MODULE 7 REVIEW
Check Your Understanding
1. For each of the following examples, explain how the indicated change affects supply or demand for
the good in question and how the shift you describe affects equilibrium price and quantity .
a. As the price of g
1. Explain why a decline in investment spending caused by a change in business expectations leads to a
fall in consumer spending.
2. What is the multiplier if the marginal propensity to consume is 0.5? What is it if MPC is 0.8?
3. Suppose a crisis in the
1. The equilibrium price will rise, but equilibrium quantity may increase, decrease, or stay the same if
a. demand increases and supply decreases.
b. demand increases and supply increases.
c. demand decreases and supply increases.
d. demand decreases and
1. Which of the following will shift the aggregate demand curve to the right?
a. a decrease in wealth
b. pessimistic consumer expectations
c. a decrease in the existing stock of capital
d. contractionary fiscal policy
e. a decrease in the quantity of mone
1. Refer to the graph.
a. Is the economy in short-run macroeconomic equilibrium? Explain.
b. Is the economy in long-run macroeconomic equilibrium? Explain.
c. What type of gap exists in this economy?
d. Calculate the size of the output gap.
e. What will h
1. Assume that total reserves are equal to $200 and total checkable bank deposits are equal to $1,000. Also assume
that the public does not hold any currency and banks hold no excess reserves. Now suppose that the required
reserve ratio falls from 20% to
1. The monetary base equals
a. currency in circulation.
b. reserves held by banks.
c. currency in circulation reserves held by banks.
d. currency in circulation + reserves held by banks.
e. currency in circulation/reserves held by banks
Tackle the Test: F
1. Decreasing which of the following is a task of the financial system?
I. transaction costs
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III
2. Which of the following is NOT a type of financial asset?
1. Which of the following is an example of expansionary fiscal policy?
a. increasing taxes
b. increasing government spending
c. decreasing government transfers
d. decreasing interest rates
e. increasing the money supply
2. Which of the following is a fisc
1. Consider the three hypothetical projects shown above. This time, however,
suppose that the interest rate is only 2%.
a. Calculate the net present values of the three projects. Which one is
b. Explain why the preferred choice is different
1. Explain why a system of commodity-backed money uses resources more efficiently than a system of commodity
Tackle the Test: Multiple-Choice Questions
1. When you use money to purchase your lunch, money is serving which role(s)?
I. medium of excha
1. If the Fed purchases U.S. Treasury bills from a commercial bank, what happens to bank reserves and the
Bank Reserves Money Supply
a. the presidents of the Regional Federal Reserve Banks
b. the president of the United States
c. the Federal Open Market Committee
d. the Board of Governors of the Federal Reserve System
e. the Reconstruction Finance Corporation
2. Which of the following
a. Calculate the net present value of each of the three hypothetical projects described below.
Assume the interest rate is 5%.
Project A: You receive an immediate payoff of $1,000.
Project B: You pay $100 today in order to receive $1,200 a year from now.
1. Define the natural rate of unemployment.
a. The natural rate of unemployment is made up of which of the types of unemployment?
b. Explain how cyclical unemployment relates to the natural rate of unemployment.
c. List three factors that can lead to a ch
1. The value of a price index in the base year is
d. the inflation rate
e. the average cost of a market basket of goods
2. If your wage doubles at the same time as the consumer price index goes from 100 to 300, your real wage
1. If inflation causes people to frequently convert their dollars into other assets, the economy experiences what type of
a. price level
2. Because dollars are used as the basis for contracts, i
1. Will each of the following transactions be included in GDP for the United States? Explain why or why not.
a. Coca-Cola builds a new bottling plant in the United States.
b. Delta sells one of its existing airplanes to Korean Air.
c. Ms. Moneybags buys a
1. Explain why the three methods of calculating GDP produce the same estimate of GDP .
2. Identify each of the sectors to which firms make sales. What are the various ways in which households are linked with
other sectors of the economy?
3. Consider the t
1. The best measure for comparing a countrys aggregate output over time is
a. nominal GDP.
b. real GDP.
c. nominal GDP per capita.
d. real GDP per capita.
e. average GDP per capita.
2. Use the information provided in the table below for an economy that pr
1. How many people are unemployed?
2. What is the unemployment rate?
3. The unemployment problem in an economy may be understated by the unemployment rate due to
1. Explain the following.
Frictional unemployment always exists.
Frictional unemployment accounts for a larger share of total unemployment when the
unemployment rate is low.
2. Why does collective bargaining have the same general effect on unemploym
1. On game days, homeowners near Middletown Universitys stadium used to rent parking spaces in
their driveways to fans at a going rate of $11. A new town ordinance now sets a maximum parking fee
of $7. Use the accompanying supply and demand diagram to exp
1. To be effective, a price ceiling must be set
I. above the equilibrium price.
II. in the housing market.
III. to achieve the equilibrium market quantity.
I, II and III.
None of the above.
2. Refer to the graph provided. A pric
1. Suppose that employment websites enable job-seekers to find suitable jobs more quickly. What effect
will this have on the unemployment rate over time? Also suppose that these websites encourage jobseekers who had given up their searches to begin lookin
1. The level of planned investment spending is negatively related to the
a. rate of return on investment
b. level of consumer spending
c. level of actual investment spending
d. interest rate
e. all of the above
2. Actual investment spending in any period
1. Determine the effect on short-run aggregate supply of each of the following
events. Explain whether it represents a movement along the SRAS curve or a
shift of the SRAS curve.
a. A rise in the consumer price index (CPI) leads producers to increase
1. Draw a correctly labeled graph illustrating a long-run aggregate supply curve.
a. On your graph from part a, label potential output.
b. On your graph from part a, illustrate an increase in long-run aggregate supply.
c. What could have caused the change
1. Consider Table 15.1 but suppose that the market basket is composed of 100 oranges, 50 grapefruit,
and 200 lemons. How does this change the pre-frost and post-frost consumer price indexes? Explain.
Generalize your answer to explain how the construction
Here is Your Real Mission
Using your newly acquired research skills and economic understanding, describe the proper
fiscal policy for the 2009-2011 time period. You are required to provide evidence for making
your decisions. So to start out you'll need to