MACROECONOMICS 4 An increase in the expected rate of inflation is

Practice Exam #1 most likely to cause which of the following

changes in the Phillips curve?
1 The central problem in economics is (A) a move downward to a new point along the
(A) promoting economic growth. short run Phillips curve
(B) ensuring stable prices; limiting inflation (B) a move upward to a new point along the
(C) promoting private ownership and short run Phillips curve
protection of private property rights. (C) a shift of the long run Phillips curve to the
(D) scarcity; the use of limited resources. right
(E) limiting unemployment. (D) a shift of the entire short run Phillips curve
to the left
2 Stagflation is the result of which of the following (E) a shift of the entire short run Phillips curve to
shifts in the AD/AS model? the right
(A) The aggregate demand curve shifting to the
left 5 If foreign investors purchase U.S. government
(B) The aggregate demand curve shifting to the treasury bills, those purchases will be included
right in their nation’s
(C) The aggregate supply curve shifting to the (A) balance of trade
left (B) current account
(D) The aggregate supply curve shifting to the (C) financial account
right (D) gini coefficient
(E) The long run aggregate supply curve shifting (E) net cash transfers
to the left 6 A rightward shift in the aggregate demand
3 The natural rate of unemployment is curve could most likely be caused by which of
(A) The number of unemployed divided by the the following?
labor force (A) a decrease in consumer confidence
(B) The rate of unemployment when there is (B) a decrease in investment spending
no frictional unemployment (C) an increase in the price level
(C) The rate of unemployment when the (D) the purchase of government securities by
economy is in long run equilibrium the central bank
(D) The labor force divided by the working- (E) an increase in personal income taxes
age non-institutionalized population
7 If nominal wages and prices are not flexible,
(E) The rate of unemployment when the price
which of the following must be true when the
level meets the Federal Reserve target for
economy has a severe recessionary gap?
inflation
(A) The aggregate demand curve is vertical
(B) The aggregate demand curve is horizontal
4 Skip this question. If your teacher gave this
(C) The short run aggregate supply curve is
exam to you but he/she didn’t buy a class set
vertical
of Clifford’s Ultimate Review Packet then you
(D) The short run aggregate supply curve is
(A) should tell your teacher that they are
upward sloping
decreasing GDP and economic growth
(E) The short run aggregate supply curve is
(B) should cheat since your teacher is clearly a
horizontal
cheater
(C) yell “my econ teacher doesn’t get econ!”
(D) remind your teacher to do the right thing
(E) should do all of the above

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 8 Which of the following groups would benefit 11 If the aggregate supply curve is upward
in the short run from an unanticipated rise in sloping and there is an increase in exports to
the inflation rate? foreign countries, what will be the resulting
(A) Retirees on a fixed income change in real gross domestic product (RGDP)
(B) Young people repaying fixed-interest-rate and price level in the short run?
student loans RGDP Price Level
(C) Union workers whose contracts do not (A) Increase Decrease
include a cost-of-living-adjustment (B) Increase Increase
(COLA) (C) Unchanged Increase
(D) Homeowners with adjustable mortgage (D) Decrease Decrease
rate loans from banks (E) Decrease Increase
(E) Financial institutions that have more fixed
interest outstanding loans than adjustable 12 What will happen to the equilibrium price and
rate loans on their books equilibrium quantity of a good if there is a
simultaneous increase in input costs while the
9 What must be true if a nation’s economy is product is gaining popularity among
operating inside of its production possibilities consumers?
curve? Equilibrium Equilibrium
(A) The nation is utilizing all resources as Price Quantity
efficiently as possible (A) Increase Increase
(B) The nation currently lacks the resources and (B) Increase Indeterminate
technology to operate at a point on the (C) Increase Decrease
production possibilities curve (D) Decrease Increase
(C) The nation is using resources and (E) Decrease Decrease
technology inefficently
(D) The nation must increase investment 13 Which of the following is true of the short run
spending on capital stock to produce on the Phillips curve, but not true for the long run
curve Phillips curve?
(E) The nation’s nominal gross domestic (A) There is a tradeoff between the
product is growing at a faster rate than real unemployment rate and the inflation rate
gross domestic product (B) It is vertical at the natural rate of
unemployment
10 Which of the following is most likely to (C) It is upward sloping
improve an economy's productivity? (D) There is not a tradeoff between the
(A) Positive net capital stock investment unemployment rate and the inflation rate
(B) A decrease in cyclical unemployment (E) Shifts of the curve are the result of a change
(C) An increase in government discretionary in aggregate demand
expenditures
(D) An increase in paid maternity leave
(E) An increase in the velocity of money

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14 Which of the following groups would most 18 If a country is experiencing a significant
likely be hurt by the depreciation of the recessionary gap, which of the following
Canadian dollar in the international market? combinations of fiscal and monetary policies
(A) Canadian banks holding large amounts of would be most likely to move the nation toward
foreign currencies long-run equilibrium?
(B) Canadian lumber producers who sell to Fiscal Policy Monetary Policy
firms in other nations (A) Increase taxes Increase the federal
(C) Europeans planning on traveling in Canada funds rate
for their vacations (B) Decrease taxes Sell government
(D) Retired Americans living in Canada on securities in the open
their US government pensions market
(E) Swiss ski manufacturers that market their (C) Decrease No change in
products in Canada Government the money supply
spending
15 Which of the following would cause an inward (D) Increase Buy government
shift of the production possibilities curve? Government securities in the
(A) A decrease in real interest rates spending open market
(B) An increase in personal income taxes (E) Decrease Sell government
(C) A decrease in the price level Government securities in the
(D) A decrease in the size of the labor force spending open market
(E) An increase in unemployment related to a
recessionary gap 19 Which of the following best defines investment
as a component of GDP?
16 If the reserve requirement increases from 5 (A) Real estate acquisitions made for future
percent to 10 percent, and assuming the resale profit
general public holds a portion of its money in (B) Buying new plants, machinery, tools and
cash, what will happen to the money multiplier inventory
and the money supply? (C) Capital gains periodically paid out to
Money Money stockholders
Multiplier Supply (D) The difference between an individual’s total
(A) Increase Increase by double income, wages plus interest, profits and
(B) Increase Increase by less than double rents, and their disposable income
(C) Decrease Decrease by more than half (E) The purchase of stocks and bonds by private
(D) Decrease Decrease by half citizens
(E) Decrease Decrease by less than half
20 Which of the following is a reason why one
17 The short run aggregate supply curve would nation's economic growth rate might be higher
shift to the left in response to which of the than another nation?
following? (A) A lower labor force participation rate
(A) An increase in net capital stock (B) A lower age of retirement
(B) A decrease in the corporate income tax (C) Larger per capita government subsidies for
rate education and worker training programs
(C) An increase in sovereign debt (D) Increased corporate tax rates
(D) A decrease in the price level (E) Increased consumer spending
(E) An increase in the cost of resources

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21 What will be the resulting change in Japan’s 24 The table below represents a simplified bank
aggregate supply and aggregate demand if the balance sheet, or T-Account, for a commercial
value of the Japanese yen increases in the bank. Use the information in the table to
foreign exchange market? answer the following question.
Aggregate Aggregate
Demand Supply Assets Liabilities
(A) Increase Increase Required Demand
(B) Increase No change Reserves: $10,000 Deposits: $100,000
(C) No change Increase Securities: $30,000
(D) Decrease No change Loans: $50,000
(E) Decrease Increase Which of the following represents the required
22 A decrease in which of the following might reserve ratio for this bank and the maximum
cause a decrease in real per capita income? amount of additional lending this bank can
(A) Inflation undertake?
(B) Output per unit of input Required Additional
(C) Personal and corporate income tax rates Reserve Ratio Loans
(D) The retirement age (A) 5% $5,000
(E) The real interest rate (B) 10% $10,000
(C) 10% $20,000
23 Nations can benefit from free trade mainly (D) 30% $70,000
because (E) 50% $50,000
(A) It allows each nation to consume beyond
its production possibilities curve. 25 Who demands the factors of production in the
(B) import tariffs can increase government circular flow diagram?
revenues. (A) Consumers
(C) income inequality will improve in both (B) Firms
societies. (C) The foreign sector
(D) free trade fosters self-sufficiency for each (D) Financial institutions
nation. (E) Households
(E) unemployment will decrease in each 26 Assume the government decreases its deficit
country. spending. What is the likely result in the money
market?
Demand Nominal
For Money Interest Rates
(A) Decrease Decrease
(B) Increase Increase
(C) Decrease Indeterminate
(D) Increase Decrease
(E) Decrease Increase

27 Which of the following assets would be

characterized as having the most liquidity?
(A) an antique etruscan vase
(B) money market mutual funds
(C) stocks
(D) savings bonds
(E) paper currency

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28 Which of the following is MOST likely to 31 In the midst of a $300 billion recessionary gap,
promote economic growth? the federal government decides to use fiscal
(A) A decrease in business tax credits for policy to bring the economy back to long run
investment spending equilibrium. If society’s marginal propensity
(B) A decrease in federal student education to consume (MPC) is 0.80, which of the
grants following could the government do to reach
(C) An increase in investment in tools and full employment assuming no crowding out or
machinery leakages?
(D) A decrease in the labor force participation (A) Increase taxes by $60 billion.
rate (B) Decrease taxes by $300 billion.
(E) An increase in the real interest rate (C) Increase government expenditures $60
billion.
29 Which of the following is NOT a criticism of (D) Increase government expenditures by $150
gross domestic product (GDP) as a measure of billion.
a nation’s well-being? (E) Increase government expenditures by
(A) GDP measures only the value of final $300 billion.
goods and services and not intermediate
goods and services. 32 Which of the following is an example of
(B) GDP does not account for the negative cyclical unemployment?
impacts of economic growth, such as (A) Sue, who is unemployed, has stopped
pollution. looking for a job.
(C) GDP does not account for non-market (B) Juan has taken voluntary retirement from
activities accomplished by individual his job at an aerospace company.
economic actors for themselves. (C) Zelda lost a job with the recent downturn
(D) GDP does not account for inequitable in the economy.
distribution of income among the (D) Jack lacks the skills to fill any of the
populace, resulting in wide discrepancies available jobs.
in living standards. (E) Robert quits his job to search for a better
(E) Economic activities for which people are job.
paid “under the table”, or barter
transactions, are not accounted for by GDP 33 Which of the following best describes the
statistics. concept of inflation?
(A) Appreciation of one currency relative to
30 The spending multiplier is the result of another currency
(A) tax revenues increase as consumer and (B) An acceleration in interest rates
business incomes increase. (C) A steady rise in the general level of prices
(B) foreign purchasers increasing expenditures (D) Growth rate of real gross domestic product
as the currency appreciates. (E) A rise in the unemployment rate
(C) government spending crowding out
consumption and investment spending. 34 In the AS/AD model, which of the following
(D) domestic investment expenditures rising as shifts would be the likely result of an increase in
interest rates rise. personal income taxes?
(E) consumer expenditures rising as incomes (A) Aggregate demand shifts to the right
rise. (B) Aggregate demand shifts to the left
(C) Aggregate supply shifts to the right
(D) Aggregate supply shifts to the left
(E) Aggregate demand and aggregate supply
both shift to the right

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35 Which of the following policy combinations 38 If the economy is operating below full-
would foster long run growth of an economy employment output, assuming that wages and
without increasing the price level? prices are flexible, long run equilibrium can be
Monetary Fiscal restored by which of the following?
Policy Policy (A) Raising the fed funds rate
(A) Buy bonds Increase government (B) Authorizing contractionary fiscal policy to
spending increase aggregate demand
(B) Sell bonds Increase government (C) Enacting no policy since lower wages will
spending result in a return to full emplloyment
(C) Buy bonds Decrease government (D) An open market sale of government bonds
spending by the central bank
(D) Sell bonds Decrease government (E) Raising personal income taxes
spending
SRAS3
(E) Buy bonds Decrease income taxes LRAS
SRAS2

Price Level
36 If a country is experiencing a recessionary gap, SRAS1
which of the following fiscal and monetary
policy combinations would be most likely to
move the nation closer to full employment
with a minimum change in interest rates?
(A) A decrease in government spending and a
decrease in taxes AD3
(B) An increase in government spending and AD2
the purchase of bonds on the open market AD1
(C) A decrease in taxes and an increase in the Y F RGDP
discount rate 39 In the graph above, assume wages and prices
(D) An increase in taxes and a decrease in the are perfectly flexible, and a starting
federal funds rate equilibrium point of AD2 and SRAS2. If this
(E) the sale of bonds on the open market and a economy experiences demand-pull inflation,
decrease in government spending identify both the short run and long run shifts
in the aggregate demand and short run
37 The opportunity cost of holding money in the aggregate supply curves.
form of cash increases when Short Run Long Run
(A) the velocity of money increases (A) AD2 to AD3 SRAS2 to SRAS3
(B) interest rates increase (B) AD2 to AD1 SRAS2 to SRAS1
(C) nominal wages decrease (C) AD2 to AD3 SRAS1 to SRAS3
(D) the price level falls (D) SRAS2 to SRAS1 AD2 to AD1
(E) aggregate demand decreases (E) SRAS2 to SRAS3 AD2 to AD3

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40 If an economy experiences an increase in net 44 What is likely to happen to the value of the
capital inflows by foreign investors, which of Mexican Peso and capital flow in Mexico if
the following will be the resulting change in there is an increase in real interest rates in
the market for loanable funds and the real Mexico relative to real interest rates in the rest
interest rate? of the world?
Market for Real Capital Value of
Loanable Funds Interest Rate Flow the Peso
(A) Decrease in supply Decrease (A) Outflow Appreciate
(B) Decrease in supply Increase (B) Inflow Appreciate
(C) Increase in supply Decrease (C) Inflow No Change
(D) Increase in demand Increase (D) Outflow Depreciate
(E) Decrease in demand Decrease (E) Inflow Depreciate

41 According to rational expectations theory 45 Answer the questions using the chart below
(A) People expect future inflation to be equal illustrating disposable income and
to the current year's inflation rate. consumption. Assume the marginal
(B) Expected inflation often leads to actual propensity to consume is 0.80.
inflation as individuals and businesses
changes their behavior. Disposable Income Consumption
(C) People rationally wait to act on their $1,500 $1,510
expectations until government agencies $1,550 $1,550
formally report inflation statistics. $1,600 $1,590
(D) People assume inflation will be stable. $1,650 $1,630
(E) People assume inflation will rise and fall $1,700 $1,670
with the unemployment rate.
At what disposable income does dissaving
42 Assume that there is no unanticipated inflation occur?
and that wages and prices are flexible. What (A) $1,500
will happen to short run real gross domestic (B) $1,550
product (RGDP) and the price level in the long (C) $1,600
run if the Federal Reserve purchases (D) $1,650
government securities in the open market? (E) $1,700
RGDP Price Level
(A) Decrease Decrease 46 In an economy is at full employment with a
(B) No change Increase vertical aggregate supply curve and aggregate
(C) No change Decrease demand is continuing to increase, which of the
(D) Increase No change following monetary policy actions would be an
(E) Increase Increase appropriate response?
(A) Decreasing the fed funds rate
43 A contractionary monetary policy will have (B) Increasing government spending
what effect on aggregate demand, price level (C) Purchasing government securities in the
and real output? open market
Aggregate Price Real (D) Decreasing the required reserve ratio
Demand Level Output (E) Selling government securities in the open
(A) Increase Increase Increase market
(B) Increase Increase Decrease
(C) Decrease Decrease Decrease
(D) Decrease Increase Increase
(E) Decrease Decrease Increase

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47 Assume a recession causes jobless workers to 51 A decrease in government deficit spending
grow more discouraged and give up their will have which of the following effects in the
search for work. What will be the resulting short term?
change in the labor force participation rate and (A) Increase net exports
unemployment rate? (B) Decrease nominal interest rates
Labor Force Unemployment (C) Increase nominal interest rates
Participation Rate Rate (D) Increase the price level
(A) Increase Decrease (E) Decrease unemployment
(B) No change Increase
(C) Decrease Increase 52 If the federal government taxes all income at a
(D) No change Decrease flat rate of 20% and the marginal propensity to
(E) Decrease Decrease consume (MPC) is 0.75. If Daniel’s gross
income increases by $1,000, how much will
48 A country’s currency might appreciate in value his consumption expenditures increase?
because of which of the following? (A) $200
(A) A higher price level relative to the rest of (B) $600
the world (C) $750
(B) A higher real interest rate relative to the (D) $800
rest of the world (E) $1,000
(C) Decreased demand for the country’s
currency 53 Given a required reserve ratio of 10% and
(D) Increased supply of the country’s currency banks loan out all of their excess reserves, if
on the world market the Federal Reserve chooses to engage in
(E) A purchase of government bonds in the contractionary monetary policy by selling
open market by the nation’s central bank $1,000 of Treasury Bills to commercial banks,
what will be the resulting change in the money
49 Which of the following is most likely to cause supply?
an increase in potential gross domestic (A) Decrease by $1,000
product? (B) Decrease by $9,000
(A) An increase in the fed funds rate (C) Decrease by $10,000
(B) A decrease in cyclical unemployment (D) Increase by $1,000
(C) An increase in government expenditures (E) Increase by $1,000
on infrastructure projects
(D) An increase in inflationary expectations 54 Assume that the velocity of money is constant in
(E) Negative net capital investment the equation of exchange. Which of the
following must be true if the GDP deflator is
50 If the U.S. Federal Reserve engages in equal to 200 while the economy is operating
expansionary monetary policy by purchasing with a vertical aggregate supply curve?
government securities through the open (A) the money supply has doubled
market, what will be the likely result on the (B) nominal interest rates have decreased by
nominal interest rate, aggregate demand and half
the unemployment rate? (C) the price level has decreased by half
Nominal Aggregate Unemployment (D) real output has increased by 100
Interest Rate Demand Rate (E) the unemployment rate has doubled
(A) Decrease Decrease Decrease
(B) Decrease Increase Decrease
(C) Decrease No change Increase
(D) Increase Increase Increase
(E) Increase Decrease Increase

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55 Country X can produce either 2 tons of corn or
4 scooters with 20 units of labor. Country Y 57 If the country is currently operating at point D
can produce either 5 tons of corn or 25 on PPC2, which of the following changes
scooters with 20 units of labor. Based on this would foster future economic growth?
information, which of the following is true. (A) Shifting from PPC2 to PPC1
(A) Country X has an absolute advantage in (B) Moving from point D to point A
the production of corn, while Country Y has a (C) Moving from point D to point B
comparative advantage in the production of (D) Moving from point D to point C
scooters. (E) Moving from point D to point G
(B) Country X has an absolute advantage in
58 If the country is currently operating at point D
the production of corn, while Country Y has a
on PPC2, which of the following changes
comparative advantage in the production of
would illustrate actual economic growth had
corn.
occurred?
(C) Country X has a comparative advantage in
(A) Shifting from PPC2 to PPC1
the production of corn, while Country Y has a
(B) Shifting from PPC2 to PPC3
comparative advantage in the production of
(C) Moving from point D to point B
scooters.
(D) Moving from point D to point C
(D) Country X has a comparative disadvantage
(E) Moving from point D to point G
in the production of both goods.
(E) Trading 1 ton of corn for 8 scooters would 59 If the relative price level in Canada is higher
benefit both countries. than in Mexico, what is the likely result in the
foreign exchange market?
56 Which of the following is the best example of
(A) A decrease in the supply of Canadian
structural unemployment?
dollars
(A) A worker is laid off during a recession.
(B) A depreciation of the Mexican peso
(B) A worker voluntarily quits a job to go
(C) An appreciation of the Canadian dollar
back to school.
(D) A depreciation of the Canadian dollar
(C) A worker is replaced by machines that are
(E) An increase in the supply of the Mexican
cheaper and more productive.
peso
(D) A worker is denied on-the-job training.
(E) A worker switches from working part-time
60 Assume that the nominal interest rate is 10
to full-time.
percent. If the expected inflation rate is 3
Use the diagram below to answer questions percent, the real interest rate is
57 and 58: (A) 0.5%
(B) 3%
(C) 7%
(D) 10%
Capital Goods

(E) 13%
B E
D
A H
F

C
G

PPC1 PPC2 PPC3

Consumer Goods

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