correct.
Chapter 33
The Short-Run Tradeoff Between
Inflation and Unemployment
Test B
xxv.
The short-run effects of an increase in government expenditures are shown in the graph as
a. a movement from A to B and 1 to 2.
b. a movement from A to B and 1 to 3.
c. a movement from B to A and 1 to 4.
ANSWER: b. a movement from A to B and 1 to 3.
xxv. In order to reduce inflation an economy will typically endure a period of

a. high unemployment and low output.
b. high unemployment and high output.
c. low unemployment and low output.
d. low unemployment and high output.
ANSWER: a. high unemployment and low output.
xxv. The Phillips curve shows the relationship between the

a. price level and real GDP.
b. price level and unemployment.
c. inflation rate and the price level.
d. inflation rate and unemployment.
ANSWER: d. inflation rate and unemployment.
xxv. If the government decided that it wanted lower inflation it would

a. increase aggregate demand which would increase unemployment.
b. increase aggregate demand which would decrease unemployment.
c. decrease aggregate demand which would increase unemployment.
d. decrease aggregate demand which would decrease unemployment.
ANSWER: c. decrease aggregate demand which would increase unemployment.
xxv. Which of the following lists contains only policies that would increase inflation and decrease
unemployment?
a. increase government expenditures, increase the money supply
b. increase government expenditures, decrease the money supply
c. decrease government expenditures, increase the money supply
d. decrease government expenditures, decrease the money supply
ANSWER: a. increase government expenditures, increase the money supply.
xxv. Friedman and Phelps argued that an inverse relation between inflation and unemployment
could exist
a. in both the long run and the short run.
b. in neither the short run nor the long run.
c. only in the short run.
d. only in the long run.
ANSWER: c. only in the short run.
xxv. According to the long-run Phillips curve, if the Fed increases the growth rate of the money
supply,
a. inflation and unemployment both rise.
b. inflation rises and unemployment falls.
c. only employment rises.
d. only inflation rises.
ANSWER: d. only inflation rises.
xxv. Which of the following policies would shift the long-run Phillips curve to the right?
a. Increased use of on-line vitas and job openings decrease the time people spend searching
for jobs.
b. The government increases the minimum wage.
c. The government increases the money supply.
ANSWER: b. The government increases the minimum wage.
xxv. Which of the following explanations for an upward sloping aggregate supply curve would imply
an upward-sloping short-run Phillips curve?
a. misperceptions of relative prices
b. sticky wages and prices
ANSWER: c. Both a and b are correct.
xxv. As compared to their initial values, which of the following variables are higher in both the short
and long run if the government pursues an expansionary policy?
a. both unemployment and inflation
b. only inflation
c. only unemployment
d. neither unemployment nor inflation
ANSWER: b. only inflation
xxv. Expansionary policy
a. increases unemployment and inflation in the short run, but only increases inflation in the
long run.
b. increases unemployment and reduces inflation in the short run, but increases
unemployment in the long run.
c. reduces unemployment in the short run, but increases inflation in the short run and long
run.
d. reduces unemployment and inflation in the short run, but increases unemployment in the
long run.
ANSWER: c. reduces unemployment in the short run, but increases inflation in the short run and
long run.
xxv. If expected inflation decreases the short-run Phillips curve shifts

a. right, so at any actual inflation rate, unemployment will be higher than before.
b. right, so at any actual inflation rate, unemployment will be lower than before.
c. left, so at any actual inflation rate, unemployment will be higher than before.
d. left, so at any actual inflation rate, unemployment will be lower than before.
ANSWER: d. left, so at any actual inflation rate, unemployment will be lower than before.
xxv. In 1973, both unemployment and inflation were higher than they had been in 1969. This can be
explained by monetary policy that increased
a. inflation expectations and so shifted the short-run Phillips curve to the right.
b. inflation expectations and so shifted the short-run Phillips curve to the left.
c. actual inflation and so shifted the long-run Phillips curve to the right.
d. actual inflation and so shifted the long-run Phillips curve to the left.
ANSWER: b. inflation expectations and so shifted the short-run Phillips curve to the left.
xxv. The Phillips curve would be shifted rightward by:

a. a decline in inflationary expectations.
b. a decrease in oil prices.
c. an increase in inflationary expectations.
d. a leftward shift of aggregate demand.
ANSWER: c. an increase in inflationary expectations.
xxv.
In late 2000 and early 2001 crude oil prices rose. On the graph this would be shown as
a. a movement from A to B and a movement from 1 to 2.
b. a movement from A to B and a movement from 2 to 1.
c. a movement from B to A and a movement from 1 to 2.
ANSWER: c. a movement from B to A and a movement from 1 to 2.
xxv. The oil price shock of the 1970s shifted the short-run Phillips curve
a. right briefly because the Fed did not accommodate the oil price shock.
b. right for an extended period because the Fed accommodated the oil price shock.
c. left briefly because the Fed did not accommodate the oil price shock.
d. left for an extended period because the Fed accommodated the oil price shock.
ANSWER: b. right for an extended period because the Fed accommodated the oil price shock.
xxv. Which of the following is a consequence of using monetary policy to fight unemployment
created by a supply shock?
a. current inflation rises
b. the Phillips curve will not soon revert to its former position
d. Neither a nor b are correct.
ANSWER: c. Both a and b are correct.
xxv. Suppose that a small economy that depends mostly on agriculture experiences a year with
exceptionally good conditions for growing crops. The effects of the good weather would shift
a. both short-run aggregate supply and the short-run Phillips curve right.
b. both short-run aggregate supply and the short-run Phillips curve left.
c. the short-run aggregate supply curve to the left, and the short-run Phillips curve to the
right.
d. the short-run aggregate supply curve to the right, and the short-run Phillips curve to the
left.
ANSWER: d. the short-run aggregate supply curve to the right, and the short-run Phillips curve to
the left.
xxv. Suppose an economy with high inflation decides to decrease the money supply growth rate
a. both the current unemployment rate and the natural rate of unemployment fall.
b. both the current unemployment rate and the natural rate of unemployment rise.
c. the current rate of unemployment rises, but there is no change in the natural rate of
unemployment.
d. the current rate of unemployment falls, but there is no change in the natural rate of
unemployment.
ANSWER: c. the current rate of unemployment rises, but there is no change in the natural rate of
unemployment.
xxv. Suppose the Fed decreased the growth rate of the money supply. Which of the following would
permanently decrease?
a. both the unemployment rate and the inflation rate
b. the unemployment rate, but not the inflation rate
c. the inflation rate, but not the unemployment rate
d. neither the unemployment rate nor the inflation rate
ANSWER: c. the inflation rate, but not the unemployment rate
xxv. The annual output of the United States is currently about $10 trillion. If the sacrifice ratio is 3 and
the Fed pursues a monetary policy designed to decrease inflation 2 percentage points, what is
the cost of reducing inflation?
a. $500 billion
b. $600 billion
c. $5 trillion
d. $6 trillion
ANSWER: b. $600 billion
xxv. If the government’s commitment to low inflation is credible, the sacrifice ratio is
a. high, so the cost of inflation reduction is high.
b. high, so the cost of inflation reduction is low.
c. low, so the cost of inflation reduction is high.
d. low, so the cost of inflation reduction is low.
ANSWER: d. low, so the cost of inflation reduction is low.
xxv. The disinflation of the early 1980s was due to:

a. restrictive monetary policies of the Federal Reserve.
b. expansionary monetary policies of the Federal Reserve.
c. restrictive fiscal policy.
d. expansionary fiscal policy.
ANSWER: a. restrictive monetary policies of the Federal Reserve.
xxv. Consider the following two sentences. Although the Volcker disinflation came at the cost of high
unemployment, the cost was less than most economists predicted. The cost of the disinflation
might have been even greater if people had believed that Volcker would really reduce inflation
as much as he did.
b. Neither sentence is true.
ANSWER: c. Only the first sentence is true.
xxv. Which of the following is helpful in explaining levels of unemployment and inflation in the late
1990s?
a. Decreased inflation expectations shifted the short-run Phillips curve to the right.
b. The U.S. economy experienced some favorable supply shocks during this period.
ANSWER: b. the U.S. economy experienced some favorable supply shocks during this period.
Chapter 34
Five Debates over Macroeconomic Policy
Test A
xxv. “Leaning against the wind” is exemplified by
a. a decrease in government expenditures when there is a recession.
b. an increase in the money supply when there is a recession.
c. a tax cut when there is an expansion.
ANSWER: b. an increase in the money supply when there is a recession.
TYPE: M KEY1: D OBJECTIVE: 1 SECTION: 1 RANDOM: Y
xxv. Those who desire that policymakers stabilize the economy would advocate which of the
following when employment is above the natural rate?
a. increase the money supply
b. decrease taxes
c. decrease government expenditures
ANSWER: c. decrease government expenditures
xxv. In general, the longest lag for

a. fiscal policy is the time it takes to change policy, while for monetary policy the longest lag is
the time it takes for policy to impact aggregate demand.
b. monetary policy is the time it takes to change policy, while for fiscal policy the longest lag is
the time it takes for policy to impact aggregate demand.
c. both fiscal and monetary policy is the time it takes to change policy.
d. both fiscal and monetary policy is the time it takes for policy to impact aggregate demand.
ANSWER: a. fiscal policy is the time it takes to change policy, while for monetary policy the longest
lag is the time it takes for policy to impact aggregate demand.
xxv. The principal reason that monetary policy has lags is that it takes a long time for
a. changes in the interest rate to change aggregate demand.
b. changes in the money supply to change interest rates.
c. the Fed to change the money supply.
ANSWER: a. changes in the interest rate to change aggregate demand.
xxv. Opponents of using policy to stabilize the economy generally believe that
a. unemployment and inflation are not cause for much concern.
b. neither fiscal nor monetary policy have much impact on aggregate demand.
c. attempts to stabilize the economy can increase the magnitude of economic fluctuations.
ANSWER: c. attempts to stabilize the economy can increase the magnitude of economic fluctuations.
xxv. The Federal Open Market Committee

a. is required to keep the interest rate within a range set by Congress.
b. operates with almost complete discretion over monetary policy.
c. is required to increase the money supply by a given growth rate each year.
d. is required by its charter to change the money supply using a complex formula that
concerns the tradeoff between inflation and unemployment.
ANSWER: b. operates with almost complete discretion over monetary policy.
xxv. The political business cycle refers to

a. changes in output associated with spending to pay for presidential campaigns.
b. changes in output created by the monetary rule the Fed must follow.
c. the potential for a central bank to increase the money supply, and so output, to help the
incumbent president get re-elected.
d. the fact that about every four years some politician advocates greater government control of
the Fed.
ANSWER: c. the potential for a central bank to increase the money supply, and so output, to help
the incumbent get re-elected.
xxv. A law that requires the money supply to grow by a fixed percentage each year would eliminate
a. the time inconsistency problem, but not political business cycles.
b. the political business cycle, but not the time inconsistency problem.
c. both the time inconsistency problem and political business cycles.
d. neither the time inconsistency problem nor political business cycles.
ANSWER: c. both the time inconsistency problem and political business cycles.
TYPE: M KEY1: C OBJECTIVE: 2 SECTION: 2 RANDOM: Y
xxv. Which of the following is true concerning the recently developed inflation-targeting policy of
Brazil’s central bank?
a. It is very different from policies used by Britain, Canada, and New Zealand.
b. Because the economy is easy to predict, they will not likely miss their inflation target.
c. If prices are rising faster than expected, the central bank is supposed to decrease interest
rates.
d. The policy may not work well since the central bank is not free from political pressures.
ANSWER: d. The policy may not work well since the central bank is not free from political
pressures.
xxv. Suppose that the central bank must follow a rule that requires it to increase the money supply
when the price level falls and decrease the money supply when the price level rises. If the
economy starts from long-run equilibrium and aggregate supply shifts right, the central bank
must
a. decrease the money supply, which will move output back towards its long-run level.
b. decrease the money supply, which will move output further from its long-run level.
c. increase the money supply, which will move output back towards its long-run level.
d. increase the money supply, which will move output further from its long-run level.
ANSWER: d. increase the money supply, which will move output further from its long-run level.
TYPE: M KEY1: G OBJECTIVE: 2 SECTION: 2 RANDOM: Y
xxv. A successful program to reduce inflation

a. eventually reduces inflation expectations.
b. permanently decreases output.
c. permanently raises interest rates.
ANSWER: a. eventually reduces inflation expectations.
xxv. Proponents of zero inflation argue that reducing inflation has

a. permanent costs and temporary benefits.
b. temporary costs and permanent benefits.
c. permanent costs and benefits.
d. temporary costs and benefits.
ANSWER: b. temporary costs and permanent benefits.
xxv. The immediate consequences of Paul Volcker’s inflation reduction efforts were to
a. increase both inflation and unemployment.
b. reduce both inflation and unemployment.
c. increase inflation and reduce unemployment.
d. reduce inflation and increase unemployment.
ANSWER: d. reduce inflation and increase unemployment.
xxv. Inflation reduction has the lowest cost when the efforts are
a. credible so that the sacrifice ratio is low.
b. unexpected so that the sacrifice ratio is low.
c. credible so that the sacrifice ratio is high.
d. unexpected so that the sacrifice ratio is high.
ANSWER: a. credible so that the sacrifice ratio is low.
xxv. Some countries have had high inflation for a long time. Others have had low or moderate
inflation for a long time. Which of the following, at least in theory, could explain why some
countries would continue to have high inflation?
a. In a country where inflation has been high for a long time, people are likely to have found
ways to limit the costs.
b. High inflation countries have relatively small sacrifice ratios and so see no need to reduce
inflation.
c. Inflation reduction works best when it is unexpected, and people in high inflation countries
would quickly anticipate any change in monetary policy.
ANSWER: a. In a country where inflation has been high for a long time, people are likely to have
found ways to limit the costs.
xxv. In the late 1990s, the U.S. government had a
a. deficit and a debt.
b. deficit, but no debt.
c. surplus, but no debt.
d. surplus and a debt.
ANSWER: d. surplus and a debt.
xxv. Part of the argument for deficit reduction is that it would

a. increase interest rates and investment.
b. decrease interest rates and investment.
c. increase interest rates and decrease investment.
d. decrease interest rates and increase investment.
ANSWER: d. decrease interest rates and increase investment.
xxv. Proponents of debt reduction argue that the rise in government debt during the 1980s
a. can be justified since the United States was involved in major military conflicts.
b. was primarily the result of politicians finding it easier to raise expenditures than cut taxes.
c. can be justified since the United States went through serious recessions.
ANSWER: b. was primarily the result of politicians finding it easier to raise expenditures than cut
taxes.
xxv. Which of the following is true?

a. The current government debt is about $114,000 per person.
b. As long as the government debt grows faster than the nation’s income, there is nothing to
prevent the government debt from growing forever.
c. If the government uses funds to pay for useful programs, on net the debt need not burden
future generations.
d. When there is a deficit, there must also be a debt.
ANSWER: c. If the government uses funds to pay for useful programs, on net the debt need not
burden future generations.
xxv. Suppose the budget deficit is rising 2 percent per year and nominal GDP is rising 4 percent per
year, the debt created by these continuing deficits is
a. sustainable, but the future burden on your children cannot be offset.
b. sustainable, and the future burden on your children can be offset if you save for them.
c. not sustainable, and the future burden on your children cannot be offset.
d. not sustainable, but the future burden on your children can be offset if you save for them.
ANSWER: b. sustainable, and the burden on your children can be offset if you save for them.
xxv. Proponents of tax-law changes to encourage saving would

a. favor the use of means-tests for government benefits.
b. support a tax on consumption instead of on income.
c. favor all of the above programs.
d. favor none of the above programs.
ANSWER: b. support a tax on consumption instead of on income.
xxv. IRA, 401(k), 403(b), and Keogh plans
a. are primarily useful to those saving to buy a home.
b. place limits on the amount people can deposit into these programs.
c. allow for unlimited withdrawals with no penalty.
ANSWER: b. place limits on the amount people can deposit into these programs.
xxv. A lower rate of return on saving has

a. income and substitution effects that decrease saving.
b. income and substitution effects that increase saving.
c. an income effect that discourages saving and a substitution effect that encourages saving.
d. an income effect that encourages saving and a substitution effect that discourages saving.
ANSWER: d. an income effect that encourages saving and a substitution effect that discourages
saving.
xxv. A reduction in the tax rate on income from saving would

a. increase real wages over time.
b. decrease the capital stock over time.
c. decrease productivity over time.
d. most directly benefit the poor in the short run.
ANSWER: a. increase real wages over time.
xxv. The five debates over macroeconomic policy exist mostly because
a. economists disagree over basic issues such as the importance of saving for economic
growth.
b. people fail to clearly see the benefits or the costs of most changes.
c. there are tradeoffs and people disagree about the best way to deal with them.
d. politicians offer misleading information.
ANSWER: c. there are tradeoffs and people disagree about the best way to deal with them.
Chapter 34
Five Debates over Macroeconomic Policy
Test B
xxv. If households and firms became more optimistic about the future real GDP
a. and unemployment would increase.
b. would increase and unemployment would decrease.
c. would decrease and unemployment would increase.
d. and unemployment would decrease.
ANSWER: b. would increase and unemployment would decrease.
xxv. If unemployment increases, which of the following could the government do to try to decrease
it?
a. decrease the money supply
b. decrease taxes
c. decrease government expendtitures
d. None of the above would tend to decrease unemployment.
ANSWER: b. decrease taxes.
xxv. Which of the following actions would be considered leaning against the wind?
a. In response to a recession, the government leaves fiscal and monetary policy unchanged.
b. In response to a recession, the government decreases the money supply.
c. In response to a boom, the government increases taxes.
ANSWER: c. In response to a boom, the government increases taxes.
xxv. In 1999 and 2000 the Federal Reserve raised interest rates several times. This policy implies the
Fed
a. increased money supply growth due to concern about inflation.
b. increased money supply growth due to concern about unemployment.
c. decreased money supply growth due to concern about inflation.
d. decreased money supply growth due to concern about unemployment.
ANSWER: c. decreased money supply growth due to concern about inflation.
xxv. An increase in the money supply affects output primarily by

a. decreasing interest rates which increases business investment.
b. decreasing interest rates which decreases business investment.
c. increasing interest rates which increases business investment.
d. increasing interest rates which decreases business investment.
ANSWER: a. decreasing interest rates which increases business investment.
xxv. The principal lag in implementing fiscal policy is the time it takes
a. for firms to change output in response to the change in the price level.
b. for fiscal policy to affect interest rates.
c. for government expenditures and taxes to affect consumer spending.
d. to pass legislation to change expenditures or taxes.
ANSWER: d. to pass legislation to change expenditures or taxes.
xxv. The Federal Reserve

a. has considerable discretion in determining monetary policy.
b. has little discretion, but not does not have to follow any specific rule.
c. must follow a monetary policy rule that requires it to be primarily concerned with inflation.
d. must follow a monetary policy rule that requires it to be primarily concerned with
unemployment.
ANSWER: a. has considerable discretion in determining monetary policy.
xxv. When the Fed has discretion, policy is time inconsistent which means inflation expectations are
a. higher and the short-run Phillips curve is further to the right than otherwise.
b. higher and the short-run Phillips curve is further to the left than otherwise.
c. lower and the short-run Phillips curve is further to the right than otherwise.
d. lower and the short-run Phillips curve is further to the left than otherwise.
ANSWER: a. higher and the short-run Phillips curve is further to the right than otherwise.
xxv. Either a constant growth rate of the money supply monetary rule, or a rule requiring the Fed to
respond to changes in real GDP would reduce or eliminate
a. the time inconsistency of monetary policy.
b. the monetary portion of the political business cycle.
c. both the time inconsistency of monetary policy and the monetary portion of the political
business cycle.
d. neither the time inconsistency of monetary policy nor the monetary portion of the political
business cycle.
ANSWER: c. both the time inconsistency of monetary policy and the monetary portion of the
political business cycle.
xxv. Consider the following two sentences. If the Fed is bound by a rule to decrease the money
supply when prices increase, then when aggregate supply shifts left, their actions will reduce
output further. Paul Volcker’s monetary policy in 1979 caused a rise in Jimmy Carter’s
popularity.
a. Only the first sentence is correct.
b. Only the second sentence is correct.
c. Both sentences are correct.
d. Neither sentence is correct.
ANSWER: a. Only the first sentence is correct.
xxv. An economist would be more likely to support a program reducing inflation to zero if she
believed that
a. shoeleather and menu costs were high.
b. Fed policy to reduce inflation was credible.
c. the short-run Phillips curve was steep.
xxv. A policy to reduce inflation is likely to increase unemployment in

a. the short run and the long run.
b. the short run but not the long run.
c. the long run but not the short run.
ANSWER: b. the short run, but not the long run.
xxv. If people believe a central bank’s intention to decrease the inflation rate, the
a. short-run Phillips curve shifts right.
b. short-run Phillips curve shifts left.
c. long-run Phillips curve shifts right.
d. long-run Phillips curve shifts left.
ANSWER: b. short-run Phillips curve shifts left.
xxv. If people in countries that have had persistently high inflation are skeptical of efforts to reduce
inflation the short-run Phillips curve will remain far to the
a. right, and the sacrifice ratio will be low.
b. right, and the sacrifice ratio will be high.
c. left, and the sacrifice ratio will be low.
d. left, and the sacrifice ratio will be high.
ANSWER: d. left, and the sacrifice ratio will be high.

a. A credible inflation reduction program can lead to a low sacrifice ratio.
b. Inflation reduction programs are likely to lower employment, but unlikely to have much
impact on the capital stock.
c. Living standards depend on productivity and not the price level.
d. Rewriting the tax laws could reduce some of the current costs of inflation.
ANSWER: b. Inflation reduction programs are likely to lower employment, but unlikely to have
much impact on the capital stock.
xxv. From 1980 to 1999 the debt of the U.S. federal government
a. fell by about 80%.
b. fluctuated but ended up about the same.
c. rose by about 200%.
d. rose by about 400%.
ANSWER: d. rose by about 400%.
xxv. Budget deficits reduce national saving causing real interest rates
a. and investment to fall.
b. and investment to rise.
c. to rise and investment to fall.
ANSWER: c. to rise and investment to fall.
xxv. Consider the following two sentences. A policy that required a balanced budget would require
the government to either increase taxes or reduce expenditures during recessions, which would
tend to worsen the recessions. Funding more education spending rather then reducing the
government debt could, all things considered, make future generations better-off.
a. Only the first sentence is true.
b. Only the second sentence is true.
c. Both sentences are true.
ANSWER: c. Both sentences are true.
xxv. Each person’s share of the government debt is about

a. 2% of lifetime income.
b. 10% of lifetime income.
c. 25% of lifetime income.
d. 40% of lifetime income.
ANSWER: a. 2% of lifetime income.
xxv. Suppose that a country has a real GDP growth rate of about 1% per year and an inflation rate of
about 3%. If they have nominal GDP of about 100 billion units of currency, they can have a
deficit of about
a. 2 billion without increasing the ratio of debt to income.
b. 3 billion without increasing the ratio of debt to income.
c. 4 billion without increasing the ratio of debt to income.
ANSWER: c. 4 billion without increasing the ratio of debt to income.
xxv. Double taxation means that both

a. the profits of corporations and the dividends shareholders receive are taxed, which is
currently the case in the United States.
b. the profits of corporations and the dividends shareholders receive are taxed, which is not
c. wage income and interest income are taxed, which they currently are in the United States.
d. wage income and interest income are taxed, which is not currently the case in the United
States.
ANSWER: a. the profits of corporations and the dividends shareholders receive are taxed, which is
xxv. U.S. public policy discourages saving because

a. other things the same, taxes reduce the return from savings.
b. means tested programs such as Medicaid provide greater benefits to those who did not
save.
c. at least some of the amount that parents bequest to their children is taxed.
xxv. Assuming the substitution effect is large relative to the income effect, tax reform designed to
increase saving,
a. decreases the interest rate and spending on capital goods.
b. decreases the interest rate and increases spending on capital goods.
c. increases the interest rate and decreases spending on capital goods.
d. increases the interest rate and increases spending on capital goods.
ANSWER: b. decreases the interest rate and increases spending on capital goods.
xxv. Tax changes that reduce taxes on interest and capital income may lower tax revenues which
a. increases public saving and so increases national saving.
b. increases public saving and so decreases national saving.
c. decreases public saving and so increases national saving.
d. decreases public saving and so decreases national saving.
ANSWER: d. decreases public saving and so decreases national saving.
a. Any tax change that favors people who save, tends to favor people with high income.
b. If saving were relatively elastic with respect to tax rates, a decrease in the tax rate on income
from saving may not change saving very much.
c. A higher return from saving raises saving if the substitution effect is larger than the income
effect.
d. Other things the same an increase in government surpluses would increase both public and
national saving.
ANSWER: b. If saving were relatively elastic with respect to tax rates, a decrease in the tax rate on
income from saving may not change saving very much.
Alternate Test Bank
to accompany
Principles of Economics, Second Edition
N. Gregory Mankiw
Harvard University
Prepared by
Bryce Kanago
University of Northern Iowa
and
Penny Kugler
Central Missouri State University
Preface
This test bank supplements Mankiw’s Principles of Economics, Second Edition and the original test
bank volumes. It contains approximately 50 questions for each chapter of the textbook.
For each chapter, the Alternate Test Bank provides two tests (A and B) of about 25 multiple choice
questions each. Test A in each chapter consists of original questions. Test B contains questions
that are picked up from previous test banks and online quizzes. Questions that are repeated
from online quizzes are noted with bold letters for convenience in selecting appropriate test
questions. Each test is designed to offer comprehensive coverage of the textbook chapter.
Codes
Each test is coded to reflect the types of question and the chapter sections that the questions test.
Answers are given with each test question. The codes that follow each test question are defined
below.
Question Type
M = multiple-choice question
Key 1
D = definition/factual question
G = graphing question
C = complex analysis/critical thinking question
E = equation
T = tabular question
Section
The number used here indicates the chapter section the question tests. Section numbers in the
textbook are communicated with the main headings in blue borders.
Objective
The number used here indicates the chapter learning objective the question is testing. Chapter
objectives in the textbook are listed in blocks on the right side of each chapter’s first page.
Variations
This test bank is also available in Microsoft Word. Contact your local Harcourt representative or visit
the instructor's portion of the Web site for more information:
www.harcourtcollege.com/econ/mankiw.
To use the Alternate Test Bank with a version of Mankiw’s textbook other than the hardcover
Principles of Economics, compare the columns of the Comparative Table of Contents below to
the version of the text you’re using to see how chapters are shared among the five versions of the
textbook.
Comparative Table of Contents

Principles of Economics Micro Macro Brief Essentials
Macr
o
Part One • Introduction Part One Part One Part One Part One
1. Ten Principles of Economics 1 1 1 1
2. Thinking Like an Economist 2 2 2 2
3. Interdependence and the Gains from Trade 3 3 3 3
Part Two • Supply and Demand I: How Markets Part Two Part Two Part Two Part Two
Work
4. The Market Forces of Supply and Demand 4 4 4 4
5. Elasticity and Its Application 5 5 5
6. Supply, Demand, and Government Policies 6 6 6
Part Three • Supply and Demand II: Markets and Part Three Part Three Part Three
Welfare
7. Consumers, Producers, and the Efficiency of 7 7 7
Markets
8. Application: The Costs of Taxation 8 8 8
9. Application: International Trade 9 9 9
Part Four • The Economics of the Public Sector Part Four Part Four
10. Externalities 10 10
11. Public Goods and Common Resources 11 11
12. The Design of the Tax System 12
Part Five • Firm Behavior and the Organization of Part Five Part Five
Industry
13. The Costs of Production 13 12
14. Firms in Competitive Markets 14 13
15. Monopoly 15 14
16. Oligopoly 16
17. Monopolistic Competition 17
Part Six • The Economics of Labor Markets Part Six
18. The Markets for the Factors of Production 18
19. Earnings and Discrimination 19
20. Income Inequality and Poverty 20
Part Seven • Advanced Topic Part Seven
21. The Theory of Consumer Choice 21
Part Eight • The Data of Macroeconomics Part Four Part Three Part Six
22. Measuring a Nation’s Income 10 5 15
23. Measuring the Cost of Living 11 6 16
Part Nine • The Real Economy in the Long Run Part Five Part Four Part Seven
24. Production and Growth 12 7 17
25. Saving, Investment, and the Financial System 13 8 18
26. Unemployment and Its Natural Rate 14 9 19
Part Ten • Money and Prices in the Long Run Part Six Part Five Part Eight
27. The Monetary System 15 10 20
28. Money Growth and Inflation 16 11 21
Part Eleven • The Macroeconomics of Open Part Seven Part Six
Economies
29. Open-Economy Macroeconomics: Basic Concepts 17 12
30. A Macroeconomic Theory of the Open Economy 18 13
Part Twelve • Short-Run Economic Fluctuations Part Eight Part Seven Part Nine
31. Aggregate Demand and Aggregate Supply 19 14 22
32. The Influence of Monetary and Fiscal Policy on 20 15 23
Aggregate Demand
33. The Short-Run Tradeoff between Inflation and 21 16
Unemployment
Part Thirteen • Final Thoughts Part Nine Part Eight
34. Five Debates over Macroeconomic Policy 22 17
Table of Contents
Chapter 1 Ten Principles of Economics 1

Chapter 2 Thinking Like an Economist 9
Chapter 3 Interdependence and the Gains from Trade 21
Chapter 4 The Market Forces of Supply and Demand 33
Chapter 5 Elasticity and Its Application 45
Chapter 6 Supply, Demand, and Government Policies 57
Chapter 7 Consumers, Producers, and the Efficiency of Markets 69
Chapter 8 Application: The Costs of Taxation 83
Chapter 9 Application: International Trade 95
Chapter 10 Externalities 109
Chapter 11 Public Goods and Common Resources 121
Chapter 12 The Design of the Tax System 131
Chapter 13 The Costs of Production 139
Chapter 14 Firm in Competitive Markets 151
Chapter 15 Monopoly 163
Chapter 16 Oligopoly 175
Chapter 17 Monopolistic Competition 187
Chapter 18 The Markets for the Factors of Production 199
Chapter 19 Earnings and Discrimination 209
Chapter 20 Income Inequality and Poverty 221
Chapter 21 The Theory of Consumer Choice 231
Chapter 22 Measuring a Nation's Income 247
Chapter 23 Measuring the Cost of Living 257
Chapter 24 Production and Growth 269
Chapter 25 Saving, Investment, and the Financial System 281
Chapter 26 Unemployment and Its Natural Rate 291
Chapter 27 The Monetary System 303
Chapter 28 Money Growth and Inflation 311
Chapter 29 Open-Economy Macroeconomics: Basic Concepts 319
Chapter 30 A Macroeconomic Theory of the Open Economy 331
Chapter 31 Aggregate Demand and Aggregate Supply 343
Chapter 32 The Influence of Monetary and Fiscal Policy on Aggregate Demand 353
Chapter 33 The Short-Run Tradeoff between Inflation and Unemployment 365
Chapter 34 Five Debates over Macroeconomic Policy 377

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Final Macro 2

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Chapter 22

Measuring a Nation’s Income

ii.For the economy as a whole

iv.Gross Domestic Product is defined as the market value of

v. Goods and services produced and sold illegally are

ix.National income is defined as

xi.The four components of GDP are consumption,

xii. In macroeconomics, investment is spending on

xiv. If exports are smaller than imports, net exports

xv. Transfer payments are

xvi. In 1998, U.S. GDP was about

xviii. The best measure of a country’s production of goods and services is

xx. The GDP deflator is the ratio of

i ANSWER: c. economy-wide phenomena.

ii ANSWER: b. income must equal expenditure.

iii ANSWER: d. the flow of income and expenditures in an economy.

v ANSWER: a. excluded from GDP.

vi ANSWER: b. will increase.

vii ANSWER: a. not added to GDP.

viii ANSWER: b. in Peruvian GDP, but not U.S. GDP.

xi ANSWER: c. investment, government purchases, and net exports.

xiii ANSWER: a. local, state, and federal governments.

xiv ANSWER: b. are negative.

xvi ANSWER: b. $8.5 trillion.

xviii ANSWER: a. real GDP.

xix ANSWER: c. constant prices.

xx ANSWER: c. nominal GDP to real GDP multiplied by 100.

xxi ANSWER: d. $6,000 billion.

xxiii ANSWER: b. GDP per person.

xxv. Which of the following represents GDP?

xxv. Which of the following would be counted in the calculation of GDP?

xxv. The largest component of GDP is

xxv. Net exports will be positive when

xxv. Transfer payments are

xxv. In 1998, U.S. GDP was

xxv. Real GDP

2000 (Base Year) 2001 (Current Year)

xxv. International GDP data show that

xxv. It is especially difficult to measure GDP in Russia because

xxv. The inflation rate is defined as the

xxv. The CPI is a measure of the overall cost of

xxv. The CPI is computed using all goods and services

xxv. In computing the CPI, the base year is the

xxv. Unmeasured quality change is a problem in the CPI because

xxv. A COLA automatically raises the wage rate when

xxv. The nominal interest rate is

xxv. The nominal interest rate tells you

xxv. The real interest rate tells you

Year Peaches Pecans

xxv. The consumer price index is based on

xxv. Which of the following is true considering substitution bias?

xxv. Which of the following is correct?

xxv. If the price of oil decreases, the CPI

xxv. Which of the following is correct?

xxv. In the late 1970s

xxv. Indexation refers to

xxv. Which of the following would be considered physical capital?

xxv. Which of the following is human capital?

xxv. Which of the following would increase productivity?

xxv. Across countries, investment and growth rates are

xxv. If there are diminishing returns to capital,

xxv. Generally, the main cause of famine is

xxv. Outward-oriented policies

xxv. A large and sudden increase in the number of workers is likely to

xxv. Typically, countries in Africa

xxv. Which of the following is correct?

xxv. Productivity is the