1. The easy credit of the 2003-2006 which allowed households to borrow and spend more would contribute to:

(a) more demand pull inflation

(b) more cost push inflation

(c) more demand pull inflation and more cost push inflation

(d) neither demand pull inflation nor cost push inflation

2. Less unemployment (a lower rate of unemployment) is likely to lead to:

(a) falling inflation (a lower rate of inflation)

(b) no change in the rate of inflation.

(c) more demand-pull and less cost-push inflation.

(d) rising inflation (a higher rate of inflation).

3. The decline in the construction of new homes that began in 2006 led to the:

(a) decline in net exports and the growing trade deficit.

(b) recession that began in December of 2007.

(c) recession that began in March of 2001.

(d) increase in interest rates that began in 2004.

4. Which of the following situations would be counted as cyclical unemployment?

(a) Frances stops working when the theme park where she worked closes at the end of summer to go to school full-time.

(b) Charles was retired but just started to look for a job after he lost half his retirement savings Bernie Madoff's ponzi scheme.

(c) John can't find work as a construction worker but there are lots of job openings at the local hospital.

(d) Last month there were ten million people without jobs and looking for work, but only four million job openings.

5. The idea that too much or too little money leads to booms and inflation, or recession and deflation, respectively, comes from:

(a) Joseph Schumpeter and the Austrian School of economics

(b) Monetarism

(c) Marxist economics

(d) Keynesian economics.

6. Assuming that nominal interest rates stay the same, a decrease in the rate of inflation would:

(a) cause real interest rates to go up causing investment spending to go up.

(b) cause real interest rates to go down investment spending to go down.

(c) cause real interest rates to go down causing investment spending to go up.

(d) cause real interest rates to go up causing investment spending to go down.

7. Which of the following is NOT money (using the economic definition of money)?

(a) The $10 in coins in Elena's piggy bank.

(b) The balance of $1000 in Fred's checking account.

(c) Phyllis' $10,000 in her savings account.

(d) Susan's $100 in paper bills in her purse.

8. The Federal Reserve Bank performs many functions, but one function it does NOT serve is:

(a) issuing currency

(b) controlling the money supply and setting interest rates

(c) lending to, and taking deposits from, commercial banks.

(d) lending to, and taking deposits from, manufacturers like General Motors.

9. In the market for laptops to the right, P S a increase in the equilibrium price from P2 to P3 and a rise in the equilibrium quantity from Q2 to Q3 would be due to: p3

(a) an increase in the supply of laptops

(b) a decrease in the supply of laptops p2

(c) an increase in the demand for laptops

(d) a decrease in the demand for laptops.

10. Bank lending is considered PRO-CYCLICAL, that is it makes the ups and downs of the business cycles more extreme because:

(a) bank lending goes up during expansions and down during recessions.

(b) bank lending goes up during recessions and down during expansions.

(c) bank lending goes up because of deposit insurance and down during financial crisis.

(d) bank lending goes up during the Christmas holidays and down during January and February when consumers pay down their credit card balances.

11. Which of the following is regarded as an automatic stabilizer in the economy?

(a) Federal Reserve monetary policy of changing interest rates.

(b) bank lending

(c) investment spending

(d) unemployment insurance

12. In 1968 the official unemployment rate was 3.6%. If the full employment rate of unemployment was about 4%, then there was:

(a) an inflationary gap in 1968.

(b) a recessionary gap in 1968.

(c) a full employment gap in 1968.

(d) an unemployment gap in 1968.

13. During the 2004 to 2006 economic boom, households bought record numbers of automobiles. This increase in household consumption would cause:

(a) aggregate supply to increase.

(b) aggregate supply to decrease.

(c) aggregate demand to increase.

(d) aggregate demand to decrease.

14. Keynesian economics says that

(a) workers are paid for their ability to work, not for the value of what their labor creates.

(b) the level of aggregate demand determines production, employment and income (c) the act of producing goods generates an amount of spending equal to the value of the goods produced

(d) for each percent the unemployment rate increases, there will be a 2.5 percent loss in output for the economy.

15. Germany is a net creditor nation where the Germans own more assets in the rest ofthe world than the rest of the world owns assets in Germany. The German external surplus is directly caused by:

(a) years of German households buying Audis, Mercedes, BMWs, and other German luxury cars.

(b) years of large German government budget surpluses.

(c) the high value of the Euro, which makes it cheap for Germany to buy assets in
the Rest of the World and expensive for the Rest of the World to buy German assets.

(d) years of large German trade and current account surpluses.

16. Which of the following is the best explanation of why the Euro-zone debt crisis ismost severe Portugal, Ireland, Greece, and Spain? All these countries:

(a) had large government budget deficits and public debts even before the financial crisis, and then their deficits and debt grew even larger.

(b) had large inflows of capital, so their economies depended on borrowing from other countries, but the financial crisis caused these foreign sources of credit to dry up.

(c) were in recession even before the financial crisis, and then they went into depression following the financial crisis.

(d) have been forced out of the Euro zone and now their economies are having hard time switching back to their national currencies.

17. The state of California has a chronic budget deficit. In 2009 and 2010 the state has raised taxes and fees and cut spending, which slowed the economic expansion in this state. The state government is doing this despite the bad economic impact because:

(a) it has a balanced-budget requirement.

(b) it has automatic destabilizers.

(c) a progressive tax policy that calls for higher taxes each year.

(d) it had to balance out the Federal tax cuts and increased spending.

18. Right now the United States has some of the lowest interest rates in the world. This would:

(a) cause the USD to appreciate more foreign investors buy dollars to loan money in the United States because of low interest rates.

(b) cause the USD to depreciate as fewer foreign investors buy dollars to loan money in the United States because of low interest rates.

(c) not affect the value of the USD because interest rates are set by the supply and demand for dollars in the United States, while exchange rates are set by the supply and demand for dollars in the Rest of the World.

(d) cause interest rates to go up since what goes down must come up.

19. According to the Stagnation school of Marxist economics the slow economic growth and high unemployment we see today is typical of modern corporate capitalism where:

(a) workers cannot afford to buy all that they make because of exploitation.

(b) there is a shortage of profitable investments as compared to the large profits generated by giant corporations, leading to less investment spending.

(c) there is not enough money to finance investment because the Federal Reserve is following a monetarist policy and is too afraid of inflation.

(d) conservative economic policies based on Say's Law have restricted the use of fiscal policies that could stimulate the economy.

20. Over the last 25 years, FICA payroll taxes have been going to:

(a) current social security benefits.

(b) a trust fund to help pay for future benefits

(c) both current benefits and a trust fund

(d) Medicare only, social security benefits are paid for by income taxes.

21. According to Marx, businesses pay their workers less than the value of the product of their labor in order to make a profit. The businesses then reinvest these profits to be able To expand production. At the same time the workers cannot afford to buy what they have produced. This leads to:

(a) the growth of the financial sector as workers borrow more and more.

(b) more inflation as the central bank prints money so workers have more money.

(c) a process of "creative destruction" where obsolete companies, products, and technology go bust, clearing the ground for innovation and economic growth.

(d) crisis of overproduction, or what is known as recessions.