Question 1: Historical evidence for the U.S. economy indicates that

• recessions have occurred roughly once every six years since the 1960s.
• the unemployment rate usually decreases during a recession and increases shortly after the recession ends.
• real GDP usually remains roughly constant during a recession and decreases shortly after the recession ends.
• changes in real GDP over the business cycle are largely attributable to changes in investment over the business cycle.

Question 2: Which of the following is most commonly used to monitor short-run changes in economic activity?

• the inflation rate
• real GDP
• aggregate demand
• aggregate supply

Question 3: During recessions investment

• falls by a larger percentage than GDP.
• falls by about the same percentage as GDP.
• falls by a smaller percentage than GDP.
• falls but the percentage change is sometimes much larger and sometimes much smaller

Question 4: The classical model is appropriate for analysis of the economy in the

• long run, since evidence indicates that money is not neutral in the long run.
• long run, since real and nominal variables are essentially determined separately in the long run.
• short run, provided money is not neutral.
• short run, provided real and nominal variables are highly intertwined.

Question 5: Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes

• both the short run and the long run.
• the short run, but not the long run.
• the long run, but not the short run.
• neither the long run nor the short run

Question 6: Aggregate demand includes

• the quantity of goods and services both the government and customers abroad want to buy.
• the quantity of goods and services neither the government nor customers abroad want to buy.
• the quantity of goods and service the government wants to buy, but not the quantity of goods and services customers abroad want to buy.
• the quantity of goods and services customers abroad want to buy, but not the quantity of goods and services the government wants to buy.

Question 7: The model of aggregate demand and aggregate supply

• is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution of resources between markets to explain aggregate relationships.
• is different from the model of supply and demand for a particular market, in that we have to separate real and nominal variables in the aggregate model.
• is a straightforward extension of the model of supply and demand for a particular market, in which substitution of resources between markets is highlighted.
• is a straightforward extension of the model of supply and demand for a particular market, in which the interaction between real and nominal variables is highlighted.

Question 8: When the price level falls the quantity of

• consumption goods demanded rises, while the quantity of net exports demanded falls
• consumption goods demanded and the quantity of net exports demanded both rise.
• consumption goods demanded and the quantity of net exports demanded both fall.
• consumption goods demanded falls, while the quantity of net exports demand rises.

Question 9: When the price level changes, which of the following variables will change and thereby cause a change in the aggregate quantity of goods and services demanded?

• the real value of wealth
• the interest rate
• the value of currency in the market for foreign exchange
• All of the above are correct.

Question 10: Other things the same, a decrease in the price level makes the dollars people hold worth

• more, so they can buy more.
• more, so they can buy less.
• less, so they can buy more.
• less, so they can buy less.

Question 11: When the price level falls

• households want to lend more, so the interest rate rises making the quantity of goods and services demanded rise.
• households want to lend more, so the interest rate falls, making the quantity of goods and services demanded rise.
• households want to lend more, so the interest rate rises, making the quantity of goods and services demanded fall.
• None of the above are correct.

Question 12: Other things the same, if the U.S. price level falls, then

• the supply of dollars in the market for foreign-currency exchange increases, so the exchange rate rises.
• the supply of dollars in the market for foreign-currency exchange increases, so the exchange rate falls.
• the supply of dollars in the market for foreign-currency exchange decreases, so the exchange rate rises.
• the supply of dollars in the market for foreign-currency exchange decreases, so the exchange rate falls.

Question 13: As the price level rises,

• the exchange rate falls, so net exports fall.
• the exchange rate falls, so net exports rise.
• the exchange rate rises, so net exports fall.
• the exchange rate rises, so net exports rise.

Question 14: Other things the same, as the price level rises, the real value of a dollar

• rises, and interest rates rise.
• rises, and interest rates fall.
• falls, and interest rates rise.
• falls, and interest rates fall.

Question 15: Other things the same, as the price level falls, a country's exchange rate

• and interest rates rise.
• and interest rates fall.
• falls and interest rates rise.
• rises and interest rates fall.

Question 16: Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to desire

• decreased consumption, shown as a movement to the left along a given aggregate-demand curve.
• increase consumption, shown as a movement to the right along a given aggregate-demand curve.
• decreased consumption, shifting the aggregate-demand curve to the left.
• increased consumption, shifting the aggregate-demand curve to the right.

Question 17: Which of the following both shift aggregate demand left?

• a decrease in taxes and at a given price level consumers feel more wealthy
• a decrease in taxes and at a given price level consumers feel less wealthy
• an increase in taxes and at a given price level consumers feel more wealthy
• an increase in taxes and at a given price level consumers feel less wealthy

Question 18: If speculators bid up the value of the U.S. dollar in the market for foreign exchange, then

• U.S. goods become more expensive relative to foreign goods so aggregate demand shifts right.
• U.S. goods become less expensive relative to foreign goods so aggregate demand shifts right.
• U.S. goods become more expensive relative to foreign goods so aggregate demand shifts left.
• U.S. goods become less expensive relative to foreign goods so aggregate demand shifts left.

Question 19: The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change

• in the price level and output.
• in the price level, but not output.
• in output, but not the price level.
• in neither the price level nor output.

Question 20: The long-run aggregate supply curve shifts right if

• immigration from abroad increases.
• the capital stock increases.
• technology advances.
• All of the above are correct.

Question 21: According to the aggregate demand and aggregate supply model, in the long run an increase in the money supply leads to

• increases in both the price level and real GDP.
• an increase in real GDP but does not change the price level.
• an increase in the price level but does not change real GDP.
• no change in either the price level or real GDP.

Question 22: In the long run, technological progress

• and increases in the money supply both make the price level rise.
• and increases in the money supply both make the price level fall.
• makes the price level rise, while increases in the money supply make prices fall.
• makes the price level fall, while increases in the money supply make prices rise.

Question 23: If the price level rises above what was expected and nominal wages are fixed, then

• production becomes less profitable so firms will hire fewer workers.
• production becomes less profitable so firms will hire more workers.
• production becomes more profitable so firms will hire fewer workers.
• production become more profitable so firms will hire more workers.

Question 24: Other things the same, when the price level rises more than expected, some firms will have

• higher than desired prices which increases their sales.
• higher than desired prices which depresses their sales.
• lower than desired prices which increases their sales.
• lower than desired prices which depresses their sales.

Question 25: According to the misperceptions theory of aggregate supply, if a firm thought that inflation was going to be 5 percent and actual inflation was 6 percent, then the firm would believe that the relative price of what they produce had

• increased, so they would increase production.
• increased, so they would decrease production.
• decreased, so they would increase production.
• decreased, so they would decrease production.

Question 26: The effects of a higher than expected price level are shown by

• shifting the short-run aggregate supply curve right.
• shifting the short-run aggregate supply curve left.
• moving to the right along a given aggregate supply curve.
• moving to the left along a given aggregate supply curve.

Question 27: A decrease in the expected price level shifts

• only the long-run aggregate supply curve right.
• only the short-run aggregate supply curve right.
• both the short-run and the long-run aggregate supply curve right.
• Neither the short-run nor the long-run aggregate supply curve right.

Question 28: Which of the following shifts short-run, but not long-run aggregate supply right?

• a decrease in the actual price level
• a decrease in the expected price level
• a decrease in the capital stock
• an increase in the money supply

Question 29: In 1986, OPEC countries increased their production of oil. This caused

• the price level to rise.
• aggregate supply to shift right.
• unemployment to rise.
• None of the above is correct.

Question 30: Keynes believed that economies experiencing high unemployment should adopt policies to

• reduce the money supply.
• reduce government expenditures.
• increase aggregate demand.
• increase aggregate supply.

Question 31: The interest-rate effect

• depends on the idea that increases in interest rates decrease the quantity of goods and services demanded.
• depends on the idea that increases in interest rates decrease the quantity of goods and services supplied.
• is responsible for the downward slope of the money-demand curve.
• is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.

Question 32: The wealth effect stems from the idea that a higher price level

• increases the real value of households' money holdings.
• decreases the real value of households' money holdings.
• increases the real value of the domestic currency in foreign-exchange markets.
• decreases the real value of the domestic currency in foreign-exchange markets.

Question 33: According to John Maynard Keynes,

• the demand for money in a country is determined entirely by that nation's central bank.
• the supply of money in a country is determined by the overall wealth of the citizens of that country.
• the interest rate adjusts to balance the supply of, and demand for, money.
• the interest rate adjusts to balance the supply of, and demand for, goods and services.

Question 34: While a television news reporter might state that "Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent," a more precise account of the Fed's action would be as follows:

• "Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent."
• "Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount."
• "Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent."
• "Today the Fed took a step toward contracting aggregate demand, and this was done by lowering the federal funds rate to 5.25 percent."

Question 35: People choose to hold a smaller quantity of money if

• the interest rate rises, which causes the opportunity cost of holding money to rise.
• the interest rate falls, which causes the opportunity cost of holding money to rise.
• the interest rate rises, which causes the opportunity cost of holding money to fall.
• the interest rate falls, which causes the opportunity cost of holding money to fall.

Question 36: If expected inflation is constant, then when the nominal interest rate increases, the real interest rate

• increases by more than the change in the nominal interest rate.
• increases by the change in the nominal interest rate.
• decreases by the change in the nominal interest rate.
• decreases by more than the change in the nominal interest rate.

Question 37: When the Fed sells government bonds, the reserves of the banking system

• decrease; increases
• increase; decreases
• increase; increases
• decrease; decreases

Question 38: The opportunity cost of holding money

• decreases when the interest rate increases, so people desire to hold more of it.
• decreases when the interest rate increases, so people desire to hold less of it.
• increases when the interest rate increases, so people desire to hold more of it.
• increases when the interest rate increases, so people desire to hold less of it.

Question 39: If there is excess money supply, people will

• deposit more into interest-bearing accounts, and the interest rate will fall.
• deposit more into interest-bearing accounts, and the interest rate will rise.
• withdraw money from interest-bearing accounts, and the interest rate will fall.
• withdraw money from interest-bearing accounts, and the interest rate will rise.

Question 40: According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

• rises and the aggregate quantity of goods demanded rises.
• rises and the aggregate quantity of goods demanded falls.
• falls and the aggregate quantity of goods demanded rises.
• falls and the aggregate quantity of goods demanded falls.

Question 41: If the MPC = 3/5, then the government purchases multiplier is

• 5/3
• 5/2
• 5
• 1.5

Question 42: If the multiplier is 5, then the MPC is

• 0.05
• 0.5
• 0.6
• 0.8

Question 43: In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is

• $151.25.
• $166.75.
• $170.20.
• $175.00.

Question 44: If the MPC is 0.80 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by

• $80 billion.
• $125 billion.
• $500 billion.
• $800 billion.

Question 45: Suppose that the MPC is 0.60; there is no investment accelerator; and there are no crowding-out effects. If government expenditures increase by $25 billion, then aggregate demand

• shifts rightward by $62.5 billion.
• shifts rightward by $50.0 billion.
• shifts rightward by $32.5 billion.
• None of the above is correct.

Question 46: The economist A.W. Phillips published a famous article in 1958 in which he showed a

• negative correlation between the rate of unemployment and the rate of inflation.
• positive correlation between the rate of unemployment and the rate of inflation.
• negative correlation between the rate of unemployment and the rate of interest.
• positive correlation between the rate of unemployment and the rate of interest

Question 47: In the short run, policy that changes aggregate demand changes

• both unemployment and the price level.
• neither unemployment nor the price level.
• only unemployment.
• only the price level.

Question 48: If policymakers decrease aggregate demand, then in the short run the price level

• falls and unemployment rises.
• and unemployment fall.
• and unemployment rise.
• rises and unemployment falls.

Question 49: If the central bank increases the money supply, then in the short run prices

• rise and unemployment falls.
• fall and unemployment rises.
• and unemployment rise.
• and unemployment fall.

Question 50: According to the short-run Phillips curve, if the central bank increases the money supply, then

• inflation and unemployment will both fall.
• inflation and unemployment will both rise.
• inflation will fall and unemployment will rise.
• inflation will rise and unemployment will fall.