macrofinal
Form A
Part I: Multiple-Choice Questions
1. Opportunity cost is best defined as:
A. Marginal cost minus marginal benefit
B. The time spent on an economic activity
C. The value of the best forgone alternative
D. The money cost of an economic decision
2. Macroeconomics focuses on:
A. Total output and the general level of prices in the economy
B. The individual units that make up the whole economy
C. Studies of how individual industries in the economy are organized
D. How a firm determines how much of a product to produce for the national market
3. A point inside the production possibilities curve is:
A. Attainable and the economy is efficient
B. Attainable, but the economy is inefficient
C. Unattainable, but the economy is inefficient
D. Unattainable and the economy is efficient
4. Real gross domestic product
A. is a measure of the overall level of prices
B. measures the value of final goods and services produced within the borders of a given
country during a given time period using current prices
C. measures the value of final goods and services produced within the borders of a given
country during a given time period corrected for changing prices
D. can change from one year to the next even if there is no change in output
5. Which of the following is most likely to be an indication of higher unemployment?
A. An increase in real GDP
B. An increase in nominal GDP
C. A decrease in real GDP
D. A decrease in nominal GDP
Form A
University Extension
6. Which of the following is included in GDP?
A. Welfare payments received by some households
B. Fees received by stockbrokers
C. Cash gifts from relatives during the holidays
D. Payments received from selling stocks in one’s portfolio
7. A nation’s real GDP will increase by increasing the following, except :
A. Number of workers
B. Labor productivity
C. Technological progress
D. Average price level
8. Which measure of inflation would include consumer goods and capital goods?
A. The GDP pr ice index
B. The Consumer Price Index (CPI)
C. The Retail Trade Survey
D. The Survey of Manufactures
9. If the Consumer Price Index was 90 in one year and 100 in the following year, then the rate
of inflation is about:
A. 9 percent
B. 10 percent
C . 11 percent
D. 12 percent
10. In what circumstances would lenders most benefit?
A. When there is an unanticipated decrease in inflation
B. When there is an anticipated increase in inflation
C. When there is an unanticipated increase in inflation
D. When there is an anticipated decrease in inflation
11. If Sara Thomas’ disposable income increases from $4,000 to $4,500 and her level of saving
increases from $200 to $325, it may be concluded that her marginal propensity to:
A. Consume is .80
B. Consume is .75
C. Consume is .60
D. Save is .30
Form A
University Extension
12. Which of the following would shift the consumption schedule downward?
A. A decrease in real interest rates
B. An increase in the value of financial assets
C. An increase in the probability of a recession
D. A decrease in disposable income
13. The set of fiscal policies that would be most contractionary would be a(n):
A. Increase in government spending and taxes
B. Decrease in government spending and taxes
C. Increase in government spending and a decrease in taxes
D. Decrease in government spending and an increase in taxes
14. Refer to the above graph. What combination would most likely cause a shift from AD1
to
AD2
?
A. An increase in taxes and an increase in government spending
B. A decrease in taxes and an increase in government spending
C. An increase in taxes and no change in government spending
D. A decrease in taxes and a decrease in government spending
Form A
University Extension
15. Refer to the figure above. The economy is at equilibrium at point A. What fiscal policy
would be most appropriate to control demand-pull inflation?
A. Shift aggregate demand by increasing taxes
B. Shift aggregate demand by decreasing taxes
C. Shift aggregate supply by increasing taxes
D. Shift aggregate demand by increasing government spending
16. You are given the following information about aggregate demand at the existing price level
for an economy: (1) consumption = $500 billion; (2) investment = $50 billion; (3)
government purchases = $100 billion; and (4) net export = $20 billion. If the full -employment level of GDP for this economy is $620 billion, then
what combination of actions
would be most consistent with closing the GDP- gap here?
A. Increase government spending and taxes
B. Decrease government spending and taxes
C. Decrease government spending and increase taxes
D. Increase government spending and decrease taxes
17. An economy is experiencing a high rate of inflation. The government wants to reduce
consumption by $36 billion to reduce inflationary pressure. The MPC is 0.75. By how much
should the government raise taxes to achieve its objective?
A. $6 billion
B. $9 billion
C. $12 billion
D. $16 billion
Form A
University Extension
18. In an economy, the government wants to increase aggregate demand by $60 billion at each
price level to increase real GDP and reduce unemployment. If the MPC is 0.9, then it could:
A. Decrease taxes by $60 billion
B. Decrease taxes by $12 billion
C. Increase government spending by $6 billion
D. Increase government spendin g by $12 billion
19. The time which elapses between the beginning of a recession or an inflationary episode and
the identification of the macroeconomic problem is referred to as a(n):
A. Budget lag
B. Recognition lag
C. Operational lag
D. Administrative lag
20. If there is a constitutional requirement to maintain a balanced budget, then during a recession
when tax revenues are shrinking, the government will have to implement:
A. Contractionary fiscal policy
B. No change in fiscal polic y
C. Expansionary fiscal policy
D. Countercyclical fiscal policy
21. The crowding-out effect arises when:
A. Government lends in the money market, thus decreasing interest rates
B. Government borrows in the money market, thus decreasing interest rates
C. Government lends in the money market, thus increasing interest rates
D. Government borrows in the money market, thus causing an increase in interest rates
22. Assume that if there was no crowding-out, an increase in government spending would
in crease GDP by $100 billion. If there had been partial crowding-out, however, then GDP
would have:
A. Increased by more than $100 billion
B. Increased by less than $100 billion
C. Increased by $100 billion
D. Not increased
Form A
University Extension
23. The effect of an increase in the government budget deficit on the equilibrium level of GDP is
essentially the same as a(n):
A. Decrease in saving
B. Increase in saving
C. Decrease in consumption
D. Decrease in investment
24. Which of the following is an important real consequence of the public debt of the United
States?
A. It will threaten to bankrupt the Federal government
B. It discourages saving among the general public
C. It decreases the inequality in the distribution of income in the U.S.
D. Its consequent higher interest rates lead to fewer incentives to bear risk and innovate
25. Checkable deposits are included in:
A. M 1
but not in M 2
B. M 2
but not in M 1
C. both M 1
and M 2
D. neither M 1
nor M 2
26. The Federal Reserve System consists of which of the following?
A. Federal Open Market Committee and Office of Thrift Supervision
B. Federal Deposit Insurance Corporation and Controller of the Currency
C. U.S. Treasury Department and Bureau of Engraving and Printing
D. Board of Governors and the 12 Federal Reserve Banks
27. A commercial bank has actual reserves of $50,000 and checkable deposits of $200,000, and
the required reserve ratio is 20%. The excess reserves of the bank are:
A. $10,000
B. $20,000
C. $40,000
D. $50,000
Form A
University Extension
28. A commercial bank has checkable -deposit liabilities of $500,000, reserves of $150,000, and a
required reserve ratio of 20 percent. The amount by which a single commercial bank and the
amount by which the banking system can increase loans are respectively:
A. $30,000 and $150,000
B. $50,000 and $250,000
C. $50,000 and $500,000
D. $100,000 and $500,000
29. An increase in the money supply is likely to reduce:
A. The general price level
B. Nominal income
C. Money demand
D. Interest rates
30. The int erest rate that the Fed charges banks for loans to them through the traditional channel
is called:
A. Discount rate
B. Term auction rate
C. Federal funds rate
D. Reserve rate
31. The Federal Reserve could reduce the money supply by:
A. Selling government bonds in the open market
B. Buying government bonds in the open market
C. Operating the term auction facility
D. Reducing the discount rate
32. The Federal Reserve can increase aggregate demand by:
A. Reducing the money supply
B. Reducing the discount rate
C. Raising the reserve requirement
D. Selling government securities in the open market
Form A
University Extension
33. Refer to the above graphs, in which the numbers in parentheses near the AD1 , AD
2 , and AD
3
labels indicate the level of investment spending associated with each curve, respectively. All
numbers are in billions of dollars. The interest rate and the level of investment spending in
the economy are at point D on the investment demand curve. To achi eve the long – run goal of
a noninflationary full – employment output Q f
in the economy, the Fed should:
A. Decrease aggregate demand by increasing the interest rate from 2 to 4 percent
B. Decrease aggregate demand by increasing the interest rate from 4 to 6 percent
C. Increase aggregate demand by decreasing the interest rate from 4 to 2 percent
D. Increase the level of investment spending from $120 billion to $150 billion
Form A
University Extension
34. Refer to the graphs above. Graph A is constructed on the basic assumption that:
A. The price level is not flexible
B. Nominal wages are unresponsive to price-level changes
C. Real output is unresponsive to price-level changes
D. Unemployment is unresponsive to price -level changes
35. Refer to the graphs above. In Graph A, an increase in the price level from P 1
to P 2
will
cause:
A. The nation’s unemployment rate to be greater than the natural rate of unemployment
B. The nation’s unemployment rate to be less than the natural rate of unemployment
C. Product prices to decrease
D. Profits to decrease
36. Refer to the graphs above. In Graph B, assume that the economy is initially in equilibrium at
point x
1
and that there is an increase in the price level from P 1
to P 2
. In the long r un, this
change will lead to:
A. Lower nominal wages and a shift in the short-run aggregate supply curve from AS
1
to
AS2
B. Higher nominal wages and a shift in the short-run aggregate supply curve from AS
1
to
AS2
C. Lower nominal wages and a movement from equilibrium point x
1
to equilibrium point x
2
D. Higher nominal wages and a movement from equilibrium point x
1
to equilibrium point x
2
37. In the long run, demand -pull inflation leads to:
A. Higher unemployment
B. Lower real wages
C. Lower real output
D. Higher price level
Form A
University Extension
38. If the government uses stimulative monetary or fiscal policies to counter the effects of cost-push inflation, then the economy is likely to
experience:
A. A decline in nominal wages
B. An inflationary spiral
C. A recession
D. Disinflation
39. Refer to the above graph. Assume that the economy is initially at equilibrium at point A. If
AD increases, then the long run equilibrium point will be at point:
A. A
B. B
C. C
D. D
40. The traditional Phillips Curve shows the:
A. Direct correlation between the rate of inflation and the unemployment rate
B. Inverse correlation between the rate of inflation and the rate of unemployment
C. Direct correlation between the short-run and long – run aggregate supply
D. Inverse correlation between the short -run and long-run aggregate supply
Form A
University Extension
41. Refer to the graphs above. Assume that the economy is initially at equilibrium where AD 2
and AS intersect in Graph 1, and also assume that the economy is initially at point C in
Graph 2. A movement from point C to point B in graph 2 would most likely be associated in
graph 1 with a shift of:
A. AD to the right
B. AD to the left
C. AS to the right
D. AS to the left
42. Refer to the graphs above. Assume that the economy is initially at equilibrium where AD 2
and AS intersect in Graph 1, and also assume that the economy is initially at point C in
Graph 2. If the government implements contractionary or restrictive policy, it would make
the economy in graph 2 to:
A. Move from point C to point B
B. Move from point C to point A
C. Move from point C to point D
D. Remain at point C
Form A
University Extension
43. A potential cause of stagflation is:
A. Agricultural surpluses
B. Declining productivity
C. Improving labor productivity
D. A rise in the value of the dollar
44. The short -run Phillips Curve intersects the long – run Phillips Curve at the:
A. Nominal rate of interest
B. Current rate of in flation
C. Real interest rate
D. Natural rate of unemployment
45. Supply -side policies can be described in terms of the aggregate demand and aggregate supply
model as an attempt to shift:
A. The aggregate demand curve to the right
B. The aggregate supply curve to the right
C. Both the aggregate supply curve and the aggregate demand curve to the right
D. The aggregate supply curve to the right and the aggregate demand curve to the left
Form A
University Extension
46. The above diagram describes the notion that as tax rates rise from zero percent, tax revenues
will:
A. Increase at first, but then decline eventually as tax rate continues rising
B. Decrease at first, but then increase eventually as tax rate continues rising
C. Rise higher and higher
D. Fall lower and lower until it shrinks to zero
47. Refer to the above diagram. If tax rates are between b and d, then supply- side economists are
of the opinion that a(n):
A. Increase in tax revenues will increase tax rates
B. Decrease in tax rates will increase tax revenues
C. Increase in tax rates will increase tax revenues
D. Decrease in tax revenues will decrease tax rates
48. Refer to the above diagram. Critics of supply- side economics would argue that tax rates are
currently between:
A. b and d an d that a decrease in tax rates will decrease tax revenues
B. 0 and b and that a decrease in tax rates will decrease tax revenues
C. 0 and b and that a decrease in tax rates will increase tax revenues
D. b and d and that a decrease in tax rates will increase tax revenues
Form A
University Extension
49. From the perspective of supply-side economists, a cut in tax rates will:
A. Increase output but will increase the budget deficit
B. Increase unemployment but will reduce the budget deficit
C. Reduce unemployment but will increase the budget deficit
D. Reduce unemployment and also reduce the budget deficit
50. The view that changes in the money supply is the primary cause of change in real output and
the price level is most closely associated with:
A. Rational expectations theory
B. Real business cycle theory
C. Mainstream economics
D. Monetarism
51. The number of times per year the average dollar is spent on final goods and services is the:
A. Monetary rule
B. Velocity of money
C. Asset demand for money
D. Transactions demand for money
52. If the amount of money in circulation is $8 billion and the value of total output is $40 billion
in an economy, the:
A. Velocity of money is 5
B. Money supply is $40 billion
C. Level of the price index is 320
D. Equilibrium level of GDP is $320 billion
53. Real -business-cycle theory focuses on factors affecting:
A. Aggregate demand
B. Aggregate supply
C. The velocity of money
D. Consumer spending
54. Monetarists base their assessment of the speed of adjustment for self- correction in the
economy on:
A. Adaptive expectations
B. Rational expectations
C. Coordination failures
D. Efficiency wages
Form A
University Extension
55. From a rational expectations perspective, an easy money policy is likely to be completely:
A. Ineffective unless the increase in the money supply is unanticipated
B. Effective unless the increase in the money supply is unanticipated
C. Ineffective unless the increase in the money supply is anticipated
D. Effective unle ss the increase in the money supply is anticipated
56. Rational expectations theory considers the aggregate:
A. Demand curve to be vertical
B. Supply curve to be vertical
C. Supply curve to be horizontal
D. Demand curve to be horizontal
57. To American buyers, there is a decrease in the relative prices of Japanese goods when the:
A. Yen appreciates
B. Dollar appreciates
C. Inflation rate in the United States is higher than the inflation rate in Japan, and there are
flexible exchange rates
D. Inflation rate in Japan is higher than the inflation rate in the United States and there are
fixed exchange rates
58. When the exchange rate between pounds and dollars moves from $2 = 1 pound to $1 = 1
pound, we say that the dollar has:
A. Depreciat ed
B. Appreciated
C. Inflated
D. Deflated
59. Consider the currency market for British pounds and U.S. dollars. A decrease in the supply of
British pounds results in:
A. An appreciation of the pound and a depreciation of the dollar
B. A depreciation of the pound and a depreciation of the dollar
C. An appreciation of the pound and an appreciation of the dollar
D. A depreciation of the pound and an appreciation of the dollar
Form A
University Extension
60. If real interest rates rise in the United Kingdom relative to the United States, then this event
is most likely to cause the British pound to:
A. Depreciate and the U.S. dollar to depreciate
B. Depreciate and the U.S. dollar to appreciate
C. Appreciate and the U.S. dollar to appreciate
D. Appreciate and the U.S. dollar to depreciate
Form A
University Extension
Short Answer
Work the following problems in the space provided. Show your work. Each question is worth 10
points.
1. List three tools of monetary policy. If the Fed wanted to use all three tools to decrease the
money supply, what would it do?
2. Describe how a decrease in money supply affects equilibrium interest rate. How does this
change in monetary policy affects real output? Use money market and AS/AD diagrams
to graphically illustrate your answer.
3. Use the figures in the table below to answer the following questions.
Billions
Small time deposits
Money-market mutual
funds held by businesses
Savings deposits, including
money-market deposit
accounts
Money-market mutual
funds held by individuals
Checkable deposits
Currency
Credit card debt
$1260
1290
1750
850
896
340
410
(a) What is the value of M1?
(b) What is the value of M2?
4. Full employment GDP = $4 trillion; Equilibrium GDP = $3.6 trillion; Marginal
Prop ensity to Consume (MPC) = 0.8. Assume: (i) fiscal policy is effective and (ii) closed
economy. Solve the economy ’s problem with
(a) government spending ONLY
(b) taxes ONLY
(c) government spending AND taxes if the government operates under the balanced
budget amendment.
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