1. In macroeconomic long run equilibrium:

A. output is below potential GDP.
B. there is full-capacity output with no unemployment.
C. output is above potential GDP.
D. there is full employment and real GDP is equal to potential GDP.

2. Increases in the money supply cause

A. demand-pull inflation, as do increases in government purchases.
B. demand-pull inflation, whereas increases in government purchases cause cost-push inflation.
C. cost-push inflation, as do increase in government purchases.
D. cost-push inflation, whereas increases in government purchases cause demand-pull inflation.

3. An increase in government expenditure when the economy is at a full-employment level of output will

A. initiate wage -price spiral and hyperinflation.
B. create a contractionary gap.
C. create an expansionary gap which will eventually be eliminated by a leftward shift in the short-run aggregate supply schedule.
D. lead to a lower price level.

4. Cost-push inflation which is not accommodated ( in other worlds, is not responded to by) the Federal Reserve

I. will repeatedly shift rightward (outward) the aggregate demand curve and rise the aggregate demand curve and raise the price level.
II. will shift the aggregate demand curve rightward and the aggregate supply curve leftward, raising prices.
III. will result initially in lower employment and a higher price level.

A. I only.
B. both I and II.
C. both II and III.
D. III only.

5. Because of automatic stabilizers, when GDP fluctuates the

A. government's budget remains in balance.
B. government's deficit fluctuates directly with GDP.
C. government's deficit fluctuates inversely with GDP.
D. the economy will automatically go to full employment.

6. The interest rate that the Federal Reserve banks charge commercial banks to borrow reserves is called the.

A. discount rate.
B. reserve rate.
C. interest rate.
D. federal funds rate.

7. If the economy is operating below full-employment, an appropriate monetary policy might be to

A. increase taxes.
B. decrease money supply.
C. decrease the discount rate.
D. increase government spending.
E. increase oil prices.

8. If Dave Matthews finds $1,000 cash and deposits it in his bank and the required reserve ratio is 10%, what is the potential change in demand deposits as a direct result of DaveÕs actions?

A. $20,000.
B. $10,000
C. $900.
D. $1,000.
E. $9,000

9. The relationship between budget deficits and debt is:

A. as the debt increases, deficits increase.
B. as the deficit increases, debt increases.
C. as the deficit decreases, debt increases.
D. as the debt decreases, deficits decrease.

10. Government transfer payments usually.

A. rise during expansions and recessions.
B. rise during expansions and fall during recessions.
C. Fall during expansions and rise during recessions.
D. Fall during expansions and recessions.

11. Economists known as supply-siders believe that a tax cut would

A. reduce the level of output.
B. produce a large rightward shift of the AS curve.
C. produce a large rightward shift of the AD curve.
D. produce a large leftward shift of the AS curve.

12. If people decide to hold in currency part of any payments received, the real-world money multiplier will be

A. larger than the theoretical money multiplier.
B. unaffected.
C. undefined.
D. Smaller than the theoretical money multiplier.

13. Economic growth can be defined as

A. an increasing rate of savings (and investment).
B. Increasing real GDP per person.
C. Increasing inflation.
D. Increasing nominal GDP.

14. Suppose a bank is exactly meeting its required reserve ratio of 10% and a new deposit of $75,000 is made. Then, the excess reserves will be:

A. zero
B. $7,500
C. $10,000
D. $67,500
E. impossible to determine given the limited information

15. If the Fed buys a $1,000 bond from you and you put the cash in a safe deposit box (not a checking account), how much can the money supply expand if the reserve requirement is 20 percent?

A. $10,000
B. $5,000
C. $200
D. $1,000
E. $0

16. Which of the following is not a function of the Federal Reserve Bank?

A. lender of last resort
B. to be concerned with the stability of the banking system
C. serve as the major bank for the central government
D. setting exchange rates

17. If the MPC = 0.75, what is the potential change in GDP as a result of a decrease in government spending of $80 billion?