141: 1
Econ Practice Questions
Chapter 23: The economy at full employment: investment, saving and the interest rate
1. If consumption expenditure is $7 trillion, saving by households is $1 trillion, the government
surplus is $1 trillion, and net exports is $2 trillion, what is investment?
a. $7 trillion
b. $4 trillion
c. $3 trillion
d. $2 trillion
2. A n increase in the real interest rate:
a. results in a movement along the investment demand curve.
b. shifts the investment demand curve rightward.
c. shifts the investment demand curve leftward
d. has no effect on the investment demand curv e
3. In economics capital is the:
a. amount of financial assets such as stocks and bonds people hold
b. quantity of machines, plant, inventories
c. both (a) and (b) are true
d. both (a) and (b) are false
4. A country's nominal interest rate increases from 5% to 10%. The country's investment (I):
a. must be decreased
b. must be increased
c. may remain the same
d. cannot be answered given the information
5. The capital stock increases if:
a. net investment is positive
b. net investment is negative
c. gross investment is greater than net investment
d. none of the above
6. A fall in the real interest rate:
a. increases investment demand
b. increases investment (or increases quantity of investment demanded)
c. shifts the investment demand
d. none of the above is correct
7. Suppose expected profit rate is 10% and the real interest rate is 12%,
a. the firm will take or undertake the project
b. the firm will not undertake the project
c. the firm is indifferent to undertake the project
d. the real interest is irrelevant to investment decision.
8. If real interest rate is above equilibrium interest rate, then:
a. Lenders will be unable to find borrowers willing to borrow all the available funds and
the real interest rate will fall.
b. Borrowers will be unable to borrow all the funds they want to borrow and the real
interest rate will rise.
c. Lenders will be able to loan all the funds they want to loan out and the real interest rate
will not change.
d. Both b and c are correct.
9. If expected profit rate increases
a. there will be an upward movement along a ID curve
b. the ID curve shifts to the right
c. the ID curve shifts to the left
d. there will be a downward movement along a ID curve
2
10. A rise in the real interest rate
a. increases saving supply
b. increases saving (or increases quantity of saving supplied)
c. increases investment demand
d. shifts investment demand rightward
11. A decrease in disposable income causes:
a. a movement along a SS curve
b. a shift of the SS curve to the left
c. a shifts of the saving supply curve to the right
d. none of the above
12. A simultaneous (or at the same time) economic expansion and increase in disposable income causes
a. real interest to increase
b. real interest to decrease
c. real interest to be unchanged
d. any one of the above may happen
13. If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest
rate is:
a. 16 percent.
b. 10 percent.
c. 6 percent.
d. 4 percent.
14. The saving supply curve has a negative slope. The investment demand curve has a positive
slope.
a. Both sentences are true.
b. The first sentence is true and the second is false.
c. The first sentence is false and the second is true.
d. Both sentences are false.
15. During a recession, the expected profit rate and the investment demand curve shifts
a. rises; rightward b. rises; leftward
c. falls; rightward
d. falls; leftward
Chapter 25: Money and Banks
1. Which of the following is NOT a function of money?
a. Medium of exchange
b. Barter
c. Unit of account
d. Store of value
2. The fact that prices are quoted in terms of money reflects money's role as a:
a. cause of inflation.
b. medium of exchange.
c. unit of account.
d. store of value.
3. Which of the following is a component of M2 but not of Ml?
a. Currency
b. Checking accounts at banks
c. Traveler's checks
d. Savings accounts at banks
4. Suppose money multiplier is 5. If the central bank sells $5 million securities, the quantity of
money will
a. decreases by $5 million
b. increases by $25 million
c. decreases by $25 million
d. increases by $5 million
5. What do "purchase of securities" and "decrease in the discount rate" have in common?
a. both increases loan and money supply
b. both are open market operations
c. both increases money supply
d. both are not related
6. Which of the following is a liability of a bank?
a. Reserves
b. Loans
c. Securities
d. Deposits
3
Consider the following initial (original) balance sheet of a commercial bank
Initial Balance Sheet (all numbers in $)
Assets
Liabilities
Reserves
Loans
200
800
Total
1000
Deposits
1000
Total
1000
Suppose the required reserve ratio = 20% and assume that the banking system keeps zero excess reserves.
Now suppose people deposit $500 in currency in their checking accounts.
7. As a direct result of people's deposit, the banks will have excess reserves equal to_________
a. 500
b. 400
c. 300
d. 0
8. As a direct result of people's deposit, the banks will immediately create new loan equal to_ ______.
_
a. 500
b. 400
c. 300
d. 0
9 How much is the change in reserve?
a. 500
b. 400
c. 300
d. 0
10. In the final balance sheet, deposits is reserves is and loans is:
a. 22500; 500; 2000
b. 3500; 700; 2800
11.
Eventually money will increase by
a. 5000
b. 2000
c. 1500
d. 800
12. If the central bank increases discount rate, which of the following is true?
a. loan decreases
b. money supply decreases
c. AD supply curve shifts to the left
d. real GDP decreases and unemployment increases
e. all of the above.
13. Suppose money multiplier is 5. If the central bank purchases $5 million government securities
(bonds), the quantity of money will
a. increases by $5 million
b. increases by $25 million
c. eases by $25 million
d. decreases by $5 million
14. Which of the following is money?
a. A check written for $200.
b. A $200 checking deposit at a bank.
c. A credit card with a $200 line of credit. d. All of the above.
15. The purchase of $1 billion of government securities by the central bank (the Fed) is an
example of
a. the discount rate being affected.
b. a multiple contraction of the quantity of money.
c. an open market operation.
d. a change in the required reserve ratio.
16. __________ increases the quantity of money?
a. A central bank (the Fed) purchase of government securities
b. An increase in the discount rate
c. An increase in the required reserve ratio
d. None of the above.
4
17.
When a bank helps create money, it does so by :
a. selling some of its investment securities.
c. lending its excess reserves.
b. increasing its reserves.
d. printing more checks.
18. Hisham takes $100 dollars from his wallet and deposits it in his checking account. As a
result, M1 __________ and M2 __________.
a. increases; increases
b. increases; does not change
c. does not change; increases
d. does not change; does not change
19. The smaller the required reserve ratio,
a. the larger the money multiplier.
c. the smaller M1 is relative to M2.
b. the smaller the money multiplier.
d. None of the above.
20. A bank's reserves include the ________ and the ___________.
a. deposits it has accepted; cash it keeps in its vault
b. liquid loans it has made; deposits it keeps at the Federal Reserve
c. liquid securities it has purchased; liquid loans it has made
d. deposits it keeps at the Federal Reserve; cash it keeps in its vault
Chapter 29: Inflation
1. In a demand-pull inflation, the AD curve shifts _______ and the SAS curve shifts ______.
a. rightward; rightward
b. rightward; leftward
c. leftward; rightward
d. leftward; leftward
2. Cost-push inflation might start with
a. a rise in money wage rates.
c. an increase in the quantity of money.
b. an increase in government purchases.
d. a fall in the prices of raw materials.
3. A rise in the price level owing to an increase in the price of oil
a. definitely triggers a cost-push inflation.
b. definitely triggers a demand-pull inflation.
c. might trigger a cost-push inflation.
d. might trigger a demand-pull inflation.
4. As far as redistribution is concerned, if the inflation rate is lower than anticipated,
a. lenders gain at the expense of borrowers and some workers gain at the expense of employers.
b. borrowers gain at the expense of lenders and some workers gain at the expense of employers.
c. lenders gain at the expense of borrowers and some employers gain at the expense of workers.
d. borrowers gain at the expense of lenders and some employers gain at the expense of
workers.
5. If the aggregate demand curve shifts rightward less than expected,
a. inflation is higher than anticipated.
b. inflation is lower than expected..
c. the real interest rate will be lower than expected.
d. shifts in the aggregate demand have no indications to the inflation rate.
6. Inflation that is higher than expected transfer resources from
a. workers to employers and lenders to borrowers
b. workers to employers and borrowers to enders
c. employers to workers and lenders to borrowers
d. none of the above
5
7. Moving along a short-run Phillips curve indicates
a. high inflation is related to lower unemployment and vice versa
b. high inflation is related to higher unemployment
c. lower inflation is related to lower unemployment and vice versa
d. both a and b are correct.
8. Refer to the table and graph above. Economy moves from point A (year 1) to C (year 2) to point E (year 3).
This means the economy has
a. positive and inflation decreasing rate
b. positive and increasing inflation rate
c. no inflation but unemployment
d. both a and b are true
9. Refer to above figure and start at point A and the economy moves to point B
a. real wage increases
b. real wage decreases
c. real wage remains the same
d. real wage is not known
10. Refer to above figure and start at point A. An increase in money wage that triggers the
cost-push inflation will initially move the economy to
a. point B
b. point F
c. point C
d. Point E
11. Refer to above figure and start at point A. An increase in money supply that triggers
the demand-pull inflation will initially move the economy to
a. point B
b. point F
c. point C
d. Point E
12. Refer to the figure above, the demand-pull inflation moves the economy
a. from A to B to C to D to E
b. from A to F to C to G to E
13. Refer to the figure above, the cost-push inflation moves the economy
a. from A to B to C to D to E
b. from A to F to C to G to E
14. If this year's price level exceeds last year's price level,
a. inflation occurred.
c. deflation occurred.
b. inflation accelerated.
d. deflation accelerated.
15. The relationship between unemployment and infla tion is illustrated by
a. the AD curve.
b. the LAS curve.
c. the SAS curve.
d. the Phillips curve.
16. For a cost-push inflation to occur, higher oil prices must be accompanied by
a. lower investment.
b. higher tax rates.
c. low government purchases.
d. higher monetary growth.
6
17. To continue, a demand-pull inflation needs _____; to continue, a cost-push inflation needs ______.
a. a continuing increase in the price of oil; a continuing increase in the price of oil
b. a continuing decrease in money wages; a continuing decrease in money wages
c. a continuing increase in the quantity of money; a continuing increase in the quantity of money
d. a continuing increase in government spending; a continuing decrease in government spending
Chapter 28: Expenditure Multipliers
1. The fraction of a change in disposable income saved is called
a. the marginal propensity to consume.
b. the marginal propensity to save.
c. the marginal tax rate.
d. none of the above.
2. Consumption expenditure increases when ____ increases.
a. the interest rate
b. the price level
c. real GDP
d. saving
3. Which of the following increases the amount a household saves?
a. A decrease in the household's current disposable income.
b. An increase in the household's expected future income.
c. An increase in the household's net taxes.
d. A decrease in the household's expected future income.
4. Which of the following shifts the consumption function downward?
a. An increase in current disposable income.
b. An increase in wealth.
c. An increase in future expected income.
d. A decrease in wealth.
5. Suppose there is no tax and no import. Planned saving increases by $25 billion when
disposable income increases by $100 billion. What is the multiplier?
a. 3
b. 4
c. 3.5
d. 4.5
6. If unplanned inventories rise, aggregate planned expenditure is
a. greater than real GDP and firms increase their output.
b. greater than real GDP and firms decrease their output.
c. less than real GDP and firms increase their output.
d. less than real GDP and firms decrease their output.
7. If investment increases by $200 and, in response, equilibrium expenditure increases by $800,
a. the multiplier is 0.25.
b. the multiplier is 4.0.
c. the slope of the AE curve is 0.25.
d. None of the above.
8. When disposable income is $500 million, planned consumption is $250 million. When
disposable income is $300 million, planned consumption is $100 million. Then planned saving is
_____ when disposable income is $500 and MPS is ______.
a. $250; 0.75
b. $250; 0.25
9. The slope of the aggregate expenditure curve equals the change in
a.
planned expenditure divided by the change in real GDP
b.
real GDP divided by the change in planned expenditure
10. Suppose investment (I) increases by $40 billion, autonomous consumption increases by $10
billion and export decreases by $30 billion and equilibrium GDP increases by $40 billion. All
other autonomous expenditures remain the same. What is the multiplier?
a. 2
b. 2.5
c. 1
d. 1.5
7
11. Autonomous expenditure is NOT influenced by
a. the interest rate.
b. taxes.
c. real GDP.
d. any variable.
12. The larger the value of MPC _______ is the multiplier and larger the value of
MPS __________ is the multiplier
a.
larger; larger
b. larger; smaller
c. smaller, smaller
d. the multiplier is not affected by MPC or MPS
13. In the short run, with fixed price level and no import or tax, a decrease in investment
a.
decreases real GDP by a smaller amount
b.
decreases real GDP by a greater amount
c.
does not affect real GDP
d.
none of the above
14. In the short run, which of the following is fixed and does not change when real GDP changes?
a.
planned consumption
b. planned import
c. planned export
d. all of the above answers are correct
15. If disposable increases by 200, consumption increases by
a.
more than 200 b. less than 200
c. exactly 200
d.. not affected
16. If prices are fixed and the MPC is 0.80, a $5 billion increase in investment increases
equilibrium expenditure by
a. $25 billion.
b. $15 billion.
c. $10 billion.
d. None of the above.
17.
A decrease in the price level
a. shifts the AE curve upward.
b. shifts the AE curve downward.
c. does not shift the AE curve.
d. perhaps shifts the AE curve depending on whether the MPC is greater than or less than
the MPS.
18.
An increase in investment spending shifts the AD curve ______by a greater distance when
the MPC is _________.
a. rightward; larger
c. leftward; larger
b. rightward; smaller
d. leftward; smaller
Chapter 30; Fiscal policy
1. The presence of income taxes ________ the magnitude of the government spending
multiplier and _______ the magnitude of the lump-sum tax multiplier.
a. increases; increases
b. increases; does not change
c. decreases; does not change
d. decreases; decreases
2. Income taxes and transfer payments
a. act like economic shock absorbers and stabilize fluctuations in income.
b. prevent the economy from moving toward equilibrium.
c. increase the impact of changes in investment and net exports.
d. increase the economy's growth rate.
3. If the government increases its purchases by $10 billion and increases its taxes by $ 10 billion,
the AD curve
a. shifts rightward.
b. does not shift.
c. shifts leftward.
d. might shift depending on whether the tax hike increases or decreases aggregate demand.
8
4. Which of the following is NOT a problem with using fiscal policy to stabilize the economy?
a. Implementing fiscal policy might be slow.
b. At times it is difficult to determine if GDP is greater than or less than potential GDP.
c. Government purchases have only an indirect effect on aggregate demand.
d. None of the above because they are all problems with using fiscal policy.
5. An increase in government purchases shifts the
a. LAS curve rightward.
b. SAS curve leftward.
c. AD curve rightward.
d. AD curve leftward.
6. Suppose that the government's expenditures in a year are $2.5 trillion, and that its tax revenues for
the year are $2.3 trillion. Hence the government is running a budget
a. surplus of $2.3 trillion.
b. surplus of $0.2 trillion.
c. deficit of $0.2 trillion.
d. deficit of $2.5 trillion.
7. If government purchases are increased by $200 billion and simultaneously taxes increase by $200
billion, then
a. potential GDP increases.
b. aggregate demand does not change.
c. aggregate demand increases.
d. aggregate demand decreases.
8. If the economy has a recessionary gap, in order to restore full employment an appropriate fiscal policy is
a. a tax hike.
b. a cut in government purchases.
c. an increase in government purchases.
d. a decrease in the government multiplier.
9. Once the multiplier effect is taken into account, which of the following policies decreases
aggregate demand the most?
a. A $10 billion increase in government purchases.
b. A $10 billion decrease in government purchases.
c. A $10 billion tax increase.
d. A $10 billion decrease in government purchases combined with a $10 billion tax decrease.
10. If the government wants to use fiscal policy to increase real GDP, it could
a. cut T or increase G
b. increase T or decrease G
11. Suppose potential GDP is $300 million and present real GDP is $350. Economy has _________
gap and to eliminate _________ policy should be used.
a. recessionary; expansionary
b. inflationary; contractionary
c. expansionary; recessionary
d. contractionary; inflationary
12. Suppose government revenue comes from income tax and suppose tax rate is 20%. Suppose
income is $100 million and government purchase (G) is $17 million. Then the government
has a budget
a. deficit by $3 million. b. surplus of $3 million
c. surplus of $83 million
13. An increase in G approved by the parliament (congress) helped to increase GDP is an example of
a. automatic fiscal policy
b. discretionary fiscal policy
9
Answers:
Chapter 23
1. b;
2.a;
13.c;
14.a;
3.b;
4.a;
5.a;
6.b;
7.b;
8.a;
9.b;
10.b;
11.c;
12.a;
4.a;
5.a;
6.d;
7.b;
8.b;
9.a;
10.b;
11. b;
12.e;
18.d;
19.a;
10.b;
11.a;
15.d
Chapter 25
1.b;
13.b;
2.c;
14.b;
3.d;
15.c;
16.a;
17.c;
20.d
Chapter 29
1.b;
13.b;
2.a;
14.a;
3.c;
4.a;
15.d;
5.b;
16.d;
6.a;
7.a;
8.a;
9.b;
12.a;
17.c
Chapter 28
1.b;
13.b;
2.c;
14.c;
3.d;
4.d;
15.a;
5.b;
16.a;
6.d;
7.b;
8.b;
9.a;
10.a;
11.c;
12.b;
17.a
Chapter 30
1.d;
13.b
2.a;
3.a;
4.c;
5.c;
6.c;
7.c;
8.c;
9.b;
10.a;
11.a;
12.b;