# Economics Review Chapters 7-12

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A review of Chapters 7-12 of "Principles of Macroeconomics."

• 1.

### Spending by consumers on consumption goods, spending by businesses on investment goods, spending by government and spending by foreigners on net exports make up

• A.

Disposable national income

• B.

The equilibrium economy

• C.

Aggregate supply

• D.

Aggregate expenditure

• E.

Discretionary spending

D. Aggregate expenditure
Explanation
Aggregate expenditure refers to the total amount of spending in an economy. It includes consumer spending on consumption goods, business spending on investment goods, government spending, and spending by foreigners on net exports. This measure is used to determine the overall level of economic activity and is an important component in calculating the gross domestic product (GDP). By considering all these types of spending, aggregate expenditure provides a comprehensive view of the total demand in an economy.

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• 2.

### If \$30 billion in new investment is added to the economy and MPC is 0.9, national income would increase by

• A.

\$30 billion

• B.

\$90 billion

• C.

\$100 billion

• D.

\$210 billion

• E.

\$300 billion

E. \$300 billion
Explanation
If \$30 billion in new investment is added to the economy and the marginal propensity to consume (MPC) is 0.9, it means that 90% of the additional income will be spent. This means that for every \$1 increase in income, \$0.90 will be spent. Therefore, if \$30 billion is added to the economy, the total increase in national income would be \$30 billion divided by (1 - 0.9), which is equal to \$300 billion.

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• 3.

### Last month 5,000 people decided to quit their jobs in order to seek better employment opportunities. These people are

• A.

Structurally unemployed

• B.

Frictionally unemployed

• C.

Discouraged workers

• D.

Cyclically unemployed

• E.

Underemployed workers

B. Frictionally unemployed
Explanation
The correct answer is frictionally unemployed. Frictional unemployment refers to the temporary unemployment that occurs when individuals are transitioning between jobs or entering the job market for the first time. In this case, the 5,000 people who quit their jobs last month are actively seeking better employment opportunities, indicating that they are frictionally unemployed as they are in the process of searching for new jobs.

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• 4.

### Among the losers from inflation are

• A.

Savers and borrowers

• B.

Landlords and the government

• C.

Borrowers and the government

• D.

Those on a fixed income and borrowers

• E.

Those on a fixed income and savers

E. Those on a fixed income and savers
Explanation
Those on a fixed income and savers are among the losers from inflation. When inflation occurs, the value of money decreases, causing prices to rise. This means that those on a fixed income, such as retirees or individuals with fixed pensions, will find it more difficult to afford goods and services. Additionally, savers will see the purchasing power of their savings decrease as inflation erodes the value of their money over time. Therefore, both those on a fixed income and savers are negatively affected by inflation.

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• 5.

### Government spending on interstate highways, public housing facilities, and defense projects are all ways that the president can

• A.

Close a recessionary gap

• B.

Close an inflationary gap

• C.

Combat inflation

• D.

Shift the aggregate demand curve to the left

• E.

A. Close a recessionary gap
Explanation
Government spending on interstate highways, public housing facilities, and defense projects can help close a recessionary gap. During a recession, there is a decrease in aggregate demand, leading to lower economic activity and higher unemployment rates. By increasing government spending on these projects, the president can stimulate economic growth, create jobs, and increase consumer spending. This will help close the recessionary gap by boosting aggregate demand and restoring economic stability.

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• 6.

### A government spending and taxation policy to create full employment without inflation is known as

• A.

Closing an inflationary gap

• B.

Fiscal policy

• C.

Closing a recessionary gap

• D.

A balanced budget

• E.

A balanced budget multiplier

B. Fiscal policy
Explanation
Fiscal policy refers to the government's use of spending and taxation to influence the economy. In this context, the government can implement fiscal policy measures to create full employment without causing inflation. This can be done by increasing government spending and/or reducing taxes to stimulate aggregate demand and boost economic activity. By doing so, the government aims to close the inflationary gap, which occurs when aggregate demand exceeds the economy's capacity to produce goods and services without causing inflation. Therefore, fiscal policy is the correct answer in this case.

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• 7.

### The capital-output ratio is measured by dividing

• A.

The capital stock by labor

• B.

Output by the capital stock

• C.

The capital stock by GDP

• D.

The change in labor by GDP

• E.

GDP by labor

C. The capital stock by GDP
Explanation
The capital-output ratio is a measure of the efficiency with which capital is used in the production process. It is calculated by dividing the capital stock (the total amount of physical capital in an economy) by GDP (the total value of goods and services produced in an economy). This ratio helps to assess the productivity and effectiveness of capital investment in generating economic output.

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• 8.

### An increase in which of the following will shift the economy's productivity (GDP/L) curve?

• A.

The quantity of laborers

• B.

Technology

• C.

Capital

• D.

Output

• E.

Consumption

B. Technology
Explanation
An increase in technology will shift the economy's productivity curve because technological advancements improve efficiency and productivity in the production process. With better technology, businesses can produce more output with the same amount of inputs, such as labor and capital. This leads to an increase in the overall productivity of the economy, shifting the productivity curve upwards. As a result, the economy can produce more goods and services, leading to higher GDP per capita.

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• 9.

### The primary functions of money are

• A.

Velocity, liquidity, and transactions

• B.

Speculative demand, measure of value, and precautionary demand

• C.

A medium of exchange, a measure of value, and a store of value

• D.

A store of value, heterogeneity, and a medium of exchange

• E.

Currency value, fiat value, and accepted value

C. A medium of exchange, a measure of value, and a store of value
Explanation
Money serves as a medium of exchange, meaning it is widely accepted in transactions for goods and services. It also acts as a measure of value, allowing individuals to compare the worth of different items. Lastly, money serves as a store of value, allowing individuals to save and accumulate wealth over time.

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• 10.

### The number of times per year a dollar is used to transact an exchange is known as

• A.

Liquidity of money

• B.

Velocity of money

• C.

Quantity theory of money

• D.

Equation of exchange

• E.

Rapidity index

B. Velocity of money
Explanation
The correct answer is velocity of money. Velocity of money refers to the number of times a dollar is used to transact an exchange in a year. It measures the rate at which money circulates within an economy. A higher velocity of money indicates a more active economy, as money is being spent and exchanged more frequently. This concept is important in understanding the relationship between money supply, economic activity, and inflation.

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• 11.

### According to the quantity theory of money, if M's growth is less than Q'a, then

• A.

V falls

• B.

V rises

• C.

P stays the same

• D.

P falls

• E.

P rises

D. P falls
Explanation
According to the quantity theory of money, if the growth rate of money supply (M) is less than the growth rate of real output (Q), then the price level (P) will fall. This is because when the money supply grows at a slower rate than the output, there is less money available relative to the goods and services produced, leading to a decrease in prices. This relationship is based on the assumption that the velocity of money (V) remains constant.

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• 12.

### Keynesians identify three principal motives for demanding money. They are the

• A.

Transactions motive, precautionary motive, and liquidity motive

• B.

Transactions motive, precautionary motive, and convertibility motive

• C.

Transactions motive, speculative motive, and volatility motive

• D.

Transactions motive, speculative motive, and liquidity motive

• E.

Transactions motive, speculative motive, and precautionary motive

E. Transactions motive, speculative motive, and precautionary motive
Explanation
Keynesians identify three principal motives for demanding money: the transactions motive, speculative motive, and precautionary motive. The transactions motive refers to the need for money to carry out day-to-day transactions such as buying goods and services. The speculative motive refers to the desire to hold money in order to take advantage of investment opportunities or to speculate on future changes in asset prices. The precautionary motive refers to the need for money to provide a buffer against unexpected expenses or emergencies.

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• 13.

### The potential money multiplier, m, is

• A.

1/excess reserves

• B.

Excess reserves x loans

• C.

Legal reserve requirement/excess reserves

• D.

1/actual reserves

• E.

1/legal reserve requirement

E. 1/legal reserve requirement
Explanation
The correct answer is 1/legal reserve requirement. The potential money multiplier, denoted as m, represents the maximum amount of money that can be created by banks through the lending process. It is calculated by dividing 1 by the legal reserve requirement. The legal reserve requirement is the percentage of deposits that banks are required to hold as reserves. By dividing 1 by this requirement, we can determine the maximum amount of loans that can be created using the available reserves. Therefore, the correct answer is 1/legal reserve requirement.

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• 14.

### If a bank keeps some of its excess reserves, the actual money multiplier

• A.

Increases

• B.

Stays the same

• C.

Goes to zero

• D.

Decreases

• E.

Increases, then decreases

D. Decreases
Explanation
When a bank keeps some of its excess reserves, it reduces the amount of money available for lending and creating new deposits. This decrease in lending and deposit creation reduces the overall money supply in the economy. As a result, the money multiplier, which represents the relationship between the amount of reserves and the amount of money that can be created, decreases. Therefore, the correct answer is that the actual money multiplier decreases.

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• 15.

### Which of the following is a bank liability?

• A.

Required reserves

• B.

Excess reserves

• C.

Actual reserves

• D.

Demand deposits

• E.

Loans

D. Demand deposits
Explanation
Demand deposits are considered a bank liability because they represent funds that customers have deposited into their bank accounts and can withdraw on demand. The bank is obligated to hold and safeguard these funds, making them liable to their customers. Demand deposits are a key component of a bank's liabilities as they represent a debt owed by the bank to its customers.

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• 16.

### The most effective and frequently used tool the ed has at its disposal to change the economy's money supply is

• A.

Open market operations

• B.

The discount rate

• C.

The legal reserve requirement

• D.

The federal funds rate

• E.

The margin requirement

A. Open market operations
Explanation
Open market operations refer to the buying and selling of government securities by the central bank in the open market. By buying government securities, the central bank injects money into the economy, increasing the money supply. Conversely, selling government securities reduces the money supply. This tool is considered the most effective and frequently used because it allows the central bank to have direct control over the money supply, influencing interest rates and overall economic conditions. The discount rate, legal reserve requirement, federal funds rate, and margin requirement are also tools used by the central bank, but they are not as flexible or widely utilized as open market operations.

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• 17.

### When the Fed purchases government securities, it

• A.

Increases banks' reserves and makes possible an increase in the money supply

• B.

Decreases banks reserves and makes possible a decrease in the money supply

• C.

Automatically raises the discount rate

• D.

Uses discounting operations to influence margin requirements

• E.

Sends a signal to the banking community that there is too much inflation

A. Increases banks' reserves and makes possible an increase in the money supply
Explanation
When the Fed purchases government securities, it increases banks' reserves. This means that banks have more money available to lend out to borrowers. As a result, the money supply in the economy increases because there is more money circulating through loans and spending. This can stimulate economic activity and promote growth.

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• 18.

### Which of the following directs open market operations?

• A.

Board of Governors

• B.

Federal Reserve Banks

• C.

Federal Open Market Committee

• D.

• E.

Treasury Department

C. Federal Open Market Committee
Explanation
The Federal Open Market Committee (FOMC) directs open market operations. The FOMC is a committee within the Federal Reserve System that is responsible for making decisions regarding monetary policy, including the buying and selling of government securities in the open market. This committee consists of members from the Board of Governors and the regional Federal Reserve Banks, but it is the FOMC that ultimately directs and implements these operations.

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• 19.

### The federal funds market is the market in which

• A.

Banks borrow from the Fed

• B.

Bank customers borrow from their banks

• C.

Banks borrow from each other

• D.

The federal government borrows from the Fed

• E.

The federal government borrows from the general public

C. Banks borrow from each other
Explanation
In the federal funds market, banks borrow from each other. This market allows banks with excess reserves to lend to banks that need additional funds to meet their reserve requirements or to fulfill their short-term obligations. Banks can borrow from each other overnight or for a specific period of time, and the interest rate at which these transactions occur is known as the federal funds rate. This market helps to ensure that banks have enough liquidity to operate smoothly and meet their daily cash flow needs.

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• 20.

### The federal funds market is the market in which

• A.

Banks borrow from the Fed

• B.

Bank customers borrow from their banks

• C.

Banks borrow from each other

• D.

The federal government borrows fromt he Fed

• E.

The federal government borrows from the general public

C. Banks borrow from each other
Explanation
In the federal funds market, banks borrow from each other. This market allows banks to lend or borrow funds to meet their reserve requirements or to manage their short-term liquidity needs. Banks with excess reserves lend to banks that need additional funds, and this borrowing and lending activity helps to maintain stability in the banking system. By borrowing from each other, banks can ensure that they have enough funds to meet their obligations and maintain the smooth functioning of the financial system.

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• Current Version
• Mar 21, 2023
Quiz Edited by
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• Dec 06, 2010
Quiz Created by
Katereneewortman

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