# View the step-by-step solution to: 1. If the unintended change in inventories equals zero, the

1.
If the unintended change in inventories equals zero, the economy is at its equilibrium level of real
GDP demanded.
A) True
B) False
2.
Consumption plus saving equals disposable income at every level of real GDP demanded.
A) True
B) False
3.
In the income-expenditure framework, if planned aggregate expenditures are greater than real GDP,

A) the price level will fall
B) consumption must fall
C) inventories will increase
D) inventories will decrease
E) consumption will decrease
4

E) 2/3
5.
In Exhibit 0045, given that leakages must equal injections in equilibrium, which of the following is
true?
A) S + NT + NX = G + I
B) S = I
C) C + S = G + I
D) S + NT = NX + G + I
6.
If autonomous investment expenditures decline because of higher interest rates
A) income increases
B) the rate of return declines
C) autonomous consumption declines
D) aggregate demand increases
E) aggregate demand decreases
7.
If an economy is in equilibrium when net taxes = \$50 trillion, saving = \$40 trillion, government
purchases = \$50 trillion, exports = \$30 trillion, and imports = \$10 trillion, then planned investment
spending must equal
A) zero
B) \$50
C) \$10
D) \$20
8.
Which of the following is not a part of planned aggregate spending?
A) consumption
B) investment
C) government expenditures
D) net exports
E) saving
9.
The aggregate expenditure function, along with the 45-degree line, determines equilibrium. This
model is based on the assumption that
A) production is constant
B) production is constant and at the full employment level of GDP
C) producers are ready to supply whatever amount of output is demanded at the existing price level
D) producers will supply more at higher prices than they will at lower prices
E) producers will supply more at lower prices than they will at higher prices
10.
Suppose that at a particular level of real GDP, the unintended change in inventories is zero. Which
of the following is true?
A) That level of real GDP is less than the equilibrium level of real GDP demanded.
B) That level of real GDP is greater than the equilibrium level of real GDP demanded.
C) That level of real GDP is the equilibrium level of real GDP demanded.
D) At that level of real GDP, there is no inflation.
E) At that level of real GDP, there is no saving.

12.
An increase in autonomous investment will
A) shift the aggregate expenditure function upward
B) shift the aggregate expenditure function downward
C) result in an upward movement along the aggregate expenditure function
D) result in a downward movement along the aggregate expenditure function
E) increase aggregate expenditures only at high levels of income
13.
On the aggregate expenditure graph, if autonomous investment decreases by \$10 billion,
A) the aggregate expenditure line shifts upward by \$10 billion
B) planned saving increases by \$10 billion
C) the aggregate expenditure line shifts downward by \$10 billion
D) planned saving decreases by \$10 billion
E) the equilibrium level of real GDP demanded increases by \$10 billion
14.
On the aggregate expenditure graph, if autonomous investment increases by \$20 billion,
A) the aggregate expenditure line shifts upward by \$20 billion
B) planned saving increases by \$20 billion
C) the aggregate expenditure line shifts downward by \$20 billion
D) planned saving decreases by \$20 billion
E) the equilibrium level of real GDP demanded increases by \$20 billion
15.
The smaller the marginal propensity to save, other things constant,
A) the smaller the marginal propensity to consume
B) the larger the multiplier
C) the smaller the multiplier
D) the flatter the consumption function
E) the steeper the saving function
16.
The larger the marginal propensity to save, other things constant,
A) the larger the marginal propensity to consume
B) the larger the multiplier
C) the steeper the consumption function
D) the steeper the saving function
E) the flatter the saving function
17.
The larger the marginal propensity to save, other things constant,
A) the larger the marginal propensity to consume
B) the larger the multiplier
C) the steeper the consumption function
D) the flatter the consumption function
E) the flatter the saving function
18.
If the marginal propensity to consume is 4/5, the value of the simple multiplier is
A) 4
B) 1/5
C) 4/5
D) 5/4
E) 5
19.
Increases in the marginal propensity to consume, other things constant,
A) increase the value of the multiplier
B) decrease the value of the multiplier
C) never change the value of the multiplier
D) shift the aggregate expenditure curve downward
E) cause a downward movement along an aggregate expenditure curve
20.
If the marginal propensity to consume is 4/5, the simple multiplier is
A) 1/6
B) 6
C) 5/6
D) 6/5
E) 5
21.
As a result of the events of September 11, 2002, investment by the airlines was projected
to decline one half. What impact would this have on aggregate expenditures and aggregate demand
A) aggregate expenditures and aggregate demand would both increase
B) aggregate demand would increase but aggregate expenditures would decline
C) aggregate demand would decline but aggregate expenditures would increase
D) both aggregate demand and expenditures would decline
E) Nothing because the price level is assumed to be constant
22.
We can use an aggregate expenditure line to trace out a single aggregate demand curve by
A) shifting the 45-degree line
B) letting changes in autonomous spending shift the aggregate expenditure line
C) letting changes in the price level shift the aggregate expenditure line
D) letting changes in the level of income shift the aggregate expenditure line
E) letting changes in real GDP shift the aggregate expenditure line
23.
An increase in the price level will
A) shift the aggregate expenditure function upward
B) shift the aggregate expenditure function downward
C) cause a movement up along the aggregate expenditure function
D) cause a movement down along the aggregate expenditure function
E) have no effect on the aggregate expenditure function or the equilibrium level of real GDP
24.
An increase in the price level will
A) shift the aggregate demand curve to the right
B) shift the aggregate demand curve to the left
C) increase the level of aggregate quantity demanded
D) decrease the level of aggregate quantity demanded
E) have no effect at all on aggregate demand
25.
An increase in the price level will
A) shift the aggregate expenditure function upward
B) shift the aggregate expenditure function downward
C) result in a movement upward along the aggregate expenditure function
D) result in a movement downward along the aggregate expenditure function
E) change the slope of the aggregate expenditure function
26.
An increase in the price level will
A) shift the aggregate demand curve to the left
B) shift the aggregate demand curve to the right
C) result in a movement up to the left along the aggregate demand curve
D) result in a movement down to the right along the aggregate demand curve
E) have no effect on the aggregate quantity demanded
27.
An increase in the U.S. price level, other things constant, would
A) increase U.S. exports and decrease U.S. imports
B) increase U.S. exports and leave U.S. imports unchanged
C) decrease U.S. exports and increase U.S. imports
D) decrease U.S. exports and leave U.S. imports unchanged
E) leave both U.S. exports and U.S. imports unchanged
28.
A decrease in the price level will
A) shift the aggregate expenditure function upward
B) shift the aggregate expenditure function downward
C) cause a movement up along the aggregate expenditure function
D) cause a movement down along the aggregate expenditure function
E) have no effect on the aggregate expenditure or the equilibrium level of real GDP
29.
A decrease in the price level will have which of the following effects?
A) The real value of dollar-denominated assets will rise.
B) The aggregate expenditure function will shift downward.
C) The equilibrium level of output demanded will fall.
D) There will be upward movement along a particular aggregate demand curve.
E) The aggregate demand curve will shift leftward
30.
Anything that causes a movement along the aggregate expenditure curve will also cause a shift
of the aggregate demand curve.
A) True
B) False
31.
Which of the following is true of the short-run aggregate supply curve?
A) It shows the relation between the inflation rate and the quantity of aggregate output firms supply,
other things constant.
B) It shows the relation between the price of labor and the aggregate quantity of labor workers
supply, other things constant.
C) It shows the relation between the interest rate and the quantity of capital goods firms supply,
other things constant.
D) It shows the relation between the price level and the quantity of aggregate output firms supply,
other things constant.
E) It displays an inverse relationship between the price level and real GDP.
32.
The real wage represents the
A) quantity of goods and services a worker can purchase in exchange for work time
B) dollar value of the goods and services a worker can purchase in exchange for working
C) nominal wage minus taxes paid on wages
D) actual amount of income a worker receives after deductions for such things as taxes, insurance,
and the like
E) nominal wage times the price level
33.
The nominal wage represents
A) the quantity of goods and services a worker can purchase in exchange for work time
B) the dollar value of the goods and services a worker can purchase in exchange for work time
C) real wages minus taxes paid on wages
D) the most accurate measure for comparing employee standard of living across time
E) real wages divided by the price level
34.
The long-run equilibrium price level is the price level the economy is expected to reach when the
A) economy produces its potential output
B) Fed has stabilized interest rates
C) federal budget is balanced
D) discount rate equals the prime rate
E) inflation rate is zero
35.
Which of the following types of unemployment can exist in an economy that is at its potential output
level?
A) cyclical unemployment only
B) structural unemployment only
C) frictional, cyclical, and seasonal unemployment only
D) frictional, seasonal, and structural unemployment only
E) there will be no unemployment in an economy that is at the potential output level
36.

Given aggregate demand and aggregate supply schedule #2 in Exhibit 11-1, the equilibrium output
level and price level are
A) output \$7.0, price level 110
B) output \$6.5, price level 120
C) output \$6.0, price level 130
D) output \$5.5, price level 140
E) output \$5.0, price level 150
37.
Given aggregate demand and aggregate supply schedule #1 in Exhibit 11-1, the equilibrium
price level is
A) 110
B) 120
C) 130
D) 140
E) 150
38.
A decrease in the expected price level will shift the short-run aggregate supply curve.
A) True
B) False
39.
If wages are flexible, the long-run aggregate supply curve is vertical.
A) True
B) False
40.
In the long run the aggregate demand curve determines the price level.
A) True
B) False
41.
Given the long-run aggregate supply curve, the aggregate demand curve determines
A) the price level and the output level
B) the price level but not the output level
C) the output level but not the price level
D) neither the price level nor the output level
E) the income level but not the output level
42.
During a recession, output is
A) above potential and unemployment is below the natural rate
B) above potential and unemployment is above the natural rate
C) below potential and unemployment is below the natural rate
D) below potential and unemployment is above the natural rate
E) below potential and the price level is below the natural level
43.
____ 44. Which of the following is true of a beneficial supply shock? a. b. c. d. e.
A) It could lead to a lower price level.
B) If the economy were initially in equilibrium, such a shock would create a contractionary gap.
C) It will permanently decrease the economy's price level.
D) It will cause the aggregate demand curve to shift rightward.
E) It will cause the aggregate demand curve to shift leftward.
44.

The graph in Exhibit 0041 shows a(n)
A) increase in short-run aggregate supply
B) increase in long-run aggregate supply
C) decrease in short-run aggregate supply
D) decrease in long-run aggregate supply
E) decrease in aggregate quantity demanded
45.
The movement shown in Exhibit 0041 could be caused by
A) a decrease in the size of the labor force
B) an increase in the price level
C) positive net investment
D) an increase in autonomous consumption
E) a decrease in autonomous consumption
46.
Beneficial supply shocks include all of the following except
A) an abundant harvest that increases food supplies
B) discoveries of natural resources
C) changes in legislation favorable to production
E) establishment of the Occupational Safety and Health Administration (OSHA)

The graph in Exhibit 0039 shows a(n)
A) increase in long-run aggregate supply
B) increase in short-run aggregate supply
C) decrease in short-run aggregate supply
D) decrease in long-run aggregate supply
E) increase in aggregate quantity demanded
48.
The movement in Exhibit 0039 could be caused by a(n)
A) decrease in the size of the labor force
B) decrease in the price level
C) positive level of net investment
D) increase in autonomous consumption
E) decrease in autonomous consumption
49.
Stagflation is defined as
A) decreased output accompanied by a higher price level
B) decreased output accompanied by a lower price level
C) increased output accompanied by a lower price level
D) increased output accompanied by a higher price level
E) stagnation in the rate of inflation (i.e., no appreciable change in the rate of inflation for a
year or more)

1.
If we were to rank the three types of money from the largest measure to the smallest,
we would have the ordering
A) M1, M2, M3.
B) M3, M2, M1.
C) All are equal.
D) They cannot be ranked, because they measure different things.
2.
From the definitions of M1 and M2, we know that
A) M1 is always larger than M2.
B) M2 is always larger than M1.
C) M1 and M2 are always equal.
D) M1 is sometimes larger than M2, and sometimes smaller than M2.
3.
Which of the following is not part of the money supply?
A) travelers checks
B) checking accounts
C) stocks
D) savings deposits accessible by debit cards
4.
Money demand refers to the amount of money
A) individuals would like to have for day-to-day transactions.
B) individuals need for day-to-day transactions.
C) people are willing to hold at a given interest rate.
D) people are willing to hold at a given price level.

5.
All of the following factors would tend to increase the demand for money EXCEPT
A) an increase in taxes.
B) an increase in inflation.
C) an increase in real consumer incomes.

6.
If income decreases, which of the following will occur?
A) Money supply will shift right.
B) Money demand will shift right.
C) The interest rate will decrease.

7.
If the money supply increases, then interest rates will rise.
A) True
B) False

8.
Which of the following is not a form of money?
A) commodities
B) travelers checks
C) credit cards
D) checking accounts
9.
When a consumer uses a \$10 bill to pay for \$10 worth of groceries, the \$10 bill is serving
which of the functions of money?
A) medium of exchange
B) unit of account
C) store of value
D) all of the above
10.
Suppose the money demand curve shifts to the left. This could have been caused by
A) an increase in the interest rate.
B) a decrease in the interest rate.
C) an increase in the price level.
D) a decrease in the price level.
11.
If Emily writes a check for her groceries, she is using money as a
A) medium of exchange.
B) store of value.
C) unit of account.
D) means of liquidity.

12.
Which of the following is NOT a stock index?
A) Dow Jones Industrial Average
B) Wilshire 5000
C) NASDAQ
D) S&P 500
13.
Owning the bond of a company
A) is equivalent to owning stock in the company.
B) means that you profit if the company loses money.
C) means that the company owes you money.
D) means that you owe the company money.
14.
The financial market in which newly issued securities such as stocks and bonds are initially
offered for sale is known as the
A) green market.
B) secondary market.
C) primary market.
D) symmetric market.
15.
An example of an asset for a financial intermediary is
A) bonds held by an insurance company.
B) checking accounts in banks.
C) credit union shares.
D) savings accounts in banks.
16.
When a person deposits a check into her checking account,
A) she owes the bank money.
B) no one owes anybody anything. The deposit is an asset to the person, but is neither an
asset nor a liability to the bank.
C) no one owes anybody anything. The deposit is an asset to both the bank and the person.
D) the bank owes her money.

17.
The person least likely to receive a payment from a corporation in a year of losses is the
A) bank that loaned money to the corporation.
B) bondholder.
C) stockholder.

18.
The process by which financial institutions accept deposits and then lend those deposits is
A) financial intermediation.
B) racketeering.
C) fiduciary clearing.
D) a double coincidence.

19.
Your friend is planning for retirement. If she invests \$500 today at 6% annual interest,
what will be the value of her investment in 40 years?
A) \$5,143
B) \$1,700
C) \$21,200
D) \$49

20.
A bond is defined by its
A) rate of return, face value, and coupon rate.
B) market interest rate, rate of return, and coupon rate.
C) face value, coupon rate, and maturity date.
D) inception date, face value, and maturity date.

21.
Moral hazard exists when
A) one has different incentives after a transaction than before the transaction.
B) people have an incentive to hide certain facts when they try to borrow money.
C) we are forced to transact with someone we think is not honest.
D) there is a positive probability that something can go wrong.

22.
If Andy receives \$150 in annual interest payments on a bond with a \$1000 face value, we know
that the coupon rate on his bond is _____.
A) 5%
B) 15%
C) 50%
D) There is not enough information to calculate the coupon rate.

23.
The Federal Reserve is involved in clearing individuals' checks and wiring money between financial
institutions.
A) True
B) False
24.
The Fed can affect interest rates by
A) changing the reserve requirements.
B) changing the discount rate.
C) open market operations.
D) all of the above.
25.
Suppose the Fed wants to decrease the money supply. Then it should
A) sell stocks.
C) sell government bonds.
26.
If the Fed wants to increase the money supply, it should
A) buy government bonds in the open market.
B) raise the discount rate.
C) raise the legal reserve requirement.
D) do any of the above.
27.
If the Fed decides to buy bonds on the open market, which of the following is true?
A) This is an easing of the money supply.
B) The money supply will shift right.
C) The equilibrium interest rate will decrease.
D) All of the above are true.
28.
When the decreases reserve requirements for banks,
A) the money supply curve shifts to the left.
B) the money supply curve shifts to the right.
C) the money demand curve shifts to the left.
D) the money demand curve shifts to the right.

29.
U.S. dollars can be exchanged for an amount of gold that varies, depending on the market price
for gold.
A) True
B) False
30.
Which of the following is NOT a function of the Federal Reserve System?
A) To issue currency.
B) To regulate financial institutions.
C) To provide banking services for the federal government.
D) To regulate the stock markets.

31.
Lowering the discount rate will increase the supply of money.
A) True
B) False

32.
Banks could not create money if the reserve requirement were 100%.
A) True
B) False
33.
When the Fed decreases the reserve requirement,
A) banks lend more and the money supply decreases.
B) banks lend more and the money supply increases.
C) banks lend less and the money supply decreases.
D) banks lend less and the money supply increases.
34.
Money is created by
A) only commercial banks.
B) only commercial banks and savings and loan associations.
C) only commercial banks and credit unions.
D) all financial intermediaries.
35.
Which of the following equations is correct?
A) required reserve ratio = (reserves - deposits) x 100
B) Reserves = deposits / (required reserve ratio)
C) Deposits = reserves x deposit multiplier
D) Deposit multiplier = 1 / (required reserve ratio)

36.
Use this information to answer the next three questions. Suppose someone deposits \$500
cash in her checking account after selling a government bond, so that the bank's reserves
and deposits increase by \$500. If the legal reserve requirement is 5% (0.05), how much is this
bank required to hold on reserve?
A) \$25
B) \$250
C) \$475
D) \$500
E) none of the above

37.
What is the deposit multiplier?
A) 5
B) 50
C) 20
D) 0.05
E) none of the above

38.
What is the total amount by which the money supply can increase as a result of the initial
\$500 deposit?
A) \$10,000
B) \$500
C) \$2500
D) none of the above.

39.
Suppose the reserve requirement is 10 percent. If the Fed buys \$1000 in bonds from bank A,
then the Fed credits the reserves at bank A with a(n)
A) increase of \$100.
B) increase of \$1000.
C) decrease of \$100.
D) decrease of \$1000.
40.
If the required reserve ratio decreases,
A) the deposit multiplier increases.
B) banks make fewer loans.
C) deposits in other banks will decrease.
D) all of the above.

41.
Household can choose to trade currency for gold.
A) True
B) False

42.
If the government runs a bigger deficit, the supply curve for loanable funds will shift outward.
A) True
B) False
43.
The equilibrium rate of interest is
A) determined primarily by business demand for loanable funds since the supply curve of
loanable funds is horizontal.
B) determined primarily by the rate at which households must be compensated to get them
to save since the market demand curve for loanable funds is nearly horizontal.
C) determined by the federal government.
D) found by the intersection of the downward-sloping demand curve for loanable funds and
the upward-sloping supply curve for loanable funds.
44.
An increase in the trade deficit will cause
A) the supply curve of loanable funds to shift to the left.
B) a movement up the supply curve for loanable funds.
C) the supply curve of loanable funds to shift to the right.
D) the supply curve of loanable funds to become more inelastic.
45.
A) demand for loanable funds increases.
B) supply of loanable funds falls.
C) want to borrow less money.
D) want to borrow more money.
46.
The nominal rate of interest
A) Rises when the inflation rate rises.
B) Rises when the inflation rate falls.
C) Equals the real rate of interest minus the rate of inflation.
D) All of the above.

47.
John takes out a loan that increases his purchasing power by 8% over one year.
If inflation is 5%, what is the nominal interest rate?
A) 13%
B) 3%
C) 8%
D) -3%
48.
When there is excess demand for loanable funds, interest rates will rise in response.
A) True
B) False

49.
The best measure of your increase or decrease in purchasing power as a result of an investment is the nominal interest rate.
A) True
B) False

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