Take The Economics Problem Sets Questions!

1. What is the reserve multiplier if the required reserve ratio is 25%?

1

25

5

4

2. Assume that money in circulation in the U.S. economy is $90 billion and nominal GDP is $270 billion. What is the income velocity of circulation of money?

6

3

12

9

3.

The money stock measured as M1 is growing at the rate of 5% per year. If real GDP is growing at 2% per year, and the income velocity of circulation of money is constant,

The inflation rate will be 3%.

The inflation rate will be 1%.

The economy will achieve noninflationary growth.

The inflation rate will be 5%.

4.

The federal funds rate is

The interest rate on federal government bonds.

The interest rate on short-term loans of reserves from one bank to another.

The interest rate banks charge the federal government.

The interest rate banks charge their most creditworthy customers.

5. A decrease in foreign demand for U.S. exports will __________ the demand for the dollar, causing the dollar to __________.

Decrease, depreciate

Increase, appreciate

Increase, depreciate

Decrease, appreciate

6. In a fractional reserve banking system, banks create money when they

Accept deposits

Issue note-certificates.

Hold their deposits as reserves.

Make loans

7. An increase in the required reserve ratio decreases excess reserves and tends to

Decrease the money supply.

Increase or decrease the money supply.

Cause no change in the money supply.

Increase the money supply.

8. If country A specializes in the production of wheat and country B specializes in the production of coal, and if both countries trade and benefit from trade, it must be true that

Country A has an absolute advantage in the production of wheat.

Country B has an absolute advantage in the production of coal.

Country A has a comparative advantage in wheat and country B has a comparative advantage in coal

All of the above.

None of the above

9. Assume a two-commodity, two-country world, and assume the United States has a comparative advantage in the production of computers and Mexico has a comparative advantage in the production of oil. Which of the following statements is true?

U.S. consumption of oil will decrease after the introduction of trade

U.S. consumption of oil will increase after the introduction of trade

Mexico's consumption of oil will decrease after the introduction of trade.

All of the above.

10. If Germany can produce electric shavers at a lower opportunity cost per unit than Saudi Arabia, Germany has

A comparative advantage.

A specialization advantage.

A production advantage.

An absolute advantage.

11. An expansionary monetary policy __________ the money supply, causing the real interest rate to __________ and planned investment to ___________.

Increases, decrease, increase

Decreases, increase, decrease

Increases, increase, increase

Decreases, decrease, decrease

Ncreases, increase, decrease

12. For a nation to engage in international trade on the basis of comparative advantage, it should

Purchase resources from other nations until it acquires a comparative advantage in at least one product.

Specialize in the production of those goods that have the highest opportunity cost, then trade the excess output.

Produce only those goods in which it has an absolute advantage over other nations.

13. Suppose the exchange rate is initially set at 123 yen per dollar and increases to 149 yen per dollar. This would be expected to cause the price of Japanese goods in the U.S. economy to

Change in a manner that cannot be determined without additional information.

Decrease.

Increase.

Remain the same, as domestic demand remains the same.

14. Monetarists would argue that the Federal Reserve should set the growth rate of the money supply at the level at which

It equals the rate of growth in nominal wages.

It equals the growth rate of nominal GDP.

It equals the rate of population growth.

It equals the growth rate of real GDP.

15. The crowding-out effect suggests that government borrowing to finance a deficit will cause

An increase in consumer spending.

An increase in corporate and personal income tax rates.

An increase in interest rates and a reduction in investment.

A decrease in government spending on Social Security.

16. Which fiscal policy can be used to stimulate aggregate demand?

Decrease taxes, and increase expenditures.

Decrease the money supply.

Decrease expenditures, and increase taxes

All of the above.

17. The federal government usually chooses to finance the deficit by borrowing from the public, rather than by creating money, because

Money creation is purely expansionary, whereas borrowing from the public enables fiscal policy to be either expansionary or contractionary.

Money creation would probably be highly inflationary.

Borrowing from the public negates the inflationary effect of a deficit.

The printing of new currency raises a second problem--that of getting the currency into public circulation.

The Federal Reserve System is often unable to accommodate the Treasury and adhere to its money supply targets.

18. If the federal government has a budget surplus and uses it to reduce the size of the national debt, interest rates would be expected to

Increase.

Change in a manner that can't be predicted without more information.

Increase only if the shift in the demand curve is larger than the shift in the supply curve.

Decrease.

Remain the same.

19. Specialization according to comparative advantage allows mutual gains from trade that

Enable each trading nation to move beyond its own production possibilities curve.

Lead to the transfer of resources between nations.

Put each nation on essentially the same production possibilities curve.

Increase each nation's comparative advantage.

Are possible as long as there are only two trading partners.

20. Suppose the Federal Reserve wants to prevent aggregate demand from increasing. Which of the following policies will help the Fed achieve its objective?

Open market purchases of government securities.

Open market sales of government securities.

A decrease in the discount rate.

A decrease in the reserve requirements.

21. Suppose the economy is currently in equilibrium at potential real GDP. During the year, the Fed expects aggregate demand to increase substantially and aggregate supply to increase only slightly. To prevent the economy from overheating, the Fed should

Lower the discount rate.

Lower reserve requirements

Engage in open market sales of government securities.

Engage in open market purchases of government securities.

22. Suppose the economy is experiencing a recessionary GDP gap of $800 billion and the marginal respending rate (MRR) is 0.5. Government fiscal policy could eliminate the recessionary gap by

Increasing purchases by $1,600 billion.

Increasing purchases by $400 billion.

Reducing purchases by $1,600 billion

Reducing purchases by $400 billion.

Reducing purchases by $800 billion.

23. If investment spending is unaffected by the level of real interest rates,

The aggregate purchases line will shift upward by a larger amount than occurs when the investment demand curve is downward-sloping.

Monetary policy will be particularly effective in reducing the equilibrium level of real GDP.

The aggregate demand curve will shift to the left, if the money supply is increased.

Monetary policy will have no effect on the equilibrium level of real GDP in the short run.

Monetary policy will be particularly effective in increasing the equilibrium level of real GDP.

24. As real GDP increases during an expansionary phase of the economy, the money stock is held fixed by monetary authorities. As a result,

Interest rates will fall.

It's impossible to predict whether interest rates will rise or fall.

There will be no effect on interest rates.

Interest rates will rise.

25.

Suppose the economy depicted above is initially at a full-employment output level of $900 billion. If a shift of the aggregate demand curve to AD₂ occurs,

An inflationary GDP gap of $75 billion exists.

A recessionary GDP gap of $75 billion exists.

A recessionary GDP gap of less than $75 billion exists, due to the existence of the multiplier effect.

An inflationary GDP gap of less than $75 billion exists, due to the existence of the multiplier effect.

A recessionary GDP gap of more than $75 billion exists

26.

A reduction in the required reserve ratio would cause the equilibrium interest rate to

Increase

Increase, only if the level of investment is low relative to historic levels.

Decrease

Remain the same.

Increase, only if the level of unemployment is high.

27. In the classical model, assuming constant money velocity, the rate of inflation equals the difference between

The rate of population growth and the rate of growth in nominal GDP.

The rate of growth in real wages and the rate of growth in real GDP.

The rate of growth in the money supply and the rate of growth in nominal GDP.

The rate of unemployment and the rate of economic growth.

The rate of growth in the money supply and the rate of growth in real GDP.

28.

If the economy is experiencing an inflationary GDP gap, __________ monetary policy might be used to __________ aggregate demand and __________ the overall price level.

Contractionary, increase, increase

Contractionary, decrease, decrease

Contractionary, decrease, increase

Expansionary, decrease, decrease

Expansionary, increase, decrease

29. Supply-side fiscal policies

Primarily involve attempts to shift the aggregate demand curve to the right.

Are not concerned with the long run

Are primarily concerned with affecting the short-run aggregate supply curve, rather than the aggregate demand curve.

Involve the use of tax-code changes to increase the incentives to supply economic resources to the market.

Are designed to improve overall equality in the nation's distribution of income, so that employee morale and productivity will increase.

30.

Which of the following is an example of an automatic stabilizer?

The rise in tax revenue that occurs as a result of growth in real GDP.

The increase in government spending that occurs as the result of new spending bills passed by Congress.

The reduction in the money supply that occurs as banks become less willing to make loans during a recession.

The reduction in real wages that occurs as the economy goes into a recession.

All of the above.