ECON509

Question 1

All of the following are measures of GDP except the total:

a) expenditures of all businesses in the economy.
b) income from all production in the economy.
c) expenditures on all final goods produced.
d) value of all final production.

Answer 1

a) expenditures of all businesses in the economy.

Question 2

Real GDP is a better measure of economic well-being than nominal GDP, because real GDP:

a) measures changes in the quantity of goods and services produced by holding prices constant.
b) adjusts the value of goods and services produced for changes in the foreign exchange rate.
c) excludes the value of goods and services exported aboard.
d) includes the value of government transfer payments

Answer 2

a) measures changes in the quantity of goods and services produced by holding prices constant.

Question 3

In the national income accounts, net exports equal:

a) exported goods minus imported goods.
b) exported goods minus imported services.
c) exported goods and services minus imported goods and services.
d) exported goods and services plus imported goods and services

Answer 3

c) exported goods and services minus imported goods and services.

Question 4

Prices of items included in the CPI are:

a) averaged with the price of every item weighted equally.
b) chained to the base year by the year-to-year growth rate of the item.
c) weighted according to quantity of the item purchased by the typical household.
d) weighted according to amount of the item produced in GDP.

Answer 4

c) weighted according to quantity of the item purchased by the typical household.

Question 5

The core inflation rate:

a) is measured using a Paasche index.
b) measures the change in producer prices.
c) excludes food and energy prices.
d) includes the price of exports and includes the price of imports.

Answer 5

c) excludes food and energy prices.

Question 6

According to the definition used by the U.S. Bureau of Labor Statistics, a person is not in the labor force if that person:

a) is out of a job and looking for work during the previous four weeks
b) has been temporarily laid off.
c) is going to school full time.
d) is temporarily absent from a job because of illness.

Answer 6

c) is going to school full time.

Question 7

According to the definition used by the U.S. Bureau of Labor Statistics, people are considered to be unemployed if they:

a) do not have a job, but have looked for work in the past 4 weeks.
b) are out of a job, but not looking for work.
c) are absent from work because of bad weather or illness.
d) retired from the labor force before age 65.

Answer 7

a) do not have a job, but have looked for work in the past 4 weeks.

Question 8

If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor force participation rate equals ______ percent.

a) 58
b) 67
c) 50
d) 60

Answer 8

d) 60

Question 9

The price received by each factor of production for its services is determined by:

a) demand for output and supply of factors.
b) demand and supply of factors.
c) demand and supply of output.
d) demand for factors and supply of output

Answer 9

b) demand and supply of factors.

Question 10

The marginal product of labor is:

a) additional output produced when one additional unit of labor is added.
b) value of additional output when one dollar’s worth of additional labor is added.
c) additional output produced when one additional unit of labor and one additional unit of capital are added.
d) output divided by labor input

Answer 10

a) additional output produced when one additional unit of labor is added.

Question 11

The property of diminishing marginal product means that, after a point, when additional quantities of:

a) both labor and capital are added, the marginal product of labor diminishes.
b) a factor are added, output diminishes
c) a factor are added when another factor remains fixed, the marginal product of that factor diminishes.
d) both labor and capital are added, output diminishes.

Answer 11

c) a factor are added when another factor remains fixed, the marginal product of that factor diminishes.

Question 12

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then C increases by:

a) 0.15 unit.
b) 1 unit.
c) 0.85 unit.
d) 0.5 unit.

Answer 12

c) 0.85 unit.

Question 13

Assume that the consumption function is given by C = 200 + 0.7(Y – T), the tax function is given by T = 100 + t1Y, and Y = 50K0.5L0.5, where K = 100 and L = 100. If t1 increases from 0.2 to 0.25, then consumption decreases by:

a) 175.
b) 250.
c) 140.
d) 70

Answer 13

a) 175.

Question 14

When economists speak of “the” interest rate, they mean:

a) the rate on 90-day Treasury bills.
b) the rate on 30-year government bonds.
c) no particular interest rate, since it is assumed that various interest rates tend to move up and down together.
d) the “prime” rate on loans.

Answer 14

c) no particular interest rate, since it is assumed that various interest rates tend to move up and down together.

Question 15

In a classical model with fixed factors of production and flexible prices, the amount of consumption spending depends on _____ , the amount of investment spending depends on _____, and the amount of government spending is determined _____.

a) labor’s share of output; capital’s share of output; by the interest rate
b) the real wage; the real rental price of capital; by factor prices
c) disposable income; the interest rate; exogenously
d) the interest rate; disposable income; by tax revenue

Answer 15

c) disposable income; the interest rate; exogenously

Question 16

In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will:

a) increase.
b) either increase or decrease, depending on whether consumption is greater or less than investment.
c) decrease.
d) remain unchanged.

Answer 16

a) increase.

Question 17

National saving refers to:

a) taxes minus government spending.
b) disposable income minus consumption.
c) income minus investment.
d) income minus consumption minus government spending.

Answer 17

d) income minus consumption minus government spending.

Question 18

Public saving is:

a) always negative.
b) always zero.
c) always positive.
d) either positive, negative, or zero.

Answer 18

d) either positive, negative, or zero.

Question 19

If disposable income is 4,000, consumption is 3,500, government spending is 1,000, and tax revenues are 800, national saving is equal to:

a) 500.
b) 1,000.
c) 700.
d) 300.

Answer 19

d) 300.

Question 20

The supply and demand for loanable funds determines the:

a) real interest rate.
b) nominal interest rate.
c) real rental price of capital.
d) real wage.

Answer 20

a) real interest rate.

Question 21

Assume that equilibrium GDP (Y) is 5,000. Consumption is given by the equation C = 500 + 0.6 (Y – T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 – 100r, where r is the real interest rate in percent. In this case, the equilibrium real interest rate is:

a) 8 percent
b) 13 percent.
c) 10 percent.
d) 5 percent.

Answer 21

b) 13 percent.

Question 22

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, public saving:

a) rises by $60 billion.
b) falls by $100 billion.
c) rises by $100 billion.
d) falls by $60 billion.

Answer 22

c) rises by $100 billion.

Question 23

When there is a fixed supply of loanable funds, an increase in investment demand results in a(n):

a) increase in investment.
b) decrease in investment.
c) lower interest rate.
d) higher interest rate.

Answer 23

d) higher interest rate.

Question 24

In the classical model with fixed income a decrease in the real interest rate could be the result of a(n):

a) increase in desired investment.
b) decrease in taxes.
c) increase in government spending.
d) increase in taxes.

Answer 24

d) increase in taxes.

Question 25

According to the model developed in Chapter 3, when taxes decrease without a change in government spending:

a) consumption and investment both increase.
b) consumption and investment both decrease.
c) consumption increases and investment decreases.
d) consumption decreases and investment increases.

Answer 25

c) consumption increases and investment decreases.

Question 26

The supply of loanable funds is equivalent to:

a) public saving.
b) national saving.
c) private saving.
d) investment.

Answer 26

b) national saving.

Question 27

An important factor in the evolution of commodity money to fiat money is:

a) a desire to reduce transaction costs.
b) a desire to increase transaction costs.
c) the fact that gold is no longer highly valued.
d) a desire to use gold for jewelry.

Answer 27

a) a desire to reduce transaction costs.

Question 28

The quantity of money in the United States is essentially controlled by the:

a) president of the United States.
b) Department of the Treasury.
c) Federal Reserve.
d) system of commercial banks.

Answer 28

c) Federal Reserve.

Question 29

Currency equals:

a) M1.
b) the sum of funds in checking accounts.
c) the sum of checking accounts and paper money.
d) the sum of coins and paper money.

Answer 29

d) the sum of coins and paper money.

Question 30

Demand deposits are funds held in:

a) currency.
b) certificates of deposit
c) checking accounts.
d) money markets.

Answer 30

c) checking accounts.

Question 31

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is ______ times per year.

a) 0.2
b) 2
c) 5
d) 10

Answer 31

c) 5

Question 32

If the transactions velocity of money remains constant while the quantity of money doubles, the:

a) price of the average transaction multiplied by the number of transactions must remain constant.
b) number of transactions must remain constant.
c) price of the average transaction must double.
d) price of the average transaction multiplied by the number of transactions must double.

Answer 32

d) price of the average transaction multiplied by the number of transactions must double.

Question 33

If the demand for real money balances is proportional to real income, velocity will:

a) increase as income increases.
b) increase as income decreases.
c) vary directly with the interest rate.
d) remain constant.

Answer 33

d) remain constant.

Question 34

Consider the money demand function that takes the form (M/P)d=kY, where M is the quantity of money, P is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average velocity of money in this economy?

a) 3 percent
b) 7 percent
c) 10 percent
d) 13 percent

Answer 34

b) 7 percent

Question 35

In the long run according to the quantity theory of money and the classical macroeconomic theory, if velocity is constant, then ______ determines real GDP and ______ determines nominal GDP.

a) the productive capability of the economy; the money supply
b) the money supply; the productive capability of the economy
c) velocity; the money supply
d) the money supply; velocity

Answer 35

a) the productive capability of the economy; the money supply

Question 36

According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be:

a) increasing.
b) decreasing.
c) 7 percent.
d) constant.

Answer 36

a) increasing.

Question 37

Percentage change in P is approximately equal to the percentage change in :

a) M minus percentage change in Y plus percentage change in velocity.
b) M.
c) M minus percentage change in Y minus percentage change in velocity.
d) M minus percentage change in Y.

Answer 37

a) M minus percentage change in Y plus percentage change in velocity.

Question 38

The right of seigniorage is the right to:

a) draft citizens into the armed forces.
b) borrow money from the public.
c) levy taxes on the public.
d) print money.

Answer 38

d) print money.

Question 39

The real interest rate is equal to the:

a) nominal interest rate plus the inflation rate.
b) nominal interest rate.
c) nominal interest rate minus the inflation rate.
d) amount of interest that a lender actually receives when making a loan.

Answer 39

c) nominal interest rate minus the inflation rate.

Question 40

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must:

a) increase by 2 percent.
b) increase by 1 percent.
c) remain constant.
d) decrease by 1 percent.

Answer 40

b) increase by 1 percent.

Question 41

Equilibrium in the market for goods and services determines the ______ interest rate and the expected rate of inflation determines the ______ interest rate.

a) ex ante real; ex ante nominal
b) ex post real; ex post nominal
c) ex ante nominal; ex post real
d) ex post nominal; ex post real

Answer 41

a) ex ante real; ex ante nominal

Question 42

The real return on holding money is:

a) the real interest rate.
b) minus the real interest rate.
c) the inflation rate.
d) minus the inflation rate.

Answer 42

d) minus the inflation rate.

Question 43

If the nominal interest increases then:

a) the money supply increases.
b) the money supply decreases.
c) the demand for money increases.
d) the demand for money decreases.

Answer 43

d) the demand for money decreases.

Question 44

If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level.

a) increase; increase
b) increase; decrease
c) decrease; increase
d) decrease; decrease

Answer 44

c) decrease; increase

Question 45

Survey evidence indicates that economists worry ______ the general public does about prices increasing more rapidly than their incomes.

a) more than
b) less than
c) about the same as
d) more intensely than

Answer 45

b) less than

Question 46

The inconvenience associated with reducing money holdings to avoid the inflation tax is called:

a) menu costs.
b) shoeleather costs.
c) variable yardstick costs.
d) fixed costs.

Answer 46

b) shoeleather costs.

Question 47

In the case of an unanticipated inflation:

a) creditors with an unindexed contract are hurt because they get less than they expected in real terms.
b) creditors with an indexed contract gain because they get more than they contracted for in nominal terms.
c) debtors with an unindexed contract do not gain because they pay exactly what they contracted for in nominal terms.
d) debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms.

Answer 47

a) creditors with an unindexed contract are hurt because they get less than they expected in real terms.

Question 48

One possible benefit of moderate inflation is:

a) a reduction in boredom attributable to the changing prices.
b) the elimination of menu costs.
c) better functioning labor markets.
d) increased certainty about the future.

Answer 48

c) better functioning labor markets.

Question 49

The hyperinflation experienced by interwar Germany illustrates how fiscal policy can be connected to monetary policy when government expenditures are financed by:

a) new taxes.
b) borrowing in the open market.
c) printing large quantities of money.
d) selling gold.

Answer 49

c) printing large quantities of money.

Question 50

The concept of monetary neutrality in the classical model means that an increase in the money supply will increase:

a) real GDP.
b) real interest rates.
c) nominal interest rates.
d) both saving and investment by the same amount.

Answer 50

c) nominal interest rates.

Question 51

In a system with fractional-reserve banking:

a) all banks must hold reserves equal to a fraction of their loans.
b) no banks can make loans.
c) the banking system completely controls the size of the money supply.
d) all banks must hold reserves equal to a fraction of their deposits.

Answer 51

d) all banks must hold reserves equal to a fraction of their deposits.

Question 52

Hyperinflations ultimately are the result of excessive growth rates of the money supply, the underlying motive for the excessive money growth rates is frequently a government’s:

a) desire to increase prices throughout the economy.
b) need to generate tax revenue to pay for spending.
c) responsibility to increase nominal interest rates by increasing expected inflation.
d) inability to conduct open-market operations.

Answer 52

b) need to generate tax revenue to pay for spending.

Question 53

Which of the following would most likely be called a hyperinflation?

a) Price increases averaged 300 percent per year.
b) The inflation rate was 10 percent per year.
c) Real GDP grew at a rate of 12 percent over a year.
d) A stock market index rose by 1000 points over a year.

Answer 53

a) Price increases averaged 300 percent per year.