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Anwers Mcq Macro Final

The document contains multiple-choice questions related to macroeconomics, covering topics such as money growth, inflation, and open economy concepts. It includes questions on the effects of government spending, the quantity theory of money, and the implications of changes in the money supply. The questions are designed for students studying macroeconomics at the University of International, Vietnam.

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0% found this document useful (0 votes)
15 views57 pages

Anwers Mcq Macro Final

The document contains multiple-choice questions related to macroeconomics, covering topics such as money growth, inflation, and open economy concepts. It includes questions on the effects of government spending, the quantity theory of money, and the implications of changes in the money supply. The questions are designed for students studying macroeconomics at the University of International, Vietnam.

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Anwers - MCQ Macro final

Introduction to Macroeconomics (Trường Đại học Quốc tế, Đại học Quốc gia Thành phố
Hồ Chí Minh)

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Lecture 17. MONEY GROWTH AND INFLATION

1. When the government spends more money than they take in each year is called a
_________?
a. Debt.
b. Surplus.
c. Deficit.
d. Expansionary.
2. In the long run, inflation is caused by
a. governments that raise taxes so high that it increases the cost of doing business and,
hence, raises prices.
b. banks that have market power and refuse to lend money.
c. governments that print too much money.
d. increases in the price of inputs, such as labour and oil.
3. When prices rise at an extraordinarily fast rate, it is called
a. deflation.
b. hyperinflation.
c. inflation.
d. hypo inflation.
4. If the price level doubles,
a. The quantity demanded of money falls by half.
b. The value of money has been cut by half.
c. Nominal income is unaffected.
d. The money supply has been cut by half.
5. In the long run, the demand for money is most dependent upon
a. the level of prices.
b. the interest rate.
c. the availability of banking outlets.
d. the availability of credit cards.
6. The quantity theory of money concludes that an increase in the money supply causes
a. a proportional increase in prices.
b. a proportional increase in real output.

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c. a proportional increase in velocity.


d. a proportional decrease in prices.
7. An example of a real variable is
a. The wage rate in euros.
b. The price of corn.
c. The ratio of the value of wages to the price of soda.
d. None of these answers are real variables.
8. The quantity equation states that
a. Money x real output = velocity x price level
b. Money x velocity = price level x real output.
c. Money x price level = velocity x real output.
d. None of theses answers.
9. If money is neutral,
a. a change in the money supply only affects real variables such as real output.
b. a change in the money supply reduces velocity proportionately; therefore there is no
effect on either prices or real output.
c. a change in the money supply only affects nominal variables such as prices and
wages.
d. the money supply cannot be changed because it is tied to a commodity such as gold.
10. If the money supply grows 5 percent, and real output grows 2 percent, prices should
rise by
a. 5 per cent.
b. more than 5 per cent.
c. less than 5 per cent.
d. none of these answers.
11. The velocity of money is
a. highly unstable.
b. the rate at which money loses its value.
c. the rate at which inflation rises.
d. the rate at which money changes hands.
12. Countries that employ an inflation tax do so because

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a. the government doesn't understand the causes and consequences of inflation.


b. government expenditures are high and the government has inadequate tax
collections and difficulty borrowing.
c. an inflation tax is the most progressive (paid by the rich) of all taxes.
d. an inflation tax is the most equitable of all taxes.
13. An inflation tax
a. is usually employed by governments with balanced budgets.
b. is an explicit tax paid quarterly by businesses based on the amount of increase in the
prices of their products.
c. is a tax borne only by people who hold interest bearing savings accounts.
d. is a tax on people who hold money.
14. Suppose the nominal interest rate is 7 percent while the money supply is growing at
a rate of 5 percent per year. If the government increases the growth rate of the
money supply from 5 percent to 9 percent, the Fisher effect suggests that, in the long
run, the nominal interest rate should become
a. 9 percent.
b. 11 percent.
c. 4 percent.
d. 16 percent.
15. If the nominal interest rate is 6 per cent and the inflation rate is 3 per cent, the real
interest rate is
a. 3 percent.
b. 6 percent.
c. 18 percent.
d. 9 percent.
16. Which of the following statements is true about a situation where real incomes are
rising at 3 percent per year.
a. If money is neutral, an increase in the money supply will not alter the rate of growth
of real income.
b. If inflation were 0 per cent, people should receive raises of about 3 per cent.
c. If inflation were 5 per cent, people should receive raises of about 8 per cent per year.

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d. All of these are true.


17. The classical dichotomy states that.
a. Real variables do not affect nominal variables in the long run.
b. Real variables do not affect nominal variables in the short run.
c. Nominal variables do not affect real variables in the long run.
d. Nominal variables do not affect real variables in the short run.
18. Quantity of money according to classical theory will determine the
a. Saving and investment
b. National output
c. Real wage
d. Price level
19. The reason for existence of proportional relationship between money stock and
price level is
a. Money illusion
b. Inflation
c. Full employment
d. Wage price flexibility
20. This independence of real variables from changes in money supply and nominal
variables is called
a. Money illusion
b. Neutrality of money
c. Classical dichotomy
d. Money multiplier
21. When the price level increases it causes households and business films try to
a. increase the demand for money and decrease aggregate expenditure.
b. decrease the demand for money and decrease aggregate demand.
c. decrease aggregate demand but not affect the demand for money.
d. decrease the demand for money and increase aggregate demand.
22. The condition of a continually rising price level is defined as
a. Stagflation
b. Disinflation

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c. Stagnation
d. Inflation
23. Based on the quantity equation, if M=10, V=15, Y=300, then P is equal to
a. 1
b. ½
c. ¾
d. 2

24. According to the chart, when the Fed decrease money supply:
a. Is represented by moving from MS2 to MS1.
b. Creates excess demand equal to the distance between A and B.
c. Eventually cause the price level to increase.
d. None of the answer.
25. The classical principle of monetary neutrality states that changes in the money
supply do not influence ________ variables and is thought most applicable in the
________ run.
a. nominal, short.
b. nominal, long
c. real, short
d. real, long.
26. If nominal GDP is $400, real GDP is $200, and the money supply is $100, then

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a. the price level is ½, and velocity is 2.

b. the price level is ½, and velocity is 4.

c. the price level is 2, and velocity is 2.

d. the price level is 2, and velocity is 4.

27. According to the quantity theory of money, which variable in the quantity equation
is most stable over long periods of time?
a. money
b. velocity
c. price level
d. output
28. Hyperinflations occur when the government runs a large budget ________, which
the central bank finances with a substantial monetary ________.
a. deficit, contraction
b. deficit, expansion
c. surplus, contraction
d. surplus, expansion
29. According to the quantity theory of money and the Fisher effect, if the central bank
increases the rate of money growth,
a. inflation and the nominal interest rate both increase.
b. inflation and the real interest rate both increase.
c. the nominal interest rate and the real interest rate both increase.
d. inflation, the real interest rate, and the nominal interest rate all increase.
30. The value of money
a. is constant.
b. is positively related to the price level.
c. is determined by the supply and demand of money.
d. is not explained by the quantity theory of money.
31. The neutrality of money refers to the situation where
a. money has not been the cause of war.
b. increases in interest rates are matched by decreases in the price of bonds.

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c. increases in interest rates are matched by increases in the price of bonds.


d. increases in the money supply eventually result in no change in real output.
e. decreases in the money supply result in increases in the interest rate in the short run.
32. When the value of money rises, the number of dollars needed to buy a
representative basket of goods
a. Increases, and so the price level rises.
b. Increases, and so the price level falls.
c. Decreases, and so the price level rises.
d. Decreases, and so the price level falls.
33. The supply curve of money is vertical because the quantity of money supplied
increases
a. When the value of money increases.
b. When the value of money decreases
c. Only if people desire to hold more money
d. Only if the central bank increases the money supply.
34. Consider an economy where the money supply is growing at 7 per cent per year and
velocity is constant. Which of the following statements about real GDP growth and
the inflation rate could be TRUE if the Quantity Theory of Money holds?
a. Real GDP is growing at 2 per cent and inflation is 5 per cent.
b. Real GDP is growing at 7 per cent and inflation is 7 per cent.
c. Real GDP is growing at 2 per cent and inflation is 9 per cent.
d. Real GDP is growing at 9 per cent and inflation is 2 per cent.
35. Suppose that the price level has risen but the government has not collected any
seigniorage. Which of the following might have happened?
a. V rose, M and Y were constant.
b. B. Y rose, M and V were constant.
c. C. M rose, Y and V were constant.
d. D. M rose, Y fell, V was constant.
36. According to the quantity equation, if M increases by 3 per cent and V increases by
2 per cent, then:
a. real income increases by approximately 5 per cent.

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b. the price level increases by approximately 5 per cent.


c. the nominal interest rate increases by approximately 5 per cent.
d. nominal income increases by approximately 5 per cent.
37. The cost of holding money is determined by the:
a. inflation rate.
b. real interest rate.
c. growth rate of the money supply.
d. nominal interest rate.
38. According to the classical dichotomy, which of these magnitudes is affected by
monetary policy?
a. the price level
b. the real wage
c. The real interest rate
d. the rate of growth of real GDP
39. When the government raises revenue by printing money, it imposes an “inflation
tax” because the:
a. real value of money holdings falls.
b. interest rate falls.
c. difference between nominal and real interest rates becomes smaller.
d. nominal value of money holdings falls.
40. The Fisher effect states that a 1 per cent rise in the rate of inflation causes a 1 per
cent rise in the:
a. real interest rate.
b. nominal interest rate.
c. money supply.
d. number of transactions.

Lecture 18. OPEN – ECONOMY MACROECONOMICS BASIC


CONCEPTS

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1. Suppose that US is the home country. In Vietnam we experience a rise in the VND
price of foreign exchange. In this circumstance, the VND will have ________ and the
exchange rate will have ________.
a. appreciated; risen
b. depreciated; fallen
c. depreciated; risen
d. appreciated; fallen
2. Trung, a VN. citizen, buys VND 100,000 of cheese from Italy. His action alone
a. increases VN exports by 100,000 and increases VN net exports by 100,000.
b. increases VN exports by 100,000 and decreases VN net exports by 100,000.
c. increases VN imports by 100,000 and increases VN net exports by 100,000.
d. increases VN imports by 100,000 and decreases VN net exports by 100,000.
3. An economy that interacts with other economies is known as
a. an export economy.
b. a friendly economy.
c. an open economy.
d. a balanced trade economy.
4. Each of the following is a reason why international trade has expanded in recent
decades except which one?
a. Technological improvements have meant that countries have become more
similar in terms of the goods they can produce.
b. Many new high technology goods have been introduced for which the cost of
transport relative to the value of the product is low.
c. There have been improvements in technology that have improved
telecommunications between countries.
d. Policy makers have promoted policies to increase international trade, such as the
General Agreement on Tariffs and Trade, and subsequently established the World
Trade Organization.
5. Which of the following is an example of foreign direct investment?
a. General Motors buys steel from South Korea.
b. General Motors of the USA buys shares in Saab of Sweden.

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c. McDonald's builds a restaurant in Moscow.


d. UK publisher Bloomsbury sells the rights to make a film of a Harry Potter book to an
American film studio.
6. Which of the following would directly increase UK net capital outflow?
a. Rolls Royce sells an aircraft engine to Boeing of the USA.
b. The Japanese financial company Nomura buys shares in Vodafone.
c. BP builds a new oilrig in Venezuela.
d. Honda builds a new plant in Swindon, England.
7. If the USA saves $900 billion and US net capital outflow is - $100 billion, US
domestic investment is
a. $800 billion.
b. $900 billion.
c. -$100 billion.
d. $1,000 billion.
8. If Japan exports more than it imports,
a. Japan's net exports are negative.
b. Japan is running a trade deficit.
c. Japan's net capital outflow must be positive.
d. Japan's net capital outflow must be negative.

9. If the exchange rate changes from 3 Brazilian reals per dollar to 4 reals per euro,

a. the euro has appreciated.

b. the euro has depreciated.

c. the euro could have appreciated or depreciated depending what happened to relative
prices in Brazil and the Eurozone countries.

d. None of these answers.

10. Suppose the real exchange rate between Russia and the UK is defined in terms of
bottles of Russian vodka per bottle of UK vodka. Which of the following will increase the
real exchange rate (that is, increase the number of bottles of Russian vodka per bottle of
UK vodka)?

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a. an increase in the price in pounds of UK vodka

b. an increase in the number of roubles for which the pound can be exchanged

c. a decrease in the price in roubles of Russian vodka

d. All of the changes described in these answers will increase the real exchange rate.

11. If the nominal exchange rate between UK pounds and US dollars is 0.5 pound per
dollar, how many dollars can you get for a pound?

a. 1.5 dollars

b. 0.5 of a dollar

c. 1 dollar

d. 2 dollars

12. Suppose the nominal exchange rate between the Japanese yen and the UK pound
is 100 yen per pound. Further, suppose that a kilogram of rice costs £2 in the UK and 250
yen in Japan. What is the real exchange rate between Japan and the UK?

a. 2.5 kilograms of Japanese rice per kilogram of UK rice

b. 0.5 kilograms of Japanese rice per kilogram of UK rice

c. 1.25 kilograms of Japanese rice per kilogram of UK rice

d. 0.8 kilograms of Japanese rice per kilogram of UK rice

13. Which of the following people or firms would be pleased by a depreciation of the
pound?

a. A UK company that wishes to expand abroad by building a factory in Poland.

b. An American tourist visiting London.

c. A UK importer of French wine.

d. All the people and firms mentioned in these answers.

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14. Suppose a cup of coffee is 1.5 euros in Germany and £0.50 in the UK. If
purchasing power parity holds, what is the nominal exchange rate between euros and
pounds?

a. 3 euros per pound

b. 1.5 euros per pound

c. 0.75 euro per pound

d. 1/3 euro per pound

15. Which of the following products would likely be the least accurate if used to
calculate purchasing power parity?

a. Diamonds

b. Cars

c. Wheat

d. Dental services

16. Suppose the money supply in Mexico grows more quickly than the money supply
in the USA. We would expect that

a. The Mexican peso should appreciate relative to the US dollar.

b. the Mexican peso should depreciate relative to the US dollar

c. the Mexican peso should maintain a constant exchange rate with the US dollar
because of purchasing power parity.

d. None of the answer.

17. When people take advantage of differences in prices for the same good by buying
it where it is cheap and selling it where it is expensive, it is known as

a. purchasing power parity.

b. net capital outflow.

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c. currency appreciation.

d. arbitrage.

18. Suppose a resident of the USA buys a Jaguar car from the UK, and the UK
exporter uses the receipts to buy shares in Boeing. Which of the following statements is true
from the perspective of the UK?

a. Net exports fall, and net capital outflow rises.

b. Net exports rise, and net capital outflow rises.

c. Net exports rise, and net capital outflow falls.

d. Net exports fall, and net capital outflow falls.

19. Which of the following statements is not true about the relationship between
national saving, investment, and net capital outflow?

a. An increase in saving associated with an equal increase in net capital outflow leaves
domestic investment unchanged.

b. For a given amount of saving, an increase in net capital outflow must decrease
domestic investment.

c. For a given amount of saving, a decrease in net capital outflow must decrease
domestic investment.

d. Saving is the sum of investment and net capital outflow.

20. Suppose the inflation rate over the last 20 years has been 10 per cent in the UK, 7
per cent in Japan, and 3 per cent in the USA. If purchasing power parity holds, which of
the following statements is true? Over this period,

a. the value of the dollar should have fallen compared to the value of the pound and the yen.

b. the yen should have fallen in value compared to the pound and risen compared to the dollar.

c. the value of the pound should have risen compared to the value of the yen and the dollar.

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d. the yen should have risen in value compared to the pound and fallen compared to the
dollar.

21. How does international trade affect the standard of living?

a. It raises the standard of living in all trading countries.

b. It lowers the standard of living in all trading countries.

c. It leaves the standard of living unchanged.

d. It raises the standard of living for importing countries and lowers it for exporting countries.

22. If a Central Bank is fully committed to a fixed exchange rate but investors expect a
devaluation, it is likely that the economy will experience:

a. an increase in the amount of money in circulation

b. no change in the amount of money in circulation

c. a decrease in the level of output

d. a decrease in the interest rate

23. Net capital outflow refers to the purchase of

a. foreign assets by domestic residents minus the purchase of domestic assets by foreign
residents.

b. foreign assets by domestic residents minus the purchase of foreign goods and services by
residents.

c. domestic assets by foreign residents minus the purchase of domestic goods and services by
foreign residents.

d. domestic assets by foreign residents minus the purchase of foreign assets by domestic
residents.

24. Which of the following would be U.S foreign direct investment?

a. A Polish company opens a shipbuilding plant in the US.

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b. A Bolivian bank buys US corporate bonds.

c. A U.S bank buys Bolivian corporate bonds.

d. A U.S furniture maker opens a plant in Mexico.

25. Which of the following would be U.S foreign portfolio investment?

a. Disney builds a new amusement park near Barcelona, Spain.

b. A U.S citizen buys stock in companies located in Asia.

c. A Dutch hotel chain opens a new hotel in the U.S.

d. A citizen of Singapore buys a bond issued by a U.S corporations.

26. The real exchange rate is the nominal exchange rate defined as foreign currency
per dollar times

a. U.S prices minus foreign prices.

b. prices in the U.S divided by foreign prices.

c. foreign prices divided by U.S prices.

d. None of the above is correct.

27. A depreciation of the U.S real exchange rate induces U.S consumers to buy

a. fewer domestic goods and fewer foreign goods.

b. more domestic goods and fewer foreign goods.

c. fewer domestic goods and more foreign goods.

d. more domestic goods and more foreign goods.

28. Bob, a Greek citizen, opens a restaurant in Chicago. His expenditure

a. increase U.S net capital outflow, and have no affect on Greek net capital outflow.

b. increase U.S net capital outflow, and increase Greek net capital outflow.

c. increase U.S net capital outflow, but decrease Greek net capital outflow.

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d. decrease U.S net capital outflow, but increase Greek net capital outflow.

29. Net Exports are affected by which of the following?


i. Tastes of consumers.

ii. Prices of goods at home and abroad.

iii. The incomes of consumers at home and abroad.

iv. Government policies toward international trade.

a. only i, ii, and iii

b. only ii, iii, and iv

c. only i, ii, and iv

d. all four

30. Other things remaining equal, when domestic incomes rise, Net Exports:

a. will decrease.

b. will increase.

c. will remain unaffected.

d. might increase or decrease.

31. When Net Capital Outflow is positive, it means:

a. imports are bigger than exports.

b. domestic residents are spending more on foreign assets than foreigners are
spending on domestic assets.

c. foreigners are spending more on domestic assets than domestic residents are
spending on foreign assets.

d. none of the above.

32. Other things remaining equal, if real interest rates increase abroad, our:

a. net exports will decrease.

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b. net capital outflow will increase.

c. net capital outflow will decrease.

d. none of the above.

33. Other things remaining equal, if there is political or economic turmoil in the U.S., we
can expect our:

a. net exports will decrease.

b. net capital outflow will increase.

c. net capital outflow will decrease.

d. none of the above.

34. If purchasing-power parity holds, and if prices in country A are the same as
prices in country B, it means that the ________ exchange rate between these countries is
equal to ________

a. real, zero

b. real, one

c. nominal, zero

d. nominal, one

35. According to the Purchasing Power Parity Theory, if a dollar will buy more in
the U.S. than abroad, traders will ________, which will cause the dollar to ________.

a. buy abroad and sell in the U.S., depreciate

b. buy abroad and sell in the U.S., appreciate

c. buy in the U.S. and sell abroad, appreciate

d. buy in the U.S. and sell abroad, depreciate

36. According to the Purchasing Power Parity Theory, the ________ exchange rate
tends to become equal to ________.

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a. nominal, zero

b. nominal, one

c. real, zero

d. real, one

37. An excess of exports over imports

a. Trade surplus

b. Trade deficit

c. Trade balance

d. International Trade

38. If a Japanese Toyota sells for 2,500,000 yen and the nominal exchange rate is 110
yen/$, then the dollar price of the Japanese automobile is:

a. 22,727 yen

b. $20,000

c.$25,000

d. $22,727

39. The law of one price state that

a. a good must sell at the price fixed by law.

b. a good cannot sell for a price greater than the legal price ceiling.

c. domestic producers of a good are guaranteed a subsidy by law.

d. a good must sell at the same price at all locations.

40. If the nominal exchange rate 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)

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b. e(P/P*)

c. e + P/P*

d. e – P/P*

41. Suppose that the U.S. is the home country. If the Japanese inflation rate is 8 per
cent while the U.S. inflation rate is 13 per cent, then the per cent change in e measured as
yen per dollar will:

a. increase by 21 per cent.

b. decrease by 21 per cent.

c. decrease by 5 per cent.

d. increase by 5 per cent.

Lecture 19. A MACROECONOMIC THEORY OF THE OPEN ECONOMY

1. Interest rate and bond prices are;


a. Positively related
b. Negatively related
c. Not related
d. Either A or B
2. Which of the following is NOT a stock variable?
a. Capital
b. Wealth
c. Interest
d. Saving
3. In an open economy, an increase in the money supply leads to
a. an increase in the external value of the dollar, thereby stimulating net exports and
raising aggregate demand.
b. an increase in the external value of the dollar, thereby inhibiting net exports and
raising aggregate demand.

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c. a reduction in the external value of the dollar, thereby stimulating net exports
and raising aggregate demand.
d. a reduction in the external value of the dollar, thereby inhibiting net exports and
raising aggregate demand.
4. A tax on imported goods is call
a. Tariff
b. Quota
c. Voluntary export restriction
d. Inflation tax.
5. Holding other things constant, an increase in a nation’s interest rate reduce
a. national saving and domestic investment.
b. national saving and the net capital outflow.
c. domestic investment and the net capital outflow.
d. national saving only.

6. Holding other things constant, an appreciation of a nation’s currency causes

a. exports to rise and imports to fall.

b. exports to fall and imports to rise.

c. both exports and imports to rise.

d. both exports and imports to fall.

7. The government in an open economy are dealing with the crowding out condition. As
a result, the interest rate ________, leading to a capital ________ and a real exchange rate

a. falls, outflow, appreciation

b. falls, outflow, depreciation

c. falls, inflow, appreciation

d. rises, inflow, appreciation

8. The nation of Ectenia has long banned the export of its highly prized puka shells.
A newly elected president, however, removes the export ban. This change in policy will

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cause the nation’s currency to ________, making the goods Ectenia imports ________
expensive

a. appreciate, less

b. appreciate, more

c. depreciate, less

d. depreciate, more

9. An appreciation of the real exchange rate for the dollar

a. increases the quantity of dollars demanded in the market for foreign-currency


exchange.

b. does not change the quantity of dollars demanded in the market for foreign-currency
exchange.

c. decreases the quantity of dollars demanded in the market for foreign-currency


exchange.

d. could do any of the above.

10. An increase in Europe's taste for UK produced Hondas would cause the pound to

a. depreciate and would increase UK net exports.

b. depreciate and would decrease UK net exports.

c. appreciate and would decrease UK net exports.

d. appreciate, but the total value of UK net export stays the same.

11. The purchase of a capital asset adds to the demand for loanable funds

a. whether the asset is located at home or abroad.

b. only if the asset is located at home.

c. only if the asset is located abroad.

d. only if it is purchased with foreign currency.

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12. Which of the following statements regarding the loanable funds market is not true?

a. A decrease in a country's net capital outflow shifts the demand for loanable funds to
the left.

b. An increase in domestic investment shifts the demand for loanable funds to the right.

c. An increase in a country's net capital outflow shifts the supply of loanable funds
to the left.

d. An increase in a country's net capital outflow raises its real interest rate.

13. An increase in the government budget deficit

a. has no impact on the real interest rate and fails to crowd out investment because
foreigners buy assets in the deficit country.

b. decreases the real interest rate and crowds out investment.

c. increases the real interest rate and crowds out investment.

d. decrease the real interest rate that leads to increase investment.

14. Which of the following statement regarding the loanable funds market is true?

a. A decrease in the government budget deficit increases the real interest rate.

b. An increase in the government budget deficit shifts the supply of loanable funds to the
right.

c. An increase in private saving shifts the supply of loanable funds to the left.

d. An increase in the government budget deficit shifts the supply of loanable funds
to the left.

15. Assuming all other things unchanged, a higher UK real interest rate

a. decreases UK net capital outflow because UK residents and foreigners prefer to


invest in the UK

b. decreases UK net capital outflow because UK residents and foreigners prefer to invest
abroad.

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c. increases UK net capital outflow because UK residents and foreigners prefer to invest
in the UK.

d. none of these answers

16. An increase in the UK government budget deficit

a. increases UK net exports and decreases UK net capital outflow.

b. decreases UK net exports and UK net capital outflow the same amount.

c. increases UK net exports and UK net capital outflow the same amount.

d. decreases UK net exports and increases UK net capital outflow.

17. Which of the following statements regarding the market for foreign currency
exchange is true?

a. An increase in UK net exports decreases the supply of pounds and the pound
depreciates.

b. An increase in UK net exports increases the demand for pounds and the pound
appreciates.

c. An increase in UK net exports increases the supply of pounds and the pound
depreciates.

d. An increase in UK net exports decreases the demand for pounds and the pound
appreciates.

18. If the EU imposes a quota on the importing of clothing produced in China, so reducing
UK imports of clothing, which of the following is true regarding the market for foreign currency
exchange?

a. The demand for pounds decreases and the pound depreciates.

b. The supply of pounds increases and the pound depreciates.

c. The supply of pounds decreases and the pound appreciates.

d. The demand for pounds increases and the pound appreciates.

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19. Suppose, due to political instability, Russians suddenly choose to invest in UK assets
as opposed to Russian assets. Which of the following statements is true regarding UK net
foreign investment?

a. UK net foreign investment is unchanged because only UK residents can alter UK net
foreign investment.

b. UK net foreign investment rises.

c. UK net foreign investment falls.

d. none of these answers

20. Suppose, due to political instability, Russians suddenly choose to purchase UK


assets as opposed to Russian assets. Which of the following statements is true regarding the
value of the pound and UK net exports?

a. The pound appreciates, and UK net exports rise.

b. The pound appreciates, and UK net exports fall.

c. The pound depreciates, and UK net exports rise.

d. The pound depreciates, and UK net exports fall.

21. An increase in UK private saving

a. increases UK net exports and UK net capital outflow the same amount.

b. increases UK net exports and decreases UK net capital outflow.

c. decreases UK net exports and UK net capital outflow the same amount.

d. decreases UK net exports and increases UK net capital outflow.

22. Which of the following statements about trade policy is true?

a. A country's trade policy has no impact on the size of its trade balance.

b. A restrictive import quota decreases a country's net exports.

c. A restrictive import quota increases a country's net exports.

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d. none of these answers.

23. Which of the following groups would not benefit from an EU import quota on
Japanese cars?

a. EU consumers who buy electronics from Japan.

b. EU farmers who export grain.

c. Employees of EU car manufacturers.

d. Shareholders of German carmaker BMW.

24. An example of a trade policy is

a. a tariff on sugar.

b. capital flight because it increases a country's net exports.

c. an increase in the government budget deficit because it reduces a country's net exports.

d. All are examples of trade policy.

25. An export subsidy should have the opposite effect of

a. a government budget deficit.

b. capital flight.

c. an increase in private saving.

d. a tariff.

26. Which of the following groups would be most harmed by a UK government budget
deficit?

a. Foreigners who wish to buy assets in the UK.

b. BAe Systems wishing to sell aircraft to Saudi Arabia.

c. UK residents wishing to buy foreign produced cars.

d. Lenders of loanable funds.

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27. Capital flight

a. decreases a country's net exports and increases its long-run growth path.

b. increases a country's net exports and increases its long-run growth path.

c. increases a country's net exports and decreases its long-run growth path.

d. decreases a country's net exports and decreases its long-run growth path.

30. If business leaders in Great Britain become less confident in their economy, their
pessimism will induce them to decrease investment, causing the British pound to ________
and pushing the British trade balance toward ________.

a. appreciate, deficit

b. appreciate, surplus

c. depreciate, deficit

d. depreciate, surplus

31. Interest rate and bond prices are;

a. Positively related

b. Negatively related

c. Not related

d. Either A or B

32. An increase in the government budget deficit most likely to result in an increase in
which of the following?

a. Exports

b. The real interest rate

c. The money supply

d. The simple multiplier

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33. Tariffs are different from assigned import quotas in that tariffs will

a. restrict imports

b. increase the price of imported goods.

c. benefit domestic consumers of imported goods.

d. generate additional revenue for the domestic government

34. To decrease the trade deficit and to increase short-run output, which of the
following could work?

a. a depreciation of the dollar

b. a depreciation of the dollar and a monetary contraction

c. adoption of a fixed exchange rate

d. contractionary monetary policy

35. In the open-economy macroeconomic model, the market for loanable funds identity can
be written as

a. S= I

b.S= NCO

c.S= I+ NCO

d.S+ I= NCO

36. A country has national saving of $70 billion, government expenditures of $20 billion,
domestic investment of $30 billion, and net capital outflow of $40 billion. What is its
supply of loanable funds?

a.$30 billion

b.$40 billion

c.$50 billion

d.$70 billion

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37. Other things the same, if the interest rate falls, then

a. firms will want to borrow more, which increases the quantity of loanable funds
demanded.

b.firms will want to borrow less, which decreases the quantity of loanable funds
demanded.

c.firms will want to borrow more, which increase the quantity of loanable funds supplied.

d.firms will want to borrow less, which decreases the quantity of loanable funds supplied.

38. If for some reason Americans desired to increase their purchases of foreign
assets,then other things the same

a.both the real exchange rate and the quantity of dollars exchanged in the market for
foreign-currency exchange would fall.

b.both the real exchange rate and the quantity of dollars exchanged in the market for
foreign-currency would rise.

c.the real exchange rate would rise and the quantity of dollars exchanged in the market
for foreign-currency would fall

d.the real exchange rate would fall and the quantity of dollars exchanged in the
market for foreign-currency would rise

39. Japan generally runs a significant trade surplus. Which of the following is likely
responsible for this?

a. A high Japanese saving rate relative to Japanese investment

b. Structural barriers against imports into Japan

c. Low Japanese demand for foreign goods

d. High foreign demand for Japanese goods

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40. According to the figure, the initial effect of an increase in the budget deficit can
be illustrated as a move from

a. a to b.

b. a to c.

c. c to b.

d. c to d.

41. According to the figure, starting from r1 and E3, an increase in the budget
deficit can be illustrated as a move to

a. r2 and E4.

b. r2 and E2.

c. r0 and E4.

d. r0 and E2.

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42. Suppose the U.S. imposes an import quota on steel. U.S. exports

a. increase, the real exchange rate of the U.S. dollar appreciates, and U.S. net
foreign investment increases.

b. increase, the real exchange rate of the U.S. dollar depreciates, and U.S. net
foreign investment is unchanged.

c. decrease, the real exchange rate of the U.S. dollar appreciates, and U.S. net
foreign investment is unchanged.

d. decrease, the real exchange rate of the U.S. dollar depreciates, and U.S. net
foreign investment decreases.

43. According to the figure, which of the following shifts show the effects of an
import quota?

a. a shift of NFI0 to the right in Panel B

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b. a shift from D0 to D1 in Panel C

c. a shift from D0 to D2 in Panel C

d. None of the above would show the effects of an import quota.

44. If the exchange rate was initially at E0 and an import quota was imposed, the
real exchange rate

a. would remain at E0.

b. would depreciate to E2.

c. would appreciate to E1.

d. could conceivably do any of the above.

45. If the economy were initially in equilibrium at r0 and E0 and the government
removed import quotas, the exchange rate would

a. appreciate to E1.

b. appreciate to E2.

c. depreciate to E1.

d. depreciate to E2.

Lecture 20. AGGREGATE SUPPLY AND AGGREGATE DEMAND

1. During period of recession


a. Aggregate output declines
b. Price level start rising
c. Unemployment declines
d. Aggregate output rises
2. If aggregate demand falls short of current output, it would result in
a. Business firms will cut production to keep from accumulating inventories.
b. Business firms will expand production to keep from accumulating inventories.
c. Business firms will cut production to build up inventories.
d. Business firms will cut production to build up inventories.

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3. An increase in planned investment spending causes aggregate output to;


a. increase by an amount equal to the change in investment spending.
b. increase by an amount less than the change in investment spending.
c. increase by an amount greater than the change in investment spending.
d. decrease by an amount less than the change in investment spending.
4. A rise in the price level, given no change in the supply of money, will
a. increase the demand for money and decrease aggregate expenditure.
b. decrease the demand for money and decrease aggregate demand.
c. increase the demand for money and increase aggregate expenditure.
d. decrease aggregate demand but not affect the demand for money.

5. According to the chart, the movement of the economy from E3 to E4 is due to


a. an increase in the productivity of workers.
b. workers accepting a reduction in their wages.
c. Bank of Canada increasing the supply of money.
d. an increase in the unemployment rate.
6. It is difficult for Bank of Canada to remove a sustained inflation without producing
stagflation because inflationary expectations cause the

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a. AS curve to continue shifting upward.


b. to shift to the right.
c. AD curve to shift too far to the left.
d. AD curve to shift too far to the right.
e. AS curve to continue shifting downward.
7. Assuming that the economy is currently in long run equilibrium at potential output
(Y*), A positive demand shock, that is not validated by the Bank of Canada, will
eventually result in
a. an ongoing inflation in the economy.
b. a higher price level and GDP at the potential level.
c. no change in the price level.
d. a lower price level and a GDP below the potential output

8. According to the chart, a one-time increase in the money supply causes


a. the aggregate demand curve to shift from AD1 to AD2.
b. the aggregate demand curve to shift from AD1 to AD2 to AD3 to AD4.
c. the aggregate supply curve to shift from AS1 to AS2.
d. the aggregate supply curve to shift from AS1 to AS2 to AS3 to AS4.
e. no change in the graph.
9. According to the chart, the adjustment of wages to output above the natural rate
causes

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a. the aggregate demand curve to shift from AD1 to AD2.


b. the aggregate demand curve to shift from AD1 to AD2 to AD3 to AD4.
c. the aggregate supply curve to shift from AS1 to AS2.
d. the aggregate supply curve to shift from AS1 to AS2 to AS3 to AS4.
e. no change in the graph.

10. An increase in which of the following would cause the aggregate demand curve to
shift to the left?
a. Consumer optimism
b. Population
c. Cost of resources
d. Income taxes
11. With an upward – sloping short- run aggregate supply curve, an increase in
government expenditure will most likely
a. Reduce the price level
b. Reduce the level of nominal GDP
c. Increase real GDP.
d. Shift both the aggregate demand curve and the long – run aggregate supply curve
to the left.
12. Which of the following statements about economic fluctuations is true?
a. A depression is a mild recession.

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b. A variety of spending, income, and output measures can be used to measure


economic fluctuations because most macroeconomic quantities tend to
fluctuate together.
c. A recession is when output rises above the natural rate of output.
d. Economic fluctuations have been termed the "business cycle" because the
movements in output are regular and predictable.
13. According to the interest rate effect, aggregate demand slopes downward
(negatively) because
a. lower prices increase money holdings, decrease lending, interest rates rise, and
investment spending falls.
b. lower prices increase the value of money holdings and consumer spending
increases.
c. lower prices decrease the value of money holdings and consumer spending
decreases.
d. lower prices reduce money holdings, increase lending, interest rates fall, and
investment spending increases.
14. Which of the following would not cause a shift in the long-run aggregate supply
curve?
a. An increase in the available capital
b. An increase in the available labour
c. An increase in the available technology
d. An increase in price expectations
15. Which of the following is not a reason why the aggregate demand curve slopes
downward?
a. The exchange-rate effect
b. The wealth effect.
c. The classical dichotomy/monetary neutrality effects.
d. The interest-rate effect
16. In the model of aggregate demand and aggregate supply, the initial impact of an
increase in consumer optimism is to
a. shift the short-run aggregate supply curve to the left.

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b. shift the aggregate demand curve to the right.


c. shift the short-run aggregate supply curve to the right.
d. shift the aggregate demand curve to the left.
e. shift the long-run aggregate supply curve to the left.
17. Which of the following statements is true regarding the long-run aggregate supply
curve? The long-run aggregate supply curve
a. is vertical because an equal change in all prices and wages leaves output
unaffected.
b. is positively sloped because price expectations and wages tend to be fixed in the
long run.
c. shifts right when the government raises the minimum wage.
d. shifts left when the natural rate of unemployment falls.
18. According to the wealth effect, aggregate demand slopes downward (negatively)
because
a. lower prices increase the value of money holdings and consumer spending
increases.
b. lower prices decrease the value of money holdings and consumer spending
decreases.
c. lower prices reduce money holdings, increase lending, interest rates fall, and
investment spending increases.
d. lower prices increase money holdings, decrease lending, interest rates rise, and
investment spending falls.
19. The natural rate of output is the amount of real GDP produced
a. when the economy is at the natural rate of unemployment.
b. when the economy is at the natural rate of investment.
c. when the economy is at the natural rate of aggregate demand.
d. when there is no unemployment.
20. Suppose the price level falls but because of fixed nominal wage contracts, the real
wage rises and firms cut back on production. This is a demonstration of the
a. sticky-wage theory of the short-run aggregate supply curve.
b. classical dichotomy theory of the short-run aggregate supply curve.

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c. misperceptions theory of the short-run aggregate supply curve.


d. d. sticky-price theory of the short-run aggregate supply curve.
21. Suppose the price level falls but suppliers only notice that the price of their
particular product has fallen. Thinking there has been a fall in the relative price of
their product, they cut back on production. This is a demonstration of the
a. misperceptions theory of the short-run aggregate supply curve.
b. classical dichotomy theory of the short-run aggregate supply curve.
c. sticky-price theory of the short-run aggregate supply curve.
d. d. sticky-wage theory of the short-run aggregate supply curve.
22. Suppose the economy is initially in long-run equilibrium. Then suppose there is a
increase in military spending due to rising international tensions. According to the
model of aggregate demand and aggregate supply, what happens to prices and
output in the short run?
a. Prices fall; output rises.
b. Prices fall; output falls.
c. Prices rise; output falls.
d. Prices rise; output rises.
23. Suppose the economy is initially in long-run equilibrium. Then suppose there is a
increase in military spending due to rising international tensions. According to the
model of aggregate demand and aggregate supply, what happens to prices and
output in the long run?
a. Output falls; prices are unchanged from the initial value.
b. Prices fall; output is unchanged from its initial value.
c. Output and the price level are unchanged from their initial values.
d. Prices rise; output is unchanged from its initial value.
24. Suppose the economy is initially in long-run equilibrium. Then suppose there is a
drought that destroys much of the wheat crop. According to the model of aggregate
demand and aggregate supply, what happens to prices and output in the short run?
a. Prices rise; output falls.
b. Prices fall; output rises.
c. Prices rise; output rises.

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d. Prices fall; output falls.


25. Suppose the economy is initially in long-run equilibrium. Then suppose there is a
drought that destroys much of the wheat crop. If policymakers allow the economy to
adjust to long-run equilibrium on its own, according to the model of aggregate
demand and aggregate supply, what happens to prices and output in the long run?
a. Output rises; prices are unchanged from the initial value.
b. Output and the price level are unchanged from their initial values.
c. Output falls; prices are unchanged from the initial value.
d. Prices fall; output is unchanged from its initial value.
26. Stagflation occurs when the economy experiences
a. rising prices and rising output.
b. rising prices and falling output.
c. falling prices and falling output.
d. falling prices and rising output.
27. Which of the following events shifts the short-run aggregate supply curve to the
right?
a. a decrease in the money supply
b. a drop in oil prices
c. an increase in government spending on military equipment
d. an increase in price expectations

Answer the two questions due to the figure

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28. According to the figure. Suppose the economy is operating in a recession such as
point B in Exhibit 4. If policymakers wished to move output to its long-run natural
rate, they should attempt to
a. shift aggregate demand to the left.
b. shift short-run aggregate supply to the left.
c. shift aggregate demand to the right.
d. shift short-run aggregate supply to the right.
29. According to the figure. Suppose the economy is operating in a recession such as
point B in Exhibit 4. If policymakers allow the economy to adjust to the long-run
natural rate on its own,
a. people will reduce their price expectations and the short-run aggregate
supply will shift right.
b. people will raise their price expectations and aggregate demand will shift left.
c. people will raise their price expectations and the short-run aggregate supply will
shift left.
d. people will reduce their price expectations and aggregate demand will shift right.
30. According to the model of aggregate supply and aggregate demand, in the long run,
an increase in the money supply should cause
a. prices to rise and output to rise.
b. prices to fall and output to remain unchanged.

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c. prices to fall and output to fall.


d. prices to rise and output to remain unchanged.
31. Policy makers are said to "accommodate" an adverse supply shock if they
a. fail to respond to the adverse supply shock and allow the economy to adjust on its
own.
b. respond to the adverse supply shock by decreasing aggregate demand, which
lowers prices.
c. respond to the adverse supply shock by decreasing short-run aggregate supply.
d. respond to the adverse supply shock by increasing aggregate demand, which
further raises prices.
32. Consider the following aggregate supply equation:
̅ + (𝑷 − 𝑬𝑷)
𝒀=𝒀
Based on this equation, the slope of the AS curve is:
a. .
b. Y.
c. 1-.
d. 1/.
33. Consider the following aggregate supply equation:
̅ + (𝑷 − 𝑬𝑷)
𝒀=𝒀
Based on this equation, , if the observed price (P) exceeds the price expected by the
producers (EP), then:
̅
a. 𝒀 > 𝒀
b. 𝑌 = 𝑌̅
c. 𝑌 < 𝑌̅
d. 𝑌=0
34. The positive relationship between the price level and the amount of output means that the
aggregate supply curve is:
a. horizontal.
b. upward-sloping.
c. vertical.
d. downward-sloping.
35. Sticky prices can result from all of the following except:

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a. setting prices on the basis of costs when wages are sticky.


b. long-term contracts between buyers and sellers.
c. market structure.
d. expansionary monetary policy.
36. Both models of aggregate supply presented in Chapter 14 share the feature that, if the price
level equals the expected price level, then:
a. output will be above its natural level.
b. nominal wages will rise.
c. output will be below its natural level.
d. output will equal its natural level.
37. According to the monetarists an increase in the money supply, other things equal, shifts the
aggregate _____ curve to the _____.
a. demand; right
b. demand; left
c. supply; left
d. supply; right
38. The aggregate demand curve is downward sloping because
a. a lower price level, holding the nominal quantity of money constant, leads to a larger
quantity of money in real terms, causes the interest rate to fall, and stimulates planned
investment spending.
b. a lower price level leads to a larger quantity of money in real terms, causing the interest
rate to fall, lowering the value of the dollar, and raising net exports.
c. a higher price level, holding the nominal quantity of money constant, leads to a smaller
quantity of money in real terms, causes the interest rate to fall, and stimulates planned
investment spending.
d. of both (a) and (b) of the above.
e. of both (b) and (c) of the above.
39. The aggregate demand curve shifts to the right when
a. taxes are cut.
b. government spending is reduced.
c. animal spirits decrease.
d. the money supply is reduced.
40. The aggregate demand curve shifts to the right when
a. the money supply increases.

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b. net exports increase.


c. taxes are decreased.
d. all of the above.
41. Which of the following does not cause the aggregate demand curve to shift to the left?
a. A decrease in net exports
b. A decrease in government spending
c. A decrease in business optimism
d. None of the answer.
42. A movement up a given aggregate demand curve is the result of
a. a rising price level.
b. a rising money supply.
c. increased taxes.
d. all of the above.

See the figure and answer the following questions from 43 to 45

43. A negative supply shock shifts the economy from


a. Point 1 to point 4.
b. Point 1 to point 2.
c. Point 3 to point 2.
d. Point 3 to point 4.

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44. A reduction of the money supply that is followed by a reduction of wages moves an economy
along a path from point
a. 1 to 2 to 3.
b. 1 to 4 to 3.
c. 3 to 2 to 1.
d. 3 to 4 to 1.
45. If government use policies to help the economy recovered after a supply shock (stagflation),
which moves an economy from point
a. 1 to 2 to 3.
b. 1 to 4 to 3.
c. 3 to 4 to 1.
d. 3 to 2 to 1.
46. If workers expect an increase in the price level, the aggregate _____ curve shifts to the
_____.
a. demand; right
b. demand; left
c. supply; left
d. supply; right
47. When output is _____ the natural rate level, wages will begin to _____, shifting the
aggregate supply curve outward.
a. above; fall
b. above; rise
c. below; fall
d. below; rise
48. Stagflation is the result of a
a. positive supply shock.
b. negative supply shock.
c. positive demand shock.
d. negative demand shock.
49. Which of the following is not a component of Aggregate Demand?
a. Consumption
b. Investment
c. Saving
d. Net Exports

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50. When consumers feel or become wealthier, what is the effect on consumption spending?
a. It increases consumption spending
b. It decrease consumption spending
c. It has no effect on consumption spending
d. It has an indeterminate effect on consumption spending

Lecture 21. THE INFLUENCE OF MONETARY AND FISCAL POLICY OF


AGGREGATE DEMAND

1. What is the purpose of Monetary Policy?


a. Contribute to economic growth and stability.
b. Keep rich people from getting too rich.
c. Functions like Fiscal Policy.
d. Give Congress and the political parties more control of the economy.
2. Fiscal policy aims to influence the economic activity through the use of?
a. Money supply and interest rate.
b. Government spending and taxation.
c. Exchange rate.
d. Direct and indirect taxation.
3. To promote higher economic growth, the best way is to
a. Decrease government spending and increase taxation.
b. Increase government spending and decrease taxation.
c. Decrease government spending and decrease taxation.
d. Increase government spending and increase taxation.
4. Congress cutting taxes is an example of
a. Fiscal Policy.
b. Monetary Policy.
c. Money Neutrality.
d. Classical Dichotomy.
5. A budget deficit occurs when
a. The government brings in more revenue than it spends for a given year.
b. The government spends more money than it brings in for a fiscal year.

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c. The government does not spend too much money for a fiscal year.
d. The government impose a high tax for imported goods.
6. Which among the following does not have the application of multiplier
a. Determination of income
b. Fiscal policy
c. Monetary policy
d. Foreign direct investment
7. A 2 percent per year rate of growth of the money supply would constitute an
expansionary monetary policy
a. in no circumstances because this growth in the money supply is too small to
effectively be considered expansionary.
b. if demand for money is increasing by more than 2 percent per year.
c. if demand for money is increasing by exactly 2 percent per year.
d. if demand for money is growing by less than 2 percent per year.
8. In the short run, under a flexible exchange rate, an expansionary fiscal policy
a. definitely has a negative effect on investment
b. definitely has a positive effect on investment
c. definitely has a negative effect on net exports
d. has an ambiguous effect on net exports

9. Expansionary monetary policy results in which of the following in the short run?

I. The money supply increases.


II. The nominal interest rate decreases.
III. The real interest rate decreases.
IV. Bond prices decrease.
a. I and II only
b. I, II and III only
c. I, II and IV only
d. III and IV only
e. IV only

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10. True statements about expansionary monetary policy in the long run include which
of the following?

I. Price level increases to match the increase in the money supply.

II. The nominal interest rate equals the real interest rate plus the expected inflation

rate.

III. The real output level has not permanently increased.

a. I only
b. II only
c. III only
d. I and II only
e. I, II and III
11. Aggregate demand and aggregate supply analysis suggests that, in the short run, an
expansionary monetary policy will result in
a. a shift in the aggregate demand curve to the left.
b. a shift in the aggregate supply curve to the left.
c. an increase in real GDP without much inflation when the economy is on the
horizontal portion of the aggregate supply curve.
d. an increase in real GDP with high inflation when the economy is on the horizontal
portion of the aggregate supply curve.
e. an increase in real GDP and no inflation when the economy is on the vertical portion
of the aggregate supply curve.
12. Which of the following would be the initial impact on an economy if wages were to
increase more than worker productivity?
a. There would be no initial impact, since neither the aggregate supply curve nor the
aggregate demand curve would shift
b. Employment would increase, causing a rightward shift in aggregate demand curve
c. The price level would increase, resulting in excess aggregate supply
d. The short – run aggregate supply curve would shift to the left, increasing the
price level.

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e. The aggregate demand curve would shift to the left, increasing the price level.
13. If the interest rate is constant and the MPC is 0.7, then the government purchases
multiplier is:
a. 0.3.
b. 0.7.
c. 1.4.
d. 3.3.
14. If, in response to an increase in government spending, the central bank decides to
keep interest rates constant, the government purchases multiplier is:
a. larger than in the case where the central bank keeps the money supply
constant.
b. smaller than in the case where the central bank keeps the money supply constant.
c. the same as in the case where the central bankd keeps the money supply constant.
d. larger or smaller than in the case where the central bank keeps money supply
constant.
15. Keynes's liquidity preference theory of the interest rate suggests that the interest
rate is determined by
a. aggregate supply and aggregate demand.
b. the supply and demand for loanable funds.
c. the supply and demand for money.
d. the supply and demand for labour.
16. When money demand is expressed in a graph with the interest rate on the vertical
axis and the quantity of money on the horizontal axis, an increase in the interest rate
a. decreases the quantity demanded of money.
b. increases the quantity demanded of money.
c. decreases the demand for money.
d. increases the demand for money.
17. When the supply and demand for money are expressed in a graph with the interest
rate on the vertical axis and the quantity of money on the horizontal axis, an
increase in the price level
a. shifts money demand to the right and increases the interest rate.

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b. shifts money demand to the right and decreases the interest rate.
c. shifts money demand to the left and increases the interest rate.
d. shifts money demand to the left and decreases the interest rate.
18. In the market for real output, the initial effect of an increase in the money supply is
to
a. shift the aggregate supply curve to the right.
b. shift the aggregate supply curve to the right.
c. shift the aggregate demand curve to the left.
d. shift the aggregate demand curve to the right.
19. The initial effect of an increase in the money supply is to
a. increase the interest rate.
b. increase the price level.
c. decrease the price level.
d. decrease the interest rate.
20. The long-run effect of an increase in the money supply is to
a. increase the interest rate.
b. decrease the price level.
c. increase the price level.
d. decrease the interest rate.
21. Suppose a wave of investor and consumer pessimism in the USA causes a reduction
in spending. If the US Federal Reserve (which has a broader remit than the Bank of
England which is charged only with controlling inflation) chooses to engage in
activist stabilization policy, it should
a. increase government spending and decrease taxes.
b. decrease the money supply.
c. decrease government spending and increase taxes.
d. decrease interest rates.
22. The initial impact of an increase in government spending is to shift
a. aggregate demand to the right.
b. aggregate demand to the left.
c. aggregate supply to the right.

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d. aggregate supply to the left.


23. If the marginal propensity to consume MPC is 0.75, the value of the multiplier is
a. 4.
b. 7.5.
c. 5.
d. 0.75.
24. An increase in the marginal propensity to consume (MPC)
a. raises the value of the multiplier.
b. has no impact on the value of the multiplier.
c. rarely occurs because the MPC is set by congressional legislation.
d. lowers the value of the multiplier.
25. When an increase in government purchases raises incomes, shifts money demand to
the right, raises the interest rate, and lowers investment, we have seen a
demonstration of
a. supply-side economics.
b. the crowding-out effect.
c. the multiplier effect.
d. none of these answers.
26. Suppose a wave of investor and consumer optimism has increased spending so that
the current level of output exceeds the long-run natural rate. If policy makers
choose to engage in activist stabilization policy, they should
a. decrease government spending, which the shifts the aggregate demand curve
to the left.
b. decrease taxes, which shifts the aggregate demand curve to the right.
c. decrease taxes, which shifts the aggregate demand curve to the left.
d. decrease government spending, which shifts the aggregate demand curve to the
right.
27. Which of the following statements regarding taxes is correct?
a. Most economists believe that, in the short run, the greatest impact of a change in
taxes is on aggregate supply, not aggregate demand.
b. An increase in taxes shifts the aggregate demand curve to the right.

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c. decrease in taxes shifts the aggregate supply curve to the left.


d. A permanent change in taxes has a greater effect on aggregate demand than
a temporary change in taxes.
28. Suppose the government increases its purchases by £16 billion. If the multiplier
effect exceeds the crowding-out effect, then
a. the aggregate supply curve shifts to the right by more than £16 billion.
b. the aggregate demand curve shifts to the left by more than £16 billion.
c. the aggregate demand curve shifts to the right by more than £16 billion.
d. the aggregate supply curve shifts to the left by more than £16 billion.
29. When an increase in government purchases increases the income of some people,
and those people spend some of that increase in income on additional consumer
goods, we have seen a demonstration of
a. the multiplier effect.
b. supply-side economics.
c. the crowding-out effect.
d. none of these answers.
30. Which of the following is an automatic stabilizer?
a. Spending on public schools
b. Military spending
c. Spending on the space shuttle
d. Unemployment benefits
31. Which of the following best describes how an increase in the money supply shifts the
aggregate demand curve?
a. The money supply shifts right, prices fall, spending increases, and the aggregate
demand curve shifts right.
b. The money supply shifts right, the interest rate rises, investment decreases, and
the aggregate demand curve shifts left.
c. The money supply shifts right, the interest rate falls, investment increases,
and the aggregate demand curve shifts right.
d. The money supply shifts right, prices rise, spending falls, and the aggregate
demand curve shifts left.

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32. To increase the money supply, the bank central could:


a. Cut taxes
b. Purchase bonds in the open-market
c. Encourage people to held more cash (currency in circulation)
d. Increase the government spending
33. Which of the following is an example of fiscal policy?
a. The Federal Reserve Board reduces interest rates.
b. The local school board raises teachers’ salaries.
c. General Electronics Corp. borrows $100 million to build anew factory.
d. The federal government reduces personal income tax rates.
34. According to Keynesian economics, an appropriate fiscal policy to deal with
inflation is to
a. increase the rate of interest.
b. increase farm subsidy payments.
c. increase government purchases.
d. increase personal taxes.
35. When net taxes and government purchases are reduced by the same amount
a. there will be an increase in real GDP equal to the size of the reduction.
b. there will be a decrease in real GDP equal to the size of the reduction.
c. there will be an increase in real GDP that depends upon the size of the multiplier.
d. there will be a decrease in the real GDP depending on the size of the
multiplier.

Lecture 22. THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND


UNEMPLOYMENT

1. According to the short – run Phillips curve, lower inflation rates are associated with
a. Higher unemployment rates
b. Higher government spending
c. Larger budget deficits
d. Greater labor – force participation rates.

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2. 18. In the country of Stabilia, the monetary authorities particularly dislike inflation.
The current inflation of 5 per cent is considered rampant. If the sacrifice ratio in
Stabilia is five, the percentage of a year’s GDP that has to be forgone to bring
inflation down to 1 per cent is:
a. 0.8 per cent.
b. 1.25 per cent.
c. 20 per cent.
d. 25 per cent.
3. The Phillips curve represents the trade-off between:
e. inflation and expected inflation.
f. output and unemployment.
g. inflation and unemployment.
h. output and interest rates.
4. If the Phillips Curve is vertical in the long run, then an increase in the money supply
from year to year will _______ the unemployment rate and will _________inflation
rate.
e. increase; increase
f. increase; not change
g. not change; increase
h. not change; not change
5. An examples of an automatic stabilizers within the economy are
a. tariffs on imports
b. a tax cut approved by Congress
c. defense spending changes
d. changes in spending for unemployment compensation
6. Along a short-run Phillips curve,
a. a higher rate of inflation is associated with a lower unemployment rate.
b. a higher rate of growth in output is associated with a lower unemployment rate.
c. a higher rate of inflation is associated with a higher unemployment rate.
d. a higher rate of growth in output is associated with a higher unemployment rate.

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7. If, in the long run, people adjust their price expectations so that all prices and
incomes move proportionately to an increase in the price level, then the long-run
Phillips curve
a. is vertical.
b. is negatively sloped.
c. has a slope that is determined by how fast people adjust their price expectations.
d. is positively slope
8. According to the Phillips curve, in the short run, if policy makers choose an
expansionary policy to lower the rate of unemployment,
a. the economy will experience an increase in inflation.
b. the economy will experience a decrease in inflation.
c. inflation will be unaffected if price expectations are unchanging.
d. none of these answer.
9. An increase in expected inflation
a. shifts the short-run Phillips curve downward and the unemployment inflation trade-off is
less favorable.
b. shifts the short-run Phillips curve upward and the unemployment inflation trade-off is
more favorable.
c. shifts the short-run Phillips curve downward and the unemployment inflation trade-off is
more favorable.
d. shifts the short-run Phillips curve upward and the unemployment inflation trade-off
is less favorable.
10. Which of the following would shift the long-run Phillips curve to the right?
a. An increase in the minimum wage
b. An increase in expected inflation
c. An increase in the price of foreign oil
d. An increase in aggregate demand
11. When actual inflation exceeds expected inflation,
a. unemployment is equal to the natural rate of unemployment.
b. people will reduce their expectations of inflation in the future.
c. unemployment is greater than the natural rate of unemployment.

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d. unemployment is less than the natural rate of unemployment.


12. A decrease the price of foreign oil
a. shifts the short-run Phillips curve downward, and makes the unemployment inflation
trade-off less favorable.
b. shifts the short-run Phillips curve upward, and makes the unemployment inflation
trade-off less favorable.
c. shifts the short-run Phillips curve upward, and makes the unemployment inflation
trade-off more favorable.
d. shifts the short-run Phillips curve downward, and makes the unemployment
inflation trade-off more favorable.

See the figure and answer the following six questions

13. If people in the economy expect inflation to be 3 per cent and inflation is 3 per cent,
the economy is operating at point
a. B
b. I

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c. A
d. H
14. If people in the economy expect inflation to be 6 per cent but inflation turns out to
be 3 per cent, the economy is operating at point
a. H
b. C
c. D
d. F
15. Suppose the economy is in long-run equilibrium at point E. A sudden increase in
government spending should move the economy in the direction of point
a. D
b. G
c. E
d. B
16. Suppose the economy is operating at point D. As people revise their price
expectations,
a. the short-run Phillips curve will shift in the direction of the short-run Phillips curve
associated with an expectation of 3 per cent inflation.
b. the short-run Phillips curve will shift in the direction of the short-run Phillips
curve associated with an expectation of 9 per cent inflation.
c. the short-run Phillips curve will shift in the direction of the short-run Phillips curve
associated with an expectation of 6 per cent inflation.
d. the long-run Phillips curve will shift to the left.
17. Suppose the economy is operating in long-run equilibrium at point E. An
unexpected monetary contraction will move the economy in the direction of point
a. H.
b. F.
c. E.
d. C.
18. Suppose the economy is operating in long-run equilibrium at point E. In the long
run, a monetary contraction will move the economy in the direction of point

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a. F.
b. A.
c. H.
d. I

19. If people have rational expectations, a monetary policy contraction that is


announced and is credible could

a. reduce inflation with little or no increase in unemployment.

b. increase inflation but it would decrease unemployment by an unusually large amount.

c. increase inflation with little or no decrease in unemployment.

d. reduce inflation but it would increase unemployment by an unusually large amount.

20. If the sacrifice ratio is five, a reduction in inflation from 7 per cent to 3 per cent
would require

a. a reduction in output of 20 per cent.

b. a reduction in output of 5 per cent.

c. a reduction in output of 15 per cent.

d. a reduction in output of 35 per cent.

21. If a country’s policy makers were to continuously use expansionary monetary policy
in an attempt to hold unemployment below the natural rate, the long-run result would be

a. an increase in the level of output.

b. a decrease in the unemployment rate.

c. an increase in the rate of inflation.

d. all of these answers.

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