Chapter 8 Reviewer

(Selected Items from a resource)

Multiple Choice Questions (40 items)

Easy

1.
Say’s Law refers to the concept that:
a. increases in aggregate demand create unionization.
b. demand creates its own supply.
c. supply creates its own demand.
d. flexible wages affect price levels.

2.
The consumption function shows the relationship between consumer expenditures and:
a. the interest rate.
b. the tax rate.
c. savings.
d. disposable income.

3.
Economists refer to the simple relationship between consumption and disposable income as:
a. autonomous consumption.
b. the marginal propensity to consume.
c. the absolute disposable income hypothesis.
d. disposable income.
e. the consumption function.

4.
That part of disposable income not spent on consumption is defined as:
a. transitory disposable income.
b. permanent disposable income.
c. disposable income.
d. autonomous consumption.
e. saving.

5.
The slope of the consumption function is called the:
a. autonomous consumption rate.
b. marginal consumption rate.
c. average propensity to consume.
d. marginal propensity to consume.
6.
Exhibit 8-2 Consumption function

As shown in Exhibit 8-2, autonomous consumption is:

a. 0.
b. $2 trillion.
c. $4 trillion.
d. $6 trillion.
e. $8 trillion.

7.
Exhibit 8-3 Consumption Function
As shown in Exhibit 8-3, the marginal propensity to save (MPS) is:
a. 0.40.
b. 0.50.
c. 0.67.
d. 0.75.

8.
Exhibit 8-4 Disposable income and consumption data

As shown in Exhibit 8-4, if disposable income is $400 billion, the marginal propensity to
consume (MPC) is:
a. 0.00.
b. 0.25.
c. 0.75.
d. 1.00.

9.
Exhibit 8-5 Consumption function
As shown in Exhibit 8-5, the marginal propensity to save (MPS) is:
a. 0.25.
b. 0.50.
c. 0.75.
d. 0.90.

10.
A shift in the consumption function:
a. is based on the marginal propensity to consume.
b. can be caused by a change in the price level.
c. can be caused by a change in GDP.
d. None of these.

11.
A decrease in the rate of interest, other things being equal, will cause a:
a. rightward shift of the investment demand curve.
b. movement upward along the investment demand curve.
c. movement downward along the investment demand curve.
d. leftward shift of the investment demand curve.

Moderate

12.
Classical theory assumes:
a. Say’s Law.
b. flexible prices.
c. flexible wages.
d. flexible interest rates.
e. All of the above answers are correct.

13.
If the economy were left on its own without the interference of government or the Fed, it would
move toward an equilibrium rate of growth that would produce, with only minor interruptions,
full employment without inflation. What school supports this view?
a. Classical.
b. Keynesian.
c. Monetarism.
d. Supply-side.
e. Neo-Keynesian.

14.
The Keynesian model of macro equilibrium provided an explanation for the:
a. high rates of both unemployment and inflation experienced during the 2110s.
b. prolonged high rates of unemployment experienced during the 1930s.
c. low interest rates of the 1950s and 1960s.
d. budget surpluses and rapid growth of the U.S. economy during the 1990s.
15.
In the basic Keynesian model, the major determinant of consumption expenditures is:
a. the interest rate.
b. inflation.
c. investment.
d. disposable income.

16.
The relationship between consumer expenditures and disposable income is the:
a. savings function.
b. the tax rate function.
c. disposable income function.
d. consumption function.

17.
A movement along a consumption function is caused by:
a. a change in households' real assets.
b. a change in interest rates.
c. changes in taxation policy.
d. expectations of price changes.
e. changes in households' disposable incomes.

18.
The vertical intercept of the consumption function that represents the portion of consumption
expenditure not associated with a level of disposable income is known as:
a. zero income intercept.
b. disposable income intercept.
c. autonomous consumption.
d. automatic consumption line.

19.
Use the table below to answer the following question.

Income Consumption
(Dollars) (Dollars)
60,000 58,000
66,000 62,000

What is the marginal propensity to consume?

a. 0.33.
b. 0.67.
c. 0.96.
d. 1.5.
20.
If your disposable personal income increases from $33,000 to $41,000 and your consumption
increases from $8,000 to $12,000, your marginal propensity to consume (MPC) is:
a. 0.2.
b. 0.4.
c. 0.5.
d. 0.8.
e. 1.0.

21.
The ratio of a change in consumption to a change in disposable income is the:
a. consumption function.
b. propensity to consume.
c. average propensity to consume.
d. extra propensity to consume.
e. marginal propensity to consume.

22.
The sum of the marginal propensity to consume (MPC) and the marginal propensity to save
(MPS) always equals:
a. 1.
b. 0.
c. the interest rate.
d. the marginal propensity to invest (MPI).

23.
Exhibit 8-2 Consumption function
As shown in Exhibit 8-2, the marginal propensity to consume (MPC) is:
a. 0.25.
b. 0.50.
c. 0.75.
d. 0.90.

24.
Exhibit 8-4 Disposable income and consumption data

As shown in Exhibit 8-4, autonomous consumption is:

a. $75 billion.
b. $100 billion.
c. $175 billion.
d. $275 billion.

25.
Real investment spending is ____ real personal consumption.
a. equal to
b. greater than
c. stable compared to
d. highly volatile compared to

26.
If the interest rate rises, then firms' investment spending:
a. falls.
b. also rises.
c. remains unchanged
d. reacts unpredictably.
27.
When sketched as a function of disposable income, the investment demand curve is:
a. always horizontal.
b. always vertical.
c. upward sloping.
d. parabolic.

28.
Which of the following will increase investment spending?
a. More optimistic business expectations.
b. An increase in interest rates.
c. An increase in business taxes.
d. A decrease in capacity utilization.
e. All of these.

29.
Exhibit 8-7 Consumption function

In Exhibit 8-7, the level of autonomous consumption for C' is:

a. $50.
b. $100.
c. $150.
d. $200.
e. $0.
30.
Exhibit 8-10 Consumption function

In Exhibit 8-10, which of the following could cause the shift from C1 to C2?
a. Higher interest rates.
b. An increase in disposable income.
c. A decrease in disposable income.
d. Lower tax rates.
e. Expectations of future economic growth.

31.

In Exhibit 8-11, the MPS when Y increases from $5,000 to $6,000 is:
a. 0.20.
b. 0.80.
c. 0.25.
d. 0.75.

Challenging

32.
In the view of the classical school, unemployment:
a. is a permanent condition.
b. disappears when everyone who is willing to work at the equilibrium wage finds employment.
c. exists because people do not interfere with the competitive process.
d. is only temporary because all wages and prices are rigid.
e. is necessary and good for the economy.

33.
A primary emphasis of the Keynesian school is the economy:
a. has a tendency to always create a full-employment level of output.
b. has a tendency to always create inflationary pressure at all levels of output.
c. has a tendency to eliminate unemployment by lowering wage rates to create an equilibrium in
the labor market.
d. is driven by the supply-side of the market.
e. has a tendency to be in equilibrium at less than full employment.

34.
The consumption function will shift upward if real asset and money holdings:
a. increase, if people expect prices to increase, if interest rates decrease, and if taxes decrease.
b. increase, if people expect prices to increase, if interest rates increase, and if taxes increase.
c. increase, if people expect prices to increase, if interest rates increase, and if taxes decrease.
d. decrease, if people expect prices to decrease, if interest rates decrease, and if taxes decrease.
e. decrease, if people expect prices to increase, if interest rates increase, and if taxes decrease.

35.
Which one of the following will shift the consumption function downward?
a. An increase in disposable income.
b. A decrease in disposable income.
c. Legislation making credit harder to obtain.
d. Lower tax rates.
e. A technological breakthrough.

36.
When economists say that private investment is "autonomous," they mean that it:
a. will never change.
b. is not dependent on the current level of disposable income.
c. is determined by the "animal spirits" of business decision makers.
d. is determined by the level of saving.

37.
If Y = $500 billion, autonomous consumption = $300 billion, and the marginal propensity to
save = 0.20, then saving will equal:
a. −$200 billion.
b. $200 billion.
c. −$100 billion.
d. $100 billion.
e. $40 billion.
38.
A downward movement along the investment demand curve would be caused by a(n):
a. increase in the expected rate of return on investment caused by an increase in business
confidence.
b. decrease in the expected rate of return on investment caused by a decrease in business
confidence.
c. increase in the rate of interest.
d. decrease in the rate of interest.

39.
Which one of the following will shift the investment demand curve leftward?
a. A technological breakthrough.
b. Lower tax rates.
c. Optimistic business expectations.
d. A lower rate of capacity utilization.
e. None of these.

40.

In Exhibit 8-7, the value of the marginal propensity to consume is:

a. high for C' than for C.
b. lower for C" than for C.
c. lower for C" than for C'.
d. the same for C, C', and C".
True or False Questions (10 items)

Easy

1. The consumption function has a negative slope. False

2. The consumption function has a positive slope. True
3. Saving is disposable personal income spent on investment. False
4. The marginal propensity to consume (MPC) is the change in consumption divided by the change
in saving. False
5. If people become pessimistic about the state of the economy, the consumption function shifts
downward. True
6. An increase in consumer wealth shifts the consumption function upward. True
7. A shift in the investment demand curve can be caused by a change in the expectations of profits
by businessmen. True

Moderate

8. The Keynesian theory focuses on aggregate supply, while the classical theory focused on
aggregate demand. False
9. Real investment spending for the past 35 years is more volatile than real personal consumption.
True

Challenging

10. Real disposable income is held constant when constructing a consumption function. False
Chapter 9 Reviewer
(Selected Items from a resource)

Multiple Choice Questions (40 items)

Easy

1.
In the Keynesian model, if aggregate expenditures exceed aggregate output and inventories of
firms fall, then the aggregate output and the business sector could be expected to:
a. increase output.
b. decrease output.
c. decrease investment.
d. hire fewer workers.

2.
The sum of consumption and investment is:
a. total production.
b. aggregate supply.
c. aggregate disposable demand.
d. aggregate expenditures.

3.
Exhibit 9-2 Keynesian aggregate-expenditures model

As shown in Exhibit 9-2, equilibrium GDP is:

a. $1 trillion.
b. $3 trillion.
c. $5 trillion.
d. $6 trillion.
e. $7 trillion.

4.
The spending multiplier indicates that:
a. changes in investment, government, or consumption spending trigger much larger changes in
real GDP.
b. an autonomous increase in saving will cause output to rise by a multiple of the additional
saving.
c. a market economy will be more stable than classical economists thought.
d. the marginal propensity to consume is greater than one.

5.
If the marginal propensity to consume (MPC) is 0.80, the value of the spending multiplier is:
a. 2.
b. 5.
c. 8.
d. 10.

6.
If the marginal propensity to save (MPS) is 0.50, the value of the spending multiplier is:
a. 1.
b. 2.
c. 4.
d. 9.

7.
The spending multiplier is:
a. 1 / (1 − MPC).
b. 1 − MPC.
c. MPC.
d. MPC / (1 − MPC).

8.
A change in real GDP divided by a change in investment is called the:
a. spending multiplier.
b. demand multiplier.
c. equilibrium multiplier.
d. investment multiplier.
e. spending multiplier

9.
A recessionary gap can be defined as:
a. an economy that is operating above its full-employment capacity.
b. an economy that is operating at full-employment capacity.
c. the amount by which aggregate expenditures exceeds the aggregate expenditures level needed
to generate equilibrium real GDP at full employment without inflation
d. the amount by which aggregate expenditures falls short of the level needed to generate
equilibrium real GDP at full employment without inflation.
e. the easiest way out of a depression.

10.
If MPC = 0.8 and the economy is in equilibrium $500 below full-employment equilibrium, how much
should government spending change to achieve full employment?
a. −100.
b. +80.
c. −80.
d. +500.
e. +100.

11.
In the aggregate expenditures model, a decrease in government spending causes a(n):
a. upward shift in the aggregate expenditures curve.
b. downward shift in the aggregate expenditures curve.
c. shift in the 45-degree line.
d. rightward movement along the aggregate expenditures curve.
e. leftward movement along the aggregate expenditures curve.

Moderate

12.
Using the Keynesian aggregate expenditures model, which of the following is true?
a. Macro equilibrium may occur at levels of real GDP other than full-employment real GDP.
b. At any macro equilibrium, the actual rate of unemployment must equal the natural rate of
unemployment.
c. If an economy is operating below full employment capacity, the Keynesian model indicates
that lower wage rates will automatically adjust the economy back to full employment.
d. All of these are correct.

13.
Within the Keynesian aggregate expenditures model, if the economy is below equilibrium, then
there will be:
a. an increase the demand for goods and services.
b. an increase in real GDP.
c. lower interest rates, which will stimulate aggregate demand and keep the economy at full
employment.
d. a lower price level, which will quickly guide the economy to full-employment equilibrium.

14.
In the aggregate expenditures model, if aggregate expenditures (AE) are greater than GDP, then:
a. inventory is depleted.
b. inventory is accumulated.
c. inventory is unchanged.
d. employment decreases.

15.
In the aggregate expenditures model, if aggregate expenditures (AE) are less than GDP, then:
a. inventory is unchanged.
b. inventory is depleted.
c. employment increases.
d. GDP decreases.

16.
Which one of the following are the components of aggregate expenditures?
a. Household consumption, business investment, government spending for goods and services,
and net exports.
b. Household consumption, business investment, government transfer payments, and net exports.
c. Household consumption, business investment, government spending for goods and services,
and exports.
d. Household consumption, business investment, government spending for goods and services,
and saving.
e. Household consumption, business inventories, government spending for goods and services,
and net exports.

ANSWER: a

17.

As shown in Exhibit 9-1, if investment is $0.5 trillion, government spending is $1 trillion, net
exports are −$0.5 trillion, and GDP is $2 trillion, then GDP will:
a. remain unchanged.
b. increase by $1 trillion.
c. decrease by $1 trillion.
d. increase by $2 trillion.
e. decrease by $2 trillion.
18.
In the aggregate expenditures model, if an economy operates above equilibrium GDP, there will
be:
a. unplanned inventory accumulation.
b. a decrease in GDP.
c. a decrease in employment.
d. all of the above.

ANSWER: d

19.

As shown in Exhibit 9-3, if GDP is $14 trillion, the economy experiences unplanned inventory:
a. accumulation of $12 trillion.
b. depletion of $14 trillion.
c. accumulation of $2 trillion.
d. depletion of $4 trillion.

20.
Suppose that consumers become more pessimistic about the future and, as a result, reduce their
consumption by $10 billion. If the marginal propensity to consume is 0.80, how will this $10
billion reduction in consumption affect the equilibrium level of real GDP?
a. Real GDP will decrease by $8 billion.
b. Real GDP will decrease by $10 billion.
c. Real GDP will decrease by $40 billion.
d. Real GDP will decrease by $50 billion.

ANSWER: d
21.
As the marginal propensity to consume (MPC) increases, the spending multiplier:
a. increases.
b. decreases.
c. remains constant.
d. becomes indefinable.

ANSWER: a

22.
If the marginal propensity to consume (MPC) is 0.90, a $100 increase in investment spending,
other things being equal, will cause an increase in equilibrium real GDP of:
a. $90.
b. $100.
c. $900.
d. $1,000.

23.
In the aggregate expenditures model, assume that the MPC is 0.75. An increase in investment
spending of $6 billion would produce an ultimate increase in real GDP of:
a. $0.25 billion.
b. $0.75 billion.
c. $12 billion.
d. $24 billion.

24.
If $30 billion in new investment was added to the economy and MPC was 0.90, real GDP would
increase by:
a. $30 billion.
b. $90 billion.
c. $100 billion.
d. $210 billion.
e. $300 billion.

25.
When the MPC gets smaller, the spending multiplier:
a. gets larger.
b. gets smaller.
c. stays the same.
d. gets smaller at low real GDP, and larger at high real GDP.
e. gets larger at low real GDP, and smaller at high real GDP.
26.
Assume that an economy's real GDP multiplier is 2 and that this economy is in equilibrium at
$500 billion. If the government wants to move this economy to full-employment at $600 billion,
while maintaining a balanced budget, it must choose which of the following options?
a. Increase government spending and taxes by $100 billion
b. Decrease government spending and taxes by $100 billion
c. Increase government spending and taxes by $200 billion
d. Decrease government spending and taxes by $200 billion

27.
Which of the following options could be used to eliminate a recessionary gap?
a. Increase government spending.
b. Decrease government spending.
c. Decrease investment.
d. Increase taxes.

28.
In the aggregate expenditures model, a tax cut causes a(n):
a. upward shift in the aggregate expenditures curve.
b. downward shift in the aggregate expenditures curve.
c. shift in the 45-degree line.
d. rightward movement along the aggregate expenditures curve.
e. leftward movement along the aggregate expenditures curve.

29.
Within the framework of the aggregate expenditures model, what will happen if an economy is
operating at a real GDP greater than full-employment real GDP?
a. An inflationary gap exists.
b. Real GDP will fall.
c. The inventories of firms will rise.
d. Firms will cut back on their current rate of output.

30.
Assume that an inflationary gap must be closed by reducing aggregate expenditures. If
consumers refuse to cut spending on consumption and producers won't cut demand for
investment goods, the President:
a. can do nothing.
b. must build more roads.
c. must borrow from Wall Street.
d. must increase Social Security expenditures.
e. must cut government spending.

ANSWER: e
31.

In Exhibit 9-6, the spending multiplier for this economy is equal to:
a. 1 2/3.
b. 2 1/2.
c. 3.
d. 5.

32.
In Exhibit 9-8, an increase in aggregate expenditures of 100 causes real GDP to rise by:
a. $100.
b. $200.
c. $300.
d. $400.
e. $500.

33.
In the aggregate expenditures model, if aggregate expenditures (AE) equal $4 trillion and GDP
equals $3 trillion, then:
a. inventory depletion equals −$1 trillion.
b. inventory accumulation equals $1 trillion.
c. investment equals −$1 trillion.
d. investment equals $1 trillion.

34.
Suppose equilibrium real GDP is currently at $800 billion and investment is $100 billion. If an
increase in the interest rate reduces investment from $100 billion to $75 billion, and the MPC is
0.8, the new level of equilibrium real GDP will be:
a. $500 billion.
b. $600 billion.
c. $675 billion.
d. $775 billion.
e. $800 billion.

35.
If the MPS = .25, and investment falls from $100 to $75, real GDP will decrease by:
a. $25.
b. $75.
c. $150.
d. $125.
e. $100.

36.
Use the aggregate expenditures model and assume the marginal propensity to consume (MPC) is
0.90. An increase in government spending of $1 billion would result in an increase in GDP of:
a. $0.
b. $0.9 billion.
c. $1.0 billion.
d. $9.0 billion.
e. $10.0 billion.

37.
The equilibrium level of real GDP is $1,000, the target level of real GDP is $1,250, and the
marginal propensity to consume (MPC) is 0.60. The target can be reached if government
spending is:
a. increased by $60 billion.
b. increased by $100 billion.
c. increased by $250 billion.
d. held constant.

38.
Use the aggregate expenditures model and assume the marginal propensity to consume (MPC) is
0.80. A decrease in government spending of $1 billion would result in a decrease in GDP of:
a. $0.
b. $0.8 billion.
c. $1.0 billion.
d. $5.0 billion.
e. $8.0 billion.

39.
Assume that full-employment real GDP is Y = $1,200 billion, the current equilibrium real GDP
is Y = $1,600 billion, and the MPC = 0.8. In order to bring the economy to a full-employment
real GDP,
a. a recessionary gap must be bridged by increasing aggregate expenditures by $80 billion.
b. an inflationary gap must be bridged by cutting aggregate expenditures by $80 billion.
c. nothing is needed to bring the economy into full employment equilibrium.
d. a recessionary gap must be bridged by increasing aggregate expenditures by $400 billion.
e. an inflationary gap must be bridged by cutting aggregate expenditures by $400 billion.

40.

In Exhibit 9-7, the value of the MPC is:

a. .20.
b. .25.
c. .50.
d. .75.
e. .80.

True or False Questions (10 items)

Easy

1. If the marginal propensity to consume (MPC) is 0.80, the value of the spending multiplier
is 2. False
2. The spending multiplier also applies to investment spending by businesses. True
3. An increase in the marginal propensity to consume (MPC) leads to an increase in the
spending multiplier. True
4. The spending multiplier does not apply to investment spending by businesses. False
5. A recessionary gap is the amount that autonomous aggregate expenditures must rise to
cause the equilibrium level of real GDP to shift to the full-employment level of real GDP.
True
6. In the aggregate expenditures model, if an economy operates below equilibrium GDP,
there will be unplanned inventory depletion. True
7. The Keynesian model shows that the economy has a natural tendency toward full
employment. False
8. In the aggregate expenditures model, if an economy operates below equilibrium GDP,
there will be unplanned inventory accumulation. False
9. According to the Keynesian model, the government can increase spending or cut taxes to
close a recessionary gap. True
10. The tax multiplier equals 1 − spending multiplier. True
Chapter 10 Reviewer
(Selected Items from a resource)

Multiple Choice Questions (40 items)

Easy

1.
The aggregate demand curve slopes downward indicating that:
a. an increase in the general price level will reduce the aggregate quantity of goods and services
demanded.
b. an increase in the general price level will increase the aggregate quantity of goods and services
demanded.
c. a change in the interest rate will alter the aggregate quantity of goods and services demanded.
d. consumers substitute between domestic-made and foreign-made goods as their relative prices
change.

2.
Which of the following is not a reason for the downward slope of the aggregate demand curve?
a. Real balances effect
b. Interest-rate effect
c. Net exports effect
d. Government spending effect

3.
14. The total quantity of goods and services demanded by households, firms, foreigners, and
government at varying price levels is:
a. gross domestic product.
b. aggregate demand.
c. aggregate expenditure.
d. total demand.
e. total expenditure.

4.
As prices rise, people will buy fewer goods and services because:
a. the interest rate has declined.
b. aggregate demand has increased.
c. the purchasing power of the fixed quantity of money has declined.
d. the income of households has increased.

5.
The negative slope of the aggregate demand curve is caused by:
a. the real balances effect, the interest rate effect, and the price level effect.
b. the real balances effect, the money supply effect, and the net exports effect.
c. the interest rate effect, the net exports effect, and the real GDP effect.
d. the real balances effect, the interest rate effect, and the net exports effect.
e. the real balances effect, the interest rate effect, and the net export effect.

6.
When the supply of credit is fixed, an increase in the price level stimulates the demand for credit,
which in turn reduces consumption and investment spending. This argument is called the:
a. real balances effect.
b. interest-rate effect.
c. net exports effect.
d. substitution effect.

7.
The net exports effect exists because a:
a. higher price level will reduce interest rates and stimulate foreign investment.
b. lower price level will make domestically produced exports less expensive relative to foreign
goods.
c. higher price level will reduce the purchasing power of money.
d. lower price level will encourage Americans to import more foreign goods.

8.
Which of the following will not shift the aggregate demand curve to the right?
a. Consumers becoming more optimistic about the future.
b. An increase in government spending.
c. Business optimism increases.
d. Consumers become pessimistic about the future.

9.
A rightward shift in the aggregate demand curve can be caused by an increase in:
a. the price level.
b. business investment spending.
c. taxes.
d. production costs.

10.
A change in which of the following would shift the aggregate demand curve?
a. Consumption (C)
b. Investment (I)
c. Government spending (G)
d. Net Exports (NX)
e. All of these

11.
The aggregate supply curve:
a. shows the level of real GDP produced in the economy at different possible price levels during
a period of time.
b. is horizontal in the Keynesian range.
c. is vertical in the classical range.
d. all of these.

12.
The aggregate supply curve reflects the relationship between the price:
a. of a particular good and the quantity supplied by all firms producing that good.
b. of a particular good and the quantity supplied by the aggregate economy.
c. level and the quantity supplied of all goods in the economy.
d. level and the quantity of all goods purchased in the economy.

13.
According to classical theory, if the aggregate demand curve decreased and the economy
experienced unemployment, then:
a. the economy would remain in this condition indefinitely.
b. the government must increase spending to restore full employment.
c. prices and wages would fall quickly to restore full employment.
d. the supply of money would increase until the economy returned to full employment.

14.
The vertical portion of the aggregate supply curve shows that at full employment an increase in
the price level will:
a. not alter the economy's full-employment real GDP.
b. increase the economy's full-employment real GDP.
c. reduce the quantity of goods and services purchasers will demand.
d. improve the overall efficiency of resource use.

15.
Which of the following is a range on the eclectic or general view of the aggregate supply curve?
a. Keynesian range.
b. Intermediate range.
c. Classical range.
d. All of these.

16.
In the horizontal segment of the aggregate supply curve, when GDP:
a. increases, the price level rises.
b. decreases, the price level falls.
c. increases, the price level does not change.
d. increases, the price level falls.
e. increases, the price level first rises and then falls.

17.
The full employment level of real GDP can be represented on an aggregate supply and demand
diagram as a(n):
a. vertical line.
b. upward-sloping line.
c. horizontal line.
d. downward-sloping line.

18.
Along the classical or vertical range of the aggregate supply curve, an increase in the aggregate
demand curve will increase:
a. both the price level and real GDP.
b. only real GDP.
c. only the price level.
d. real GDP and reduce the price level.

19.
Other things constant, an increase in resource prices will:
a. increase aggregate demand.
b. decrease aggregate demand.
c. decrease aggregate supply.
d. increase aggregate supply.

20.
Advances in technology will shift the aggregate:
a. demand curve rightward.
b. supply curve rightward.
c. demand curve leftward.
d. supply curve leftward.

21.
Stagflation occurs when the economy experiences:
a. low unemployment and low inflation.
b. high unemployment and rapid inflation.
c. low unemployment and rapid inflation.
d. high unemployment and low inflation.

22.
_________ inflation can be explained by an ________ shift in the aggregate _________ curve.
a. Demand-pull, leftward, demand
b. Cost-push, rightward, supply
c. Demand-pull, leftward, supply
d. Cost-push, rightward, supply

23.
An increase in the price level caused by a rightward shift of the aggregate demand curve is
called:
a. cost-push inflation.
b. supply shock inflation.
c. demand shock inflation.
d. demand-pull inflation.
24.
Demand-pull inflation is associated with a(n):
a. decrease in the aggregate supply curve.
b. increase in the aggregate supply curve.
c. increase in the aggregate demand curve.
d. decrease in the aggregate demand curve.
e. decline in the availability of a productive resource

Moderate

25.
The aggregate demand curve:
a. would be little affected by a technological advancement.
b. shifts to the right when spending decreases.
c. shifts to the left when there is a decrease in taxes.
d. cannot move independently of the aggregate supply curve.
e. shifts to the right when there is an expectation that future income will fall.

26.
Suppose the price level falls. The result is that the:
a. aggregate supply curve would shift to the right.
b. aggregate supply curve would shift to the left.
c. general price level would rise causing a movement up the aggregate demand curve.
d. aggregate demand curve would slope downward because of the real balances effect.

27.
Which of the following will increase aggregate demand in the United States?
a. A higher price level.
b. An increase in the real interest rate.
c. An increase in wealth due to a substantial appreciation in the value of stocks.
d. A decrease in real income in Japan and Western Europe.

28.
In the aggregate demand/aggregate supply model, a country's full-employment real GDP is
represented by:
a. prices.
b. aggregate demand.
c. aggregate supply.
d. an increase in the general level of prices.

29.
In the upward-sloping segment of the aggregate supply curve,
a. when GDP increases, the price level rises.
b. when GDP increases, the price level does not change.
c. when GDP decreases, the price level rises.
d. when GDP increases, the price level falls.
e. there is no relationship between changes in GDP and changes in the price level.

30.
Exhibit 10-1 Aggregate supply curve

In Exhibit 10-1, as production increases, firms resort to offering higher-wage rates to attract the
dwindling supply of unemployed resources in:
a. the segment labeled ab.
b. the segment labeled bc.
c. the segment labeled cd.
d. both segment bc and segment cd.
e. the entire curve.

31.
When the economy is operating well below capacity, an increase in spending tends to be
reflected primarily in a(n):
a. lower level of employment.
b. increase in price.
c. lower level of output.
d. higher level of output and employment.
e. increase in business failures.

32.
An increase in oil prices will shift the aggregate:
a. demand curve leftward.
b. demand curve rightward.
c. supply curve leftward.
d. supply curve rightward.
33.
An increase in aggregate supply will cause the price level to:
a. rise and GDP to rise
b. rise and GDP to fall.
c. rise and the unemployment rate to fall.
d. fall and GDP to rise.
e. fall and the unemployment rate to rise.

34.

In Exhibit 10-2, the change in equilibrium from E1 to E2 represents:

a. cost-push inflation.
b. demand-pull inflation.
c. price-push inflation.
d. wage-push inflation.

35.
In Exhibit 10-4 which of the following is not consistent with a shift in the aggregate demand
curve from AD1 to AD2?
a. A decrease in consumer spending.
b. An increase in investment.
c. An increase in government spending.
d. An increase in net exports.

36.
The increase in the price level as the economy moves from E1 to E2 in Exhibit 10-4 represents:
a. cost-push inflation.
b. demand-shock inflation.
c. wage push inflation.
d. demand-pull inflation.

37.

In Exhibit 10-6, the economy's employment potential is fully exhausted at:

a. GDP = $1,000 billion.
b. GDP = $1,100 billion.
c. GDP = $1,200 billion.
d. GDP slightly above $1,200 billion.
e. the employment potential is never fully exhausted.
38.

In Exhibit 10-7, choosing to operate the economy at GDP = $1200 billion and P = 110 would be
opting for an economy of:
a. moderate unemployment with inflation.
b. full employment without inflation.
c. full employment with inflation.
d. high unemployment and high inflation.
e. moderate cyclical unemployment without inflation.

39.

In Exhibit 10-8, if aggregate demand shifts from AD3 to AD2, real GDP will:
a. fall from $7.0 to $4.0, and the price level will not change.
b. not change, and the price level will fall from 120 to 100.
c. fall from $7.0 to $3.0, and the price level will fall from 120 to 100.
d. fall from $8.0 to $4.0, and the price level will fall from 120 to 100.
e. fall from $7.0 to $4.0, and the price level will fall from 120 to 100.

40.

In Exhibit 10-8, when aggregate demand shifts from AD4 to AD5, the economy experiences:
a. cost push-inflation.
b. cost-pull inflation.
c. demand-push inflation.
d. demand-pull inflation.
e. price-pull inflation.

True or False Questions (10 items)

Easy

1. The aggregate demand curve slopes downward because of the real balances, interest-rate,
and net exports effects. True
2. The net exports effect is the direct relationship between net exports and the price level of
an economy. False
3. The aggregate demand curve shifts due to changes in consumption expenditures,
investment expenditures government spending, and net exports. True
4. The classical economists believed there was no role for government to play in restoring
full employment. True
5. The aggregate supply curve is horizontal in the intermediate range. False
6. Stagflation means a simultaneous decrease in the unemployment and inflation rates. False
7. Cost-push inflation is caused by a leftward shift of the aggregate demand curve. False
8. Cost-push inflation is caused by supply shocks like higher oil prices and poor weather
conditions. True
Moderate

9. Along the Keynesian range of the aggregate supply curve, higher aggregate demand fails
to stimulate output and only causes inflation. False
10. An increase in input prices will cause the aggregate supply curve to shift rightward. False
Chapter 11 Reviewer
(Selected Items from a resource)

Multiple Choice Questions (40 items)

Easy

1.
When the federal government is running a budget deficit:
a. government tax revenues exceed government expenditures.
b. government expenditures exceed government tax revenues.
c. the economy must be in an economic recession.
d. the size of the national debt will decline.

2.
Fiscal policy is government action to influence aggregate demand and in turn to influence the
level of real GDP and the price level, through:
a. expanding and contracting the money supply.
b. regulation of net exports.
c. changes in government spending and/or tax revenues.
d. encouraging businesses to invest.

3.
Which of the following statements is true?
a. Fiscal policy is the manipulation of the nation's money supply to influence the nation's output,
employment and price level.
b. Discretionary fiscal policy is the deliberate use of changes in government spending and taxes
to stabilize the economy.
c. The tax multiplier is the change in aggregate demand resulting from an initial change in
government spending.
d. A budget deficit exists when government tax revenues exceed government spending.

4.
If the marginal propensity to consume (MPC) is 0.75, the value of the spending multiplier is:
a. 0.
b. 1.
c. 4.
d. 5.

5.
Mathematically, the value of the spending multiplier in terms of the marginal propensity to
consume (MPC) is given by the formula:
a. MPC − 1.
b. (MPC −1) / MPC.
c. 1 / MPC.
d. 1 / (1 − MPC).
6.
The change in saving divided by the change in income is the:
a. propensity to save.
b. saving function.
c. average propensity to save.
d. extra propensity to save.
e. marginal propensity to save.

7.
"Tax cuts, by providing incentives to work, save, and invest, will raise employment and lower
the price level." This argument is made by the:
a. Keynesian economists.
b. supply-side economists.
c. classical economists.
d. monetarists.

8.
Those who favor government policies to stimulate the economy by creating incentives for
individuals and businesses to increase their productive efforts are supporting:
a. supply-side economics.
b. Keynesian economics.
c. monetarist economics.
d. Marxian economics.

9.
According to the Laffer curve, when the tax rate is 100 percent, tax revenue will be:
a. 0.
b. at the maximum value.
c. the same as it would be at a 50 percent tax rate.
d. greater than it would be at a 50 percent tax rate.
e. the same as it would be at a 20 percent tax rate.

Moderate

10.
When an economy is operating below its potential capacity, Keynesian economists argue that:
a. taxes should be raised if the government is currently running a budget deficit.
b. taxes should be lowered but only if the government is running a budget surplus.
c. the government should cut taxes and/or increase spending in order to stimulate aggregate
demand.
d. all of these.

11.
To combat a recession, Keynesian fiscal policy recommends:
a. an increase in taxes.
b. an increase in government spending.
c. an increase in taxes and a decrease in government purchases to balance the budget.
d. a reduction in both taxes and government spending.

12.
When the MPC gets smaller, the spending multiplier:
a. gets larger.
b. gets smaller.
c. stays the same.
d. gets smaller at low real GDP, and larger at high real GDP.
e. gets larger at low real GDP, and smaller at high real GDP.

13.
If MPC = 0.80, how much should government spending change to increase real GDP by $500?
a. -100.
b. +80.
c. -80.
d. +500.
e. +100.

14.
The marginal propensity to consume is:
a. the change in income divided by the change in consumption.
b. consumption spending divided by income.
c. income divided by consumption spending.
d. the change in consumption divided by the change in income.
e. the change in consumption divided by income.

15.
The marginal propensity to save (MPS) is computed as the change in:
a. savings divided by the change in saving.
b. savings divided by the change in income.
c. saving divided by the change in GDP.
d. None of these.

16.
The relationship between MPC and MPS is:
a. 1 + MPC = MPS.
b. 1 − MPC = MPS.
c. 1 + MPS = MPC.
d. MPC − MPS = 1.

17.
Assume the marginal propensity to consume (MPC) is 0.80 and the government increases taxes
by $100 billion. The aggregate demand curve will shift to the:
a. left by $80 billion.
b. right by $200 billion.
c. right by $400 billion.
d. left by $400 billion.

18.
If an inflationary boom exists, the appropriate fiscal policy is to:
a. increase the budget deficit.
b. increase government spending and hold taxes constant.
c. decrease government spending and/or raise taxes.
d. hold government spending constant and decrease taxes.

19.
If the economy is experiencing demand-pull inflation, then the appropriate government policy
would be to shift the:
a. aggregate demand curve by using a tax increase coupled with spending cuts.
b. aggregate demand curve by using a tax increase coupled with more spending.
c. aggregate demand curve by using a tax cut coupled with spending cuts.
d. aggregate demand curve by using a tax cut coupled with more spending.
e. aggregate supply curve by using a tax cut coupled with spending cuts.

20.
To help close an inflationary gap, the government could:
a. run budget deficits.
b. decrease taxes.
c. increase government spending.
d. run budget surpluses.
e. do nothing.

21.
Equal increases in government spending and taxes will:
a. cancel each other out so that the equilibrium level of real GDP will remain unchanged.
b. lead to an equal decrease in the equilibrium level of real GDP.
c. lead to an equal increase in the equilibrium level of real GDP.
d. lead to an increase in the equilibrium level of real GDP real GDP that is larger than the initial
change in government spending and taxes.
e. lead to an increase in the equilibrium level of output that is smaller than the initial change in
government spending and taxes.

22.
Which of the following is an example of an automatic stabilizer?
a. Congress legislates lower tax rates to increase consumption and investment.
b. Tax rates are increased during a recession to maintain a balanced budget.
c. A regressive income tax system reduces tax revenues (as a share of income) as income
expands.
d. Revenues from the corporate income tax increase sharply during a business boom but decline
substantially during a recession, even though no new tax legislation has been enacted.

23.
A decrease in real GDP would affect the U.S. economy by:
a. cutting tax revenues and raising government expenditures.
b. cutting government expenditures and raising tax revenues.
c. raising both tax revenues and government expenditures.
d. cutting both government expenditures and tax revenues.

24.
Automatic stabilizers "lean against the prevailing wind" of the business cycle because:
a. wages are controlled by the minimum wage law.
b. federal expenditures and tax revenues change as the level of real GDP changes.
c. the spending and tax multipliers are constant.
d. they include the power of special interests.

25.
Unemployment insurance payments act as automatic stabilizers by:
a. allowing for more consumer spending during prosperity.
b. making the unemployment rate worse during a recession.
c. allowing for more consumer spending during a recession.
d. changing the Phillips curve to a Laffer curve.

26.
Unemployment compensation payments:
a. fall during periods of prosperity and thus reduce federal budget deficits.
b. fall during periods of prosperity and thus increase federal budget deficits.
c. fall during recessions and thus increase the problem of unemployment.
d. rise during periods of prosperity and thus increase federal budget deficits.
e. rise during recessions and thus increase the problem of unemployment.

27.
Appropriate supply-side policy (or policies) during a recession would be to do which of the
following?
a. Cut taxes on business.
b. Reduce costly regulations on businesses.
c. Increase government spending.
d. Both a. and b. above are correct.

28.
According to supply-side fiscal policy, reducing tax rates on wages and profits will:
a. create demand-pull inflation.
b. lower the price level but may trigger a recession.
c. result in stagflation.
d. reduce both unemployment and inflation.
29.
Which of the following groups believes that the economy can achieve full employment without
inflation through tax reductions, lower resource prices, and deregulation?
a. Classical school.
b. Keynesian school.
c. Neo-Keynesian school.
d. Rational expectations school.
e. Supply-side school.

30.
According to the Laffer curve, the federal tax rate affects:
a. incentive to work.
b. savings.
c. investment.
d. tax revenue.
e. All of these.

31.
The Laffer curve shows the relationship between tax:
a. revenue and tax rates.
b. revenue and take-home pay.
c. revenue and government spending.
d. rates and take-home pay.
e. rates and government spending.

32.
Assume the economy is in recession and real GDP is below full employment. The marginal
propensity to consume (MPC) is 0.75, and the government follows Keynesian economics by
using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of
$1,000 billion aggregate demand can restore full employment, the government should:
a. increase spending by $250 billion.
b. decrease spending by $750 billion.
c. increase spending by $1,000 billion.
d. increase spending by $750 billion.

33.
As the marginal propensity to consume (MPC) decreases, the spending multiplier:
a. increases.
b. decreases.
c. remains constant.
d. becomes undefinable.
34.
Given full-employment output = $2,800, equilibrium real GDP = $2,500, and MPS = 0.25, which
of the following changes would most likely bring the economy to a full-employment level of real
GDP?
a. $300 decrease in taxes.
b. $75 increase in government spending.
c. $75 decrease in taxes.
d. $300 increase in government spending.
e. $75 decrease in government spending.

35.
Suppose the economy in Exhibit 11-2 is in equilibrium at point E1 and the marginal propensity
to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move
the economy to full employment at point E2 by:
a. decreasing government spending by $750 billion.
b. decreasing government spending by $100 billion.
c. increasing government spending by $25 billion.
d. decreasing government spending by $25 billion.
e. None of these.

Challenging

36.
Exhibit 11-3 Aggregate demand and supply model
Suppose the economy in Exhibit 11-3 is in equilibrium at point E1, and the marginal propensity
to consume (MPC) is 0.75. Following Keynesian economics, to restore full employment, the
government should cut taxes by:
a. $0.20 trillion.
b. $1 trillion.
c. $0.5 trillion.
d. $0.25 trillion.

37.

Suppose the economy in Exhibit 11-4 is in equilibrium at point E1 and the marginal propensity
to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move
the economy to point E2 and reduce inflation by:
a. decreasing government spending by $750 billion.
b. decreasing government spending by $100 billion.
c. increasing government spending by $25 billion.
d. decreasing government spending by $25 billion.
38.

In Exhibit 11-6, if the aggregate demand curve is at AD1, the government should:
a. raise taxes to move to AD2.
b. cut taxes to move to AD2.
c. cut taxes to move to AD3.
d. cut spending to move to AD2.
e. not change its behavior.

39.
An increase in government spending will have the greatest expansionary impact on the economy
if it is combined with:
a. an increase in tax revenue equal to the increase in spending.
b. a decrease in tax revenue equal to the increase in spending.
c. unchanged tax revenue.
d. none of these is true.

40.
The balanced budget multiplier is always equal to:
a. 0.50.
b. 0.75.
c. 1 / MPC.
d. 1.
True or False Questions (10 items)

Easy

1. The size of the spending multiplier depends on the level of real GDP. False
2. The marginal propensity to consume (MPC) is the change in consumption divided by the
change in income. True
3. The balanced budget multiplier is equal to one. True
4. The Laffer curve represents the relationship between real GDP and various possible tax
rates. False

Moderate

5. According to Keynesian economics, fiscal policy should be coordinated to create a

surplus during economic expansions. True
6. Following Keynesian economics, and assuming a marginal propensity to consume (MPC)
of 0.80, an increase in federal government spending of $100 billion at below full
employment would be expected to shift the aggregate demand curve by $500 billion to
the right. True
7. The tax multiplier equals 1 − spending multiplier. True
8. A $10 million increase in government spending has the same economic impact as a $10
million tax cut. False
9. The presence of the automatic stabilizers means an increase in the budget deficit will be
automatically experienced during a recession whereas a budget surplus will be
automatically experienced during an economic expansion. True
10. Supply-side economic policies are designed to shift the aggregate supply curve to the left,
whereas Keynesian economic policies focus on shifting the aggregate demand curve to
the right during recessions and to the left during economic expansions. False
Chapter 14 Reviewer
(Selected Items from a resource)

Multiple Choice Questions (40 items)

Easy

1.
A direct exchange of fish for corn is an example of:
a. storing value.
b. a modern exchange method.
c. barter.
d. a non-coincidence of wants.

2.
What is the “store of value” function of money?
a. A common measurement of the relative value of different goods and services.
b. The ability of money to hold value over time.
c. The quality of money not to be hoarded because of its commodity value.
d. The function of money to be widely accepted I exchange for goods and services.

3.
Which of the following correctly describes the difference between commodity money and fiat
money?
a. Fiat money is only used in Italy, and is issued by a major Italian automobile manufacturer to
support Italian schools.
b. Commodity money is either made out of a valuable commodity like silver or gold, or is
redeemable for a valuable commodity. Fiat money is not.
c. Commodity money can only be used to buy commodities such as grains or lumber, while fiat
money can be used to buy anything.
d. Fiat money is used during times of emergency, such as hurricanes or war, when the existing
stock of commodity money is inadequate to purchase needed goods and services.

4.
Which of the following defines the “store of value” function of money?
a. A common measurement of the relative value of different goods and services.
b. The ability of money to hold value over time.
c. That the materials used to manufacture money are of medium grade or quality, so that people
will not hoard money for its commodity value.
d. That money is widely accepted in exchange for goods and services.

5.
Which of the following items does not provide a store of value?
a. Currency.
b. Checkable deposits.
c. Credit cards.
d. All of these are correct.

6.
Currency consists of:
a. coins and Eurodollars.
b. paper money and checks.
c. coins and paper money.
d. paper money and Eurodollars.
e. coins and checks.

7.
Which of the following forms of money is the least liquid?
a. Dollars.
b. Checking account deposits.
c. Passbook savings.
d. Certificates of deposit.

8.
What establishes the value of fiat money?
a. Our collective trust and confidence that the central government, which decrees that money
cannot be refused as payment for debt.
b. Gold and silver owned by the large commercial banks.
c. The central government authority’s promise to redeem fiat money for gold or silver upon
demand.
d. None of the above.

9.
In the United States, the money supply (M1) consists of:
a. paper currency and coins.
b. coins, paper currency, checkable deposits, and traveler's checks.
c. paper currency, coins, checkable deposits, and savings deposits.
d. government bonds, currency, checkable deposits, and traveler's checks.

10.
M1 money includes all but which one of the following?
a. Checkable deposits.
b. Savings accounts.
c. Paper money.
d. Coins.

11.
Which of the following is counted as part of M2?
a. Currency.
b. Checkable deposits.
c. Money-market mutual funds.
d. All of these.
12.
The conduct of monetary policy is the responsibility of:
a. commercial banks.
b. the U.S. Treasury.
c. the Federal Reserve System.
d. the Congress and the president.

13.
Decisions regarding purchases and sales of government securities by the Fed are made by the:
a. Federal Funds Committee.
b. Discount Committee.
c. Federal Open Market Committee.
d. FDIC.

14.
Which of the following groups oversees and administers the Federal Reserve System?
a. The House of Representatives.
b. The President's Council of Economic Advisors.
c. The U.S. Treasury Department.
d. None of these, the Fed is an independent agency.

15.
The main purpose of the Fed is to:
a. serve as the bankers' bank for member banks.
b. regulate interest rates.
c. print Federal Reserve Notes.
d. regulate financial institutions.
e. maintain the proper functioning of our money system.

16.
The Federal Reserve System is divided into:
a. 2 districts.
b. 12 districts.
c. 26 districts.
d. 50 districts.
e. 1 district.

17.
Which of the following institutions is responsible for supervising the banking system of the
United States?
a. The Federal Reserve System.
b. The Open Market Committee.
c. The U.S. Treasury.
d. The Federal Deposit Insurance Corporation.
18.
The government agency that provides insurance for all checkable deposits up to $100,000 in
banks choosing its protection is the:
a. Federal Deposit Insurance Corporation.
b. Federal Reserve.
c. Office of Management and Budget.
d. Treasury.
e. Securities and Exchange Commission.

Moderate

19.
In the United States, the purchasing power of money is determined by:
a. the underlying precious metals that back each unit of currency.
b. the value of U.S. treasury bonds that back each unit of currency.
c. its acceptability.
d. Congress, which controls the money supply.

20.
Are outstanding credit card balances counted as part of the money supply?
a. Yes; they are used to purchase things, and therefore, they are included in the money supply
figures.
b. No; money is an asset, while the credit card balances are a liability. Thus, they are not
included in the money supply figures.
c. Partly; credit card balances of $100 or less are included in the M1 money supply, but the
money supply figures do not include balances in excess of $100.
d. Partly; credit card balances are included in the M1 money supply, but not the M2 money
supply.

21.
The statement that Computech's profits totaled $500 million last year represents the use of
money as a:
a. medium of exchange.
b. store of value.
c. unit of account.
d. means of coincidence.

22.
Anything can be money if it acts as a:
a. unit of account.
b. store of value.
c. medium of exchange.
d. All of these must be correct.
23.
If something is a unit of account, then it:
a. serves as a yardstick for measuring the relative value of other goods
b. is a means of holding wealth for the future
c. is fairly stable
d. is durable and portable
e. is accepted as payment for any purchase

24.
The ease with which an asset can be converted into a medium of exchange is known as:
a. volatility.
b. liquidity.
c. currency.
d. Gresham's Law.
e. speculative exchange.

25.
The currency of the United States is:
a. backed dollar for dollar by gold.
b. backed by a gold cover of 50 percent.
c. not backed by any precious metal.
d. backed by the government's silver reserves.
e. backed by the government's gold and silver reserves.

26.
Which one of the following is part of the official money supply in the United States?
a. Federal Reserve Notes.
b. Gold bars.
c. Common stock.
d. Silver coins.

27.
The M1 definition of the money supply includes:
a. currency in circulation and checkable deposits.
b. Federal Reserve Notes, gold certificates, and checkable deposits.
c. Federal Reserve Notes and bank loans.
d. None of these.

28.
Which of the following statements is true?
a. Money must be relatively "scarce" if it is to have value.
b. Money must be divisible and portable.
c. M1 is the narrowest definition of money.
d. All of these.
29.
Which one of the following is part of the M2 definition of the money supply, but not part of M1?
a. Checkable deposits.
b. Currency held in banks.
c. Currency in circulation.
d. Small time deposits of less than $100,000.

30.
Which of the following is considered part of M2?
a. Savings deposits.
b. Money market mutual fund shares.
c. Small time deposits of less than $100,000.
d. All of these.

31.
When M1 is expanded to M2, the money supply:
a. almost doubles.
b. more than triples.
c. goes up tenfold in size.
d. changes very little.
e. goes up by 50 percent.

32.
The number of presidentially appointed members who sit on the Federal Reserve Board of
Governors is:
a. none.
b. seven.
c. nine.
d. twelve.

33.
The Fed is often considered the bankers' bank because it:
a. demands much more currency than it has available.
b. no longer has a monopoly on printing paper currency.
c. lowers the discount rate in order to restrict the money supply.
d. holds bankers reserves, provides banks with currency and loans, and clears their checks.
e. refuses to uses its power of open market operations when a quorum of state-chartered bankers
petitions it.

34.
Which of the following is in charge of the buying and selling of government securities by the
Fed?
a. The president.
b. The Federal Open Market Committee.
c. The Congress.
d. None of these.
35.
The Federal Deposit Insurance Corporation (FDIC):
a. insures all demand deposit accounts up to $10 million in banks choosing FDIC protection.
b. was created as a government-owned corporation following the creation of the World Bank and
the International Monetary Fund after World War II.
c. rarely evaluates bank performance to detect weaknesses in operation.
d. creates monetary policy in conjunction with the Federal Reserve Board.
e. was created to reduce the risk of banking by compensating depositors and keeping bank
failures from spreading.

36.
The Monetary Control Act of 1980:
a. allowed savings and loan associations to offer checking accounts.
b. allowed more institutions to offer checking account services.
c. created greater competition among various financial institutions.
d. all of the above.
e. none of the above.

Challenging

37.
Gold is a perfect medium of exchange and measure of value because of its:
a. divisibility, portability, and homogeneity.
b. divisibility and durability.
c. durability and relative scarcity.
d. durability and homogeneity.
e. divisibility, durability, and relative scarcity.

38.
Economists who prefer a broader definition of money prefer the:
a. M4 measure of the money supply to the M1 measure.
b. M2 measure of the money supply to the M1 measure.
c. M3 measure of the money supply to the M2 measure.
d. prefer the M1 measure of the money supply to the M2 measure.

39.
Suppose you transfer $1,000 from your checking account to your savings account. How does this
action affect the M1 and M2 money supplies?
a. M1 and M2 are both unchanged.
b. M1 falls by $1,000, and M2 rises by $1,000.
c. M1 is unchanged, and M2 rises by $1,000.
d. M1 falls by $1,000, and M2 is unchanged.
40.
Which of the following is not one of the functions of the Federal Reserve?
a. Clearing checks.
b. Printing currency.
c. Supervising and regulating banks.
d. Controlling the money supply.

True or False Questions (10 items)

Easy

1. Money eliminates the need to barter. True

2. M1 is actually a smaller amount than M2. True
3. The Federal Reserve System is a branch of the Treasury Department. False
4. The Federal Reserve's most important function is to change the money supply in order to
smooth out the business cycle. True
5. The Fed's responsibilities include controlling the money supply, clearing checks, and
supervising and regulating banks. True

Moderate

6. Credit cards are money because they serve the three functions of money. False
7. M1 includes savings accounts. False
8. The Federal Reserve System was created by an act of Congress in 1933 in an effort to
end a wave of bank failures brought on the Great Depression. False
9. The President and the Congress jointly determine the nation's monetary policies, and the
Fed is required by law to implement those policies. False

Challenging

10. Although it has considerable political independence, the Fed is legally a branch of the
U.S. Treasury Department. False
Chapter 15 Reviewer
(Selected Items from a resource)

Multiple Choice Questions (40 items)

Easy

1.
If total deposits at Last Bank and Trust are $100 million, total loans are $70 million, and excess
reserves are $20 million, then which of the following is the required reserve ratio?
a. 70 percent.
b. 30 percent.
c. 20 percent.
d. 10 percent.

2.
A bank's required reserves are either held as vault cash or:
a. used to purchase Treasury bonds.
b. deposited with the Fed.
c. invested in the stock market.
d. loaned out to other commercial banks.

3.
The required reserve ratio for a bank is set by:
a. Congress.
b. the bank itself.
c. the Treasury Department.
d. the banking system.
e. the Federal Reserve.

4.
The money multiplier equals:
a. 1 / excess reserves.
b. excess reserves / loans.
c. required reserve ratio / excess reserves.
d. 1 / actual reserves.
e. 1 / required reserve ratio.

5.
Which of the following directs open market operations?
a. Board of Governors.
b. Federal Reserve Banks.
c. Federal Open Market Committee
d. Federal Advisory Council.
e. Member banks.
6.
When the Fed purchases government securities, it:
a. increases banks' reserves and makes possible an increase in the money supply.
b. decreases banks' reserves and makes possible a decrease in the money supply.
c. automatically raises the discount rate.
d. uses discounting operations to influence margin requirements.
e. has no effect on either the money supply or the discount rate.

7.
When the Fed buys federal government securities on the open market from commercial banks,
then, over time, the:
a. assets of these banks fall.
b. assets of the banks stay the same.
c. assets of the banks rise.
d. liabilities of the bank rise.
e. liabilities of the bank fall.

8.
The cost to a member bank of borrowing from the Federal Reserve is called the:
a. reserve requirement.
b. price of securities in the open market.
c. discount rate.
d. yield on government bonds.

9.
When the Fed lowers the discount rate, it:
a. lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general
public.
b. raises the cost of borrowing from the Fed, discouraging banks from making loans to the
general public.
c. increases the amount of excess reserves that banks hold, encouraging them to make loans to
the general public.
d. increases the amount of excess reserves that banks hold, discouraging them from making loans
to the general public.
e. decreases the amount of excess reserves that banks hold, discouraging them from making
loans to the general public.

10.
A decrease in the required reserve ratio will:
a. reduce commercial bank loans and reduce the money supply.
b. increase commercial bank loans and reduce the money supply.
c. increase commercial bank loans and increase the money supply.
d. decrease commercial bank loans and increase the money supply.
11.
Which of the following would cause the money supply to increase?
a. An open market purchase by the Fed.
b. A reduction in the discount rate.
c. A reduction in required ratios.
d. All of these.

Moderate

12.
Which of the following appears on the asset side of a bank's balance sheet?
a. Required reserve deposits.
b. Loans.
c. Excess reserves.
d. All of these.

13.
Banks normally hold few excess reserves because this practice is:
a. subject to an excess reserves tax.
b. not profitable.
c. against Fed policy.
d. illegal.

14.
Which of the following is not an interest-earning asset of commercial banks?
a. Required reserves.
b. Checkable deposits.
c. Customer savings accounts.
d. All of the above are interest-earning assets of commercial banks.
e. None of the above are interest-earning assets of commercial banks.

15.
If the fractional reserve system did not exist,
a. the banking system could not create money.
b. there would be no effect on the ability of the banking system to create money.
c. banks would loan out its required reserves.
d. banks would be highly susceptible to bank runs.
e. the banking system would realize the money multiplier.

16.
If loans are $300,000, checkable deposits are $600,000, and the required reserve ratio is 40
percent, then excess reserves are:
a. $360,000.
b. $240,000.
c. $120,000.
d. $60,000.
e. $30,000.

17.
Best National Bank is subject to a 20 percent required reserve ratio. If this bank received a new
checkable deposit of $1,000, it could make new loans of:
a. $500.
b. $800.
c. $1,000.
d. $5,000.

18.
A bank creates money when it:
a. gets new checkable deposits which the depositor formerly held as cash.
b. has a loan paid off, which creates excess reserves for the bank.
c. makes a loan from its excess reserves.
d. holds back excess reserves because of an increase in the required reserve ratio.
e. gets more excess reserves because of a decrease in the required reserve ratio.

19.
Best National Bank operates with a 20 percent required reserve ratio. One day a depositor
withdraws $500 from his or her checking account at this bank. As a result, the bank's excess
reserves:
a. fall by $500.
b. fall by $400.
c. rise by $100.
d. rise by $500.

20.
If the required reserve ratio is a uniform 25 percent on all deposits, the money multiplier will be:
a. 4.00.
b. 2.50.
c. 0.40.
d. 0.25.

21.
When the required reserve ratio is changed,
a. the money multiplier is changed but the amount of excess reserves in the banking system is
unchanged.
b. the money multiplier is unchanged but the amount of excess reserves in the banking system is
changed.
c. the size of the money multiplier and the amount of excess reserves change in the opposite
direction from the required reserve ratio.
d. the size of the money multiplier and the amount of excess reserves change in the same
direction as the required reserve ratio.
e. neither the money multiplier nor the amount of excess reserves change.
22.
When the Federal Reserve sells government bonds to the public, it:
a. increases the M1 money supply and increases the reserves of the commercial banking system.
b. increases the M1 money supply, while reducing the reserves of the commercial banking
system.
c. reduces the M1 money supply, while increasing the reserves of the commercial banking
system.
d. reduces the M1 money supply and decreases the reserves of the commercial banking system.

23.
Decisions regarding purchases and sales of government securities by the Fed are made by the:
a. Federal Deposit Insurance Commission (FDIC).
b. Discount Committee (DC).
c. Federal Open Market Committee (FOMC).
d. Federal Funds Committee (FFC).

24.
If there is a recession, the Fed would most likely encourage banks to provide loans by:
a. buying government securities.
b. raising the discount rate.
c. selling government securities.
d. raising the federal funds rate.

25.
Which of the following policy actions by the Fed would cause the money supply to increase?
a. An open market sale of government securities.
b. An increase in required reserve ratios.
c. A decrease in the discount rate.
d. All of these.

26.
When the Fed raises the discount rate, it:
a. lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general
public.
b. raises the cost of borrowing from the Fed, discouraging banks from making loans to the
general public.
c. increases the amount of excess reserves that banks hold, encouraging them to make loans to
the general public.
d. increases the amount of excess reserves that banks hold, discouraging them from making loans
to the general public.
e. decreases the amount of excess reserves that banks hold, discouraging them from making
loans to the general public.
27.
The federal funds market is the market in which:
a. banks borrow from the Fed.
b. bank customers borrow from their banks
c. banks borrow from each other.
d. the federal government borrows from the Fed.
e. the federal government borrows from members of the general public.

28.
Which of the following would cause the money supply in the United States to expand?
a. A decrease in reserve requirements.
b. An increase in the discount rate.
c. The sale of U.S. government bonds by a Federal Reserve bank.
d. An increase in the world supply of gold.

29.
When the Fed lowers the required reserve ratio, it:
a. lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general
public
b. raises the cost of borrowing from the Fed, discouraging banks from making loans to the
general public.
c. increases the amount of excess reserves that banks hold, encouraging them to make loans to
the general public.
d. increases the amount of excess reserves that banks hold, discouraging them from making loans
to the general public.
e. decreases the amount of excess reserves that banks hold, discouraging them from making
loans to the general public.

30.
If the Fed wanted to use all three of its major monetary control tools to decrease the money
supply, it would:
a. buy bonds, reduce the discount rate, and reduce reserve requirements.
b. sell bonds, reduce the discount rate, and reduce reserve requirements.
c. sell bonds, increase the discount rate, and increase reserve requirements.
d. buy bonds, increase the discount rate, and increase reserve requirements.

31.
When the economy is at full employment and inflation is present, the government could create a
surplus budget by cutting its own spending and raising taxes. The Fed would be expected to:
a. reduce the required reserve ratio, increase the discount rate, and buy securities on the open
market.
b. reduce the required reserve ratio, reduce the discount rate, and sell securities on the open
market.
c. reduce the required reserve ratio, reduce the discount rate, and buy securities on the open
market.
d. increase the required reserve ratio, reduce the discount rate, and sell securities on the open
market.
e. increase the required reserve ratio, increase the discount rate, and sell securities on the open
market.

32.

Assume all banks in the system started with the balance sheet shown in Exhibit 15-4 and the Fed
makes a $1,000 open market purchase. The result would be a(n):
a. infinite contraction of the money supply.
b. infinite expansion of the money supply.
c. $1,000 expansion of the money supply.
d. $5,000 expansion of the money supply.

33.

If all banks in the system shown in Exhibit 15-5 were identical to Tucker National Bank, the
money multiplier for the system would be:
a. 4.
b. 5.
c. 10.
d. 25.

Challenging

34.
In Exhibit 15-1, if the required reserve ratio is raised to 15 percent, First Iliad State will have to
convert loans worth:
a. $9,000,000 to required reserves.
b. $1,500,000 to required reserves.
c. $500,000 to required reserves.
d. $1,000,000 to required reserves.
e. $450,000 to required reserves.

35.

In Exhibit 15-2, if Springfield National has excess reserves equal to $300, and then its customers
write checks for $200, its excess reserves will fall to:
a. $0.
b. $100.
c. $140.
d. $160.
e. $200.

36.
If Matt Taylor gets his $800 loan from the Paris First National Bank in cash rather than in the
form of a new checkable deposit, the:
a. Paris First National Bank will get $800 in new reserves.
b. Paris First National Bank will not get $800 in new reserves.
c. assets of the Paris First National Bank will increase by $800.
d. assets of the Paris First National Bank will decease by $88.
e. liabilities of the Paris First National Bank will increase by $800.

37.
In a simplified banking system subject to a 25 percent required reserve ratio, a $1,000 open-
market purchase by the Fed would cause the money supply to:
a. increase by $1,000.
b. decrease by $1,000.
c. decrease by $4,000.
d. increase by $4,000.

38.
Suppose the Fed sells $100 million of U.S. securities to the security dealers. If the reserve
requirement is 20 percent, the currency holdings of the public are unchanged, and banks have
zero excess reserves both before and after the transaction, the total impact on the money supply
will be a:
a. $100 million decrease.
b. $500 million increase.
c. $500 million decrease.
d. $100 million increase.

39.
Assume that the Paris First National Bank's loan position contracted from $16 million to $12
million. If the required reserve ratio was increased from 20 percent to 40 percent, how much
would the money supply shrink?
a. $5 million.
b. $10 million.
c. $15 million.
d. $20 million.
e. $24 million.

40.

In Exhibit 15-7, if Lower Walloon National bank loans out all of its excess reserves to James
Brown so that Mr. Brown can upgrade his restaurant, and the money is put into Mr. Brown's
account at the Lower Walloon National bank, then the bank will have reserves of:
a. $10,000, loans of $8,000, and checkable deposits of $18,000.
b. $2,000, loans of $4,000, and checkable deposits of $14,000.
c. $6,000, loans of $4,000, and checkable deposits of $10,000.
d. $10,000, loans of $8,000, and checkable deposits of $10,000.
e. $0, loans of $8,000, and checkable deposits of $18,000.

True or False Questions (10 items)

Easy

1. A bank can lend out its excess reserves but not its required reserves. True
2. Banks do not create money when they make loans. False
3. In a simplified system where all banks have uniform reserve requirements and checkable
deposits are the only form of money, the money multiplier is equal to 1 over the required
reserve ratio. True
4. As discussed in the text, a bank can extend new loans equal to the amount by which its
excess reserves increase. True
5. An open-market purchase by the Federal Reserve injects excess reserves into the banking
system and allows the money supply to expand. True
6. An increase in the discount rate by the Federal Reserve causes the money stock to
expand. False
7. Raising the required reserve ratio causes the money multiplier to increase. False
Moderate

8. The amount of checkable deposits in an economy cannot exceed the amount of currency
that the government has issued. False
9. A decrease in the required reserve ratio will increase banks' excess reserves and decrease
the money multiplier. False

Challenging

10. If the Federal Reserve wishes to increase the money supply it should decrease the
discount rate and/or decrease the required reserve ratio and/or buy government securities
on the open market. True
Chapter 16 Reviewer
(Selected Items from a resource)

Multiple Choice Questions (40 items)

Easy

1.
One reason that people hold money is to pay for unexpected car repairs and other unpredictable
expenses. This motive for holding money is called:
a. transactions demand.
b. precautionary demand.
c. speculative demand.
d. noncyclical demand.

2.
The speculative demand for money is the stock of money that people hold to:
a. pay their predictable, everyday expenses.
b. pay for any unexpected expenses that may occur.
c. buy stocks, bonds, and other financial assets.
d. buy the foreign currencies needed to purchase imports.

3.
The demand for money curve shows that there is an inverse relationship between the quantity of
money demanded and the:
a. quantity of money supplied.
b. gross domestic product (GDP).
c. price level.
d. interest rate.

4.
The equation of exchange states that:
a. money supply multiplied by real output equals velocity.
b. velocity multiplied by money supply equals the selling price times the quantity of actual
output.
c. money supply divided by velocity equals nominal GDP.
d. money supply divided by velocity equals real GDP.

5.
The velocity of money is the:
a. number of times per year each dollar is used to transact an exchange.
b. rapidity of price increases during inflation.
c. number of times the price level increases during a year.
d. time it takes for checks to clear banks.
e. number of times per year each product is purchased during the year.
Moderate

6.
The transactions demand for holding money is when people hold money:
a. instead of near money.
b. to transact purchases they expect to make.
c. as insurance against unexpected expenses.
d. to speculate in the stock market.
e. to take advantage of changes in interest rates.

7.
The precautionary demand for holding money is when people hold money:
a. instead of near money.
b. to transact purchases they expect to make.
c. as insurance against unexpected needs.
d. to speculate in the stock market.
e. to take advantage of changes in interest rates.

8.
The speculative demand for money:
a. varies inversely with income.
b. is only concerned with active money.
c. involves holding money for unexpected problems.
d. varies directly with the transactions demand for money.
e. varies inversely with the interest rate.

9.
Which of the following explains why the demand for money curve has an inverse relationship
between the interest rates and the quantity of money demanded?
a. As the interest rate rises, the opportunity cost of holding money rises, and people respond by
converting cash or checking account balances into interest-bearing financial investments.
b. As the interest rate rises, people find it advantageous to borrow money, which increases the
quantity of money demanded.
c. As the interest rate falls, the opportunity cost of holding money rises, and people respond by
converting cash or checking account balances into interest-bearing financial investments.
d. As the interest rate rises, the demand for money curve shifts outward to the right.

10.
Other things being equal, an increase in the rate of interest causes a(n):
a. upward movement along the demand for money curve.
b. downward movement along the demand for money curve.
c. rightward shift of the demand for money curve.
d. leftward shift of the demand for money curve.
11.
If the Fed wants to raise interest rates, then it can use its open market operations to:
a. increase the money supply.
b. decrease the money supply.
c. increase money demand.
d. decrease money demand.

12.

Starting from an equilibrium at E1 in Exhibit 16-1, a leftward shift of the money supply curve
from MS1 to MS2 would cause an excess:
a. demand for money, leading people to sell bonds.
b. demand for money, leading people to buy bonds.
c. supply of money, leading people to sell bonds.
d. supply of money, leading people to buy bonds.

13.
Which of the following policies would be most likely to reduce the rate of inflation?
a. sale of government bonds by the Federal Reserve
b. a reduction in the discount rate
c. an increase in the size of the federal budget deficit
d. a reduction in the required reserves imposed on the banking system

14.
The Keynesian mechanism through which monetary policy affects the price level, real GDP, and
employment depends on the impact of the:
a. interest rate on savings.
b. inflation on investment.
c. interest rate on investment.
d. interest rate on bond prices.

15.
According to Keynesians, for monetary policy to have a stimulative effect on GDP, a(n):
a. increase in the money supply lowers the interest rate in order to stimulate higher levels of
investment.
b. increase in the money supply lowers the interest rate in order to lower levels of investment.
c. decrease in the money supply lowers interest rate in order to stimulate higher levels of
investment
d. decrease in the money supply causes the interest rate to rise in order to stimulate higher levels
of investment.
e. increase in the money supply causes the interest rate to rise in order to stimulate higher levels
of investment.

16.

In Exhibit 16-4, which one of the following actions could the Fed use to shift the AD curve from
AD3 to AD2?
a. Lower the legal reserve requirement.
b. Lower the discount rate.
c. Lower the federal funds rate.
d. Raise the discount rate.
e. Buy government securities.
17.

In Exhibit 16-5, if the interest rate falls from i1 to i2, investment spending will:
a. increase, and aggregate demand will shift from AD1 to AD2.
b. decrease, and aggregate demand will shift from AD2 to AD1.
c. remain the same, and aggregate demand will shift from AD2 to AD3.
d. increase, and aggregate demand will shift from AD2 to AD1.
e. decrease, and aggregate demand will shift from AD1 to AD2.

18.
According to monetarists, which of the following would be most important for the control of
inflation?
a. a steady increase in federal expenditures
b. the imposition of price controls
c. keeping the growth rate of the money supply low and steady
d. a steady increase in the size of the budget deficit

19.
According to the equation of exchange, if M = 200, P = 100, and Q = 10, the V is:
a. 20.
b. 2.
c. 10.
d. 5.
e. 2,000.
20.
If nominal GDP is $7 trillion, and the money supply is $2 trillion, then what is the velocity of
money?
a. 14.
b. 7.
c. 3.5.
d. 2.

21.
If the nominal GDP is $500 billion and the money supply is $100 billion, the velocity of money
is:
a. 500.
b. 5.00
c. 2.50.
d. 0.40.

22.
According to classical economists,
a. prices are rigid.
b. both V and Q are variable for an economy in short-run equilibrium.
c. changes in M cause changes in V.
d. the velocity of money is constant.

23.
Monetarists believe that:
a. velocity is constant.
b. velocity is highly predictable.
c. there are three motives for demanding money.
d. changes in the money supply cause changes in velocity.
e. a change in the money supply can affect real GDP.

24.
In the quantity theory of money:
a. the price level is a function of the supply of money.
b. the supply of money is a function of the price level.
c. the money supply and the price level are inversely related.
d. the money supply is controlled by the government.

25.
If M = 200, P = 100, and Q = 10, then V is:
a. 20.
b. 2.
c. 10.
d. 5.
e. 2,000.
26.
Monetarists argue that the Federal Reserve should allow the money supply to grow:
a. counter to the business cycles.
b. faster than 10 percent annually.
c. only during recessions.
d. at a constant rate.

27.
Which of the following is an important issue in the Keynesian-Monetarist debate?
a. The relative importance of monetary and fiscal policy.
b. The nature of the transmission mechanism through which a change in the money supply
affects the economy.
c. The shape of the investment-demand curve.
d. All of these.

28.
Monetarists argue that fiscal policy is ineffective because:
a. the velocity of money is predictable.
b. the crowding-out effect reduces investment.
c. prices and wages are sticky in the short run.
d. it causes the value of the dollar to depreciate.

Challenging

29.
Other things being equal, the quantity of money that people wish to hold in currency and their
checking accounts can be expected to:
a. increase as the interest rate increases.
b. decrease as the interest rate increases.
c. decrease as real GDP increases.
d. none of these.

30.
In Keynes's view, an excess quantity of money demanded causes people to:
a. sell bonds and the interest rate rises.
b. buy bonds and the interest rate falls.
c. buy bonds and the interest rate rises.
d. increase speculative balances.

31.
Suppose that the current money market equilibrium features an interest rate of 5 percent and a
quantity of $2 trillion. If the Fed raises the discount rate, which of the following ismostlikely to
be the new money market equilibrium?
a. An interest rate of 6 percent and a quantity of $1.5 trillion.
b. An interest rate of 5 percent and a quantity of $2 trillion.
c. An interest rate of 4 percent and a quantity of $2.5 trillion.
d. None of the above.

32.
Assume the demand for money curve is stationary and the Fed increases the money supply. The
result is that people:
a. increase the supply of bonds, thus driving up the interest rate.
b. increase the supply of bonds, thus driving down the interest rate.
c. increase the demand for bonds, thus driving up the interest rate.
d. increase the demand for bonds, thus driving down the interest rate.

33.

As shown in Exhibit 16-2, assume the money supply curve shifts rightward from MS1 to MS2
and the economy is operating along the intermediate segment of the aggregate supply curve. The
result will be a:
a. higher interest rate and no effect on real GDP or the price level.
b. lower investment, lower real GDP, and lower price level.
c. higher investment, higher real GDP, and higher price level.
d. higher investment, lower real GDP, and lower price level.

34.
If the Fed reduces the discount rate, which of the following are most likely to result?
a. The money supply curve shifts rightward, and the equilibrium interest rate falls in the money
market.
b. Investment declines, causing the aggregate demand curve to shift leftward, reducing
equilibrium real GDP and thus slowing the economy.
c. Investment rises, causing the aggregate demand curve to shift rightward, increasing
equilibrium real GDP and thus accelerating the economy.
d. Both a. and b. above are correct.
e. Both a. and c. above are correct.

35.
The Keynesian cause-and-effect sequence predicts that an increase in the money supply will
cause interest rates to:
a. fall, boosting investment and shifting the AD curve rightward, leading to an increase in real
GDP.
b. fall, boosting investment and shifting the AD curve rightward, leading to a decrease in real
GDP.
c. rise, cutting investment and shifting the AD curve rightward, leading to an increase in real
GDP.
d. rise, boosting investment and shifting the AD curve rightward, leading to an increase in real
GDP.
e. fall, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP.

36.
According to Keynesians, an increase in the money supply will have its least impact on GDP
when the aggregate demand curve intersects:
a. the horizontal portion of the aggregate supply curve.
b. the vertical portion of the aggregate supply curve.
c. the upward sloping portion of the aggregate supply curve.
d. either the horizontal or upward sloping portion of the aggregate supply curve.
e. either the horizontal or upward sloping portion of the aggregate supply curve.

37.

In Exhibit 16-6, if the Fed believes the economy is at AD3, how might it engineer a decline in
the price level?
a. By decreasing the money supply, the interest rate falls, investment rises, and aggregate
demand falls, causing the price level to fall.
b. By decreasing the money supply, the interest rate rises, investment rises, and aggregate
demand rises, causing the price level to fall.
c. By decreasing the money supply, the interest rate rises, investment falls, and aggregate
demand falls, causing the price level to fall.
d. By increasing the money supply, the interest rate rises, investment rises, and aggregate
demand falls, causing the price level to fall.
e. By increasing the money supply, the interest rate rises, investment falls, and aggregate demand
rises, causing the price level to fall.

38.
According to the quantity theory of money, a 10 percent increase in the money supply leads to a
10 percent increase in:
a. velocity.
b. unemployment.
c. the price level.
d. real GDP.

39.
Since classical economists and monetarists believe that the economy operates at full
employment, real GDP, that is, along the vertical segment of aggregate supply:
a. any increase in the money supply can only end up raising the price level.
b. any increase in the money supply can only end up lowering the price level.
c. any decrease in the money supply can only end up raising the price level.
d. changes in the money supply will not affect the price level.
e. any increase in the money supply will cause both nominal and real GDP to increase.

40.
Most monetarists favor:
a. frequent changes in the growth rate of the money supply to avoid inflation.
b. placing the Federal Reserve under the Treasury.
c. a steady, gradual shrinkage of the money supply.
d. a constant increase in the money supply year after year equal to the potential annual growth
rate in real GDP.

True or False Questions (10 items)

Easy

1. John Maynard Keynes listed three types of motives for people holding money ⎯
transactions, precautionary, and speculative. True
2. If M stand for the money supply, V for the velocity of money, P for the average selling
price, and Q for the output of goods and services, the equation of exchange is MV = PQ.
True
Moderate

3. Bond prices and interest rates are directly related. False

4. A rightward shift in the money supply curve is likely to produce a rightward shift in the
money demand curve. False
5. A decrease in the supply of money, other things being equal, will raise the equilibrium
interest rate. True
6. According to Keynesian theory, changes in the money supply have a direct and
immediate impact on aggregate demand. False
7. If the investment curve is relatively flat, the Keynesian conclusion is that the
transmission mechanism has little effect on the economy. False
8. Monetarists argue that the Treasury's conduct of fiscal policy is the most important factor
affecting real GDP and interest rates. False

Challenging

9. If the money supply increases this will cause the interest rate to rise, investment to fall
and GDP to fall. False
10. The Monetarists advocate the monetary rule in order to stabilize the business cycle which
states that the money supply should be decreased by a constant rate year after year. False
Chapter 18 Reviewer
(Selected Items from a resource)

Multiple Choice Questions (40 items)

Easy

1.
Specialization and trade allow an economy to expand its:
a. production possibilities.
b. consumption possibilities.
c. technological advantage.
d. absolute advantage.

2.
Which of the following provides the foundation of the case for free trade?
a. The law of diminishing marginal utility
b. The anti-dumping argument
c. The industrial diversity argument
d. The theory of comparative advantage

3.
Juanita, a lawyer, can type faster than Jill, her secretary. Jill, on the other hand, does not have the
ability or skills to practice law. Applying the principles of international trade to this situation, an
economic consultant advises Juanita to:
a. fire Jill, practice law during the day, and do her own typing at night.
b. practice law and leave all the typing to the secretary.
c. divide her time equally between typing and practicing law.
d. quit practicing law and take a job as a secretary.
e. have Jill attend law school.

4.
A country that can produce a good using fewer resources than another country has a(n):
a. lower opportunity cost of producing the good than another country.
b. absolute advantage.
c. specialization in the production of the good.
d. all of these.

5.
A tariff is:
a. a duty that a company must pay its own government on exports.
b. the price charged by one country to buyers of a good in another country.
c. a price reduction designed to encourage international trade.
d. a tax on an import.
6.
GATT stands for:
a. Good and Total Trade.
b. General Agreement on Tariffs and Trade.
c. Greater Agreements Toward Trade.
d. Gold and Trade Totals.
e. Greater Area Trade Transactions.

7.
Suppose a quota on foreign-made automobiles is proposed in Congress. Which of the following
groups is most likely to oppose the bill?
a. American Automobiles Manufacturers.
b. Consumers.
c. American Steel Workers.
d. United Auto Workers.

8.
Which of the following is a partially valid economic argument for restricting free trade?
a. Restrictions on foreign trade will increase employment and permanently reduce
unemployment.
b. Removal of restrictions that have existed for years will initially cause inflation.
c. Infant industries need permanent protection to develop and gain productive efficiency.
d. A nation needs to protect industries that are vital to national defense in case of future
international conflict.

9.
The term "balance of payments" refers to a nation's:
a. goods exports minus imports.
b. record of all international transactions.
c. capital inflows minus outflows.
d. official reserves inflows minus outflows.

10.
An unfavorable balance of trade occurs when:
a. exports equal imports.
b. the balance of payments balances.
c. the current and capital account in the BOP are equal.
d. the value of the exports of goods exceeds the value of the imports of goods.
e. the value of the exports of goods is less than the value of the imports of goods .

11.
An exchange rate is the number of units of:
a. a nation's money that is equal to one unit of another nation's money.
b. a nation's output that is equal to one unit of another nation's output.
c. gold backing a nation's money.
d. none of these.
12.

In Exhibit 15-6, when the exchange rate is 1 dollar per pound,

a. the market is in equilibrium.
b. there is a surplus of 30 pounds.
c. there is a surplus of 60 pounds.
d. there is a shortage of 30 pounds.
e. there is a shortage of 60 pounds.

13.
Suppose Japan has a comparative advantage over Canada in the production of DVDs. This
means that Japan:
a. needs fewer resources to produce DVDS than does Canada.
b. has better technology for producing DVDs than does Canada.
c. has a lower opportunity cost of DVD production than does Canada.
d. can produce more DVDs in a given period of time than can Canada.

14.
If the United States were to adopt a policy of free trade with European countries and Japan, this
policy would:
a. help the United States and hurt the other countries because the United States has a larger
population.
b. help all of the countries involved because every country would have a comparative advantage
in the production of some goods.
c. hurt all of the countries involved because all the countries are capable of producing anything
that could be produced in one of the other countries.
d. help the United States and hurt the other countries because the United States has more natural
resources than the other countries.

15.
Suppose rice can be produced in country X at a lower cost than in country Y, while tuna can be
produced in country Y at a lower cost than in country X. International competition will:
a. destroy the rice market in both countries.
b. drive X to specialize in rice and Y to specialize in tuna.
c. drive Y to specialize in rice and X to specialize in tuna.
d. cause both X and Y to reject international specialization.
e. result in lower total output of rice and tuna.

16.
A lawyer once said, "I could paint my house and fix my plumbing if I just had some technical
training and good tools. But, I would rather hire a painter and a plumber." When it comes to
fixing a leaking sink, the plumber:
a. d and e.
b. charges more per hour than the lawyer does.
c. charges less per hour than the lawyer does.
d. is more efficient.
e. has a comparative advantage.

17.

If each nation in Exhibit 15-3 specializes in producing the good for which it has a comparative
advantage, then:
a. Ireland would produce neither potatoes or wheat.
b. the United States would produce both potatoes and wheat.
c. the United States would produce potatoes.
d. Ireland would produce potatoes.

18.
Which of the following would be expected if the tariff on foreign-produced automobiles were
increased?
a. The domestic price of automobiles would fall.
b. The supply of foreign automobiles to the domestic market would decline, causing auto prices
to rise.
c. The number of unemployed workers in the domestic automobile industry would rise.
d. The demand for foreign-produced automobiles would increase, causing the price of
automobiles to increase in other nations.

19.
A tariff has the effect of granting ____ a larger share of the domestic market.
a. domestic consumers
b. foreign consumers
c. domestic producers
d. foreign producers
e. no producers or consumers
20.
The principal objective of WTO is to:
a. reduce the level of all tariffs.
b. establish fair prices for all goods traded internationally.
c. prevent the trading of services across nations' borders.
d. encourage countries to establish quotas.

21.
Which of the following is an infant-industry argument in favor of restrictions on foreign trade?
a. Foreign producers must be stopped from selling their products in this country below cost of
production.
b. Domestic workers must be protected from the lower wages paid in foreign countries.
c. The nation's security demands we ensure an adequate domestic supply capacity of certain
products.
d. Do unto others as they do unto you.
e. Industries in the early stages of development must be protected from more mature producers.

22.
A favorable balance of trade occurs when:
a. exports equal imports.
b. the balance of payments balances.
c. the current and capital account in the BOP are equal.
d. the value of the exports of goods exceeds the value of the imports of goods.
e. the value of the exports of goods is less than the value of the imports of goods .

23.
Which of the following is not included in the current account?
a. Exports of goods.
b. Imports of goods.
c. U.S. capital inflow and outflow.
d. Unilateral transfers.

24.
In the U.S. balance of payments, purchases of foreign assets by U.S. residents are tabulated as a:
a. unilateral transfer.
b. capital outflow.
c. current account outflow.
d. capital inflow.

25.
Suppose a German bank purchases a U.S. Treasury bond. This transaction would be recorded in
the:
a. capital account.
b. current account.
c. goods trade balance.
d. unilateral transfers.
26.
If a box of Swiss chocolate priced at 100 francs can be purchased for $50, the exchange rate is:
a. 0.50 francs per dollar.
b. 4.00 francs per dollar.
c. 0.50 dollars per franc.
d. none of these.

27.
If the exchange rate between the yen and the dollar changes from 100 yen = $1 to 110 yen = $1,
then:
a. the dollar has depreciated in value.
b. U.S.-made goods will become less expensive to Japanese citizens.
c. the dollar has appreciated in value.
d. Japanese-made goods will become more expensive to U.S. citizens.
e. there will be an increase in the demand for dollars in the foreign exchange market.

28.
The exchange rate is the:
a. value of money.
b. quantity of dollars, yen, etc. that are traded.
c. amount of a foreign currency that is brought back to the United States by tourists.
d. number of units of your currency that it takes to buy one unit of a foreign currency.
e. number of units of a foreign currency that can be bought with one unit of your own currency.

29.

In Exhibit 15-6, when the exchange rate is 3 dollars per pound,

a. there is an excess supply of 110 pounds.
b. there is an excess demand of 110 pounds.
c. there is an excess supply of 110 dollars.
d. there is an excess demand of 110 dollars.
e. the market is in equilibrium.
30.
Which of the following would cause the supply of dollars curve in the United States to shift to
the right?
a. Japanese imports become less popular.
b. The value of the dollar falls.
c. The supply of dollars decreases.
d. Japanese imports became more popular.

31.
A depreciation of one's currency means that:
a. the country's exports will become more expensive.
b. the country's imports will become more expensive.
c. the country's imports will become less expensive.
d. it now requires less of this currency in exchange for one unit of another currency.
e. it now requires more units of other currencies in exchange for one unit of this currency.

32.
An increase in demand for a nation's currency in the foreign exchange market will:
a. cause the nation's currency to appreciate.
b. make it more expensive for the nation to import goods.
c. cause the nation's balance on current account to shift toward a surplus.
d. make it less expensive for foreigners to buy the nation's goods.

Challenging

33.

In Exhibit 15-1, the production possibilities curves of wheat and corn for Nabia and Pada are
presented. In Pada the cost of producing one more unit of corn is equal to:
a. 3 units of wheat.
b. 3 units of corn.
c. 1/3 unit of wheat.
d. 15 units of wheat.
e. 30 units of wheat.

34.
Comparative advantage indicates that:
a. specialization and exchange will cause trading partners to reduce their joint output.
b. a nation can gain from trade even when it is at an absolute disadvantage in producing all
goods.
c. trade with low-wage countries will pull down the wages of workers in high-wage countries.
d. all of these.

35.
If it costs the DuPont Chemical Company more to make the chemical flaxinate in the United
States than it does to make it in Formosa, the Formosans must have:
a. lower demand for flaxinate.
b. tariffs on flaxinate.
c. inefficient markets.
d. a more favorable political environment.
e. an absolute advantage in flaxinate production.

36.
The balance of payments ____.
a. b and e
b. is always zero
c. is positive when the nation runs a trade surplus
d. is negative when the nation runs a trade deficit
e. is an itemized account of a nation's foreign economic transactions

37.

Exhibit 15-5 displays the international currency market for yen in terms of dollars and dollars in
terms of yen. The demand curve in graph 15-5(A) is determined by:
a. U.S. citizens attempting to purchase Japanese-made goods.
b. Japanese attempting to purchase U.S.-made goods.
c. U.S. businesses attempting to sell to the Japanese.
d. Japanese businesses attempting to sell to the U.S.
e. the U.S. government attempting to unload dollars to the international market.

38.
Suppose there are two countries, X and Y. If the exchange rate, as measured in X's currency, is
currently 9, what do citizens of the nation of Y see when they read their newspapers?
a. The exchange rate for X's currency is 9.
b. The exchange rate for X's currency is more than 9.
c. The exchange rate for X's currency is 3.
d. The exchange rate for X's currency is 0.11.
e. Knowing one exchange rate does not mean we can tell the other exchange rate.

39.
If the dollar appreciates (becomes stronger) this causes:
a. the relative price of U.S. goods to increase for foreigners.
b. the relative price of foreign goods to decrease for Americans.
c. U.S. exports to fall and U.S. imports to rise.
d. a balance of trade deficit for the U.S.
e. all of these.

40.
If real interest rates in the United States are higher than those of our trading partners, what will
tend to happen to the foreign exchange value of the dollar and the U.S. current account deficit or
surplus?
a. The dollar will depreciate; the current account will move toward a deficit.
b. The dollar will depreciate; the current account will move toward a surplus.
c. The dollar will appreciate; the current account will move toward a deficit.
d. The dollar will appreciate; the current account will move toward a surplus.

True or False Questions (10 items)

Easy

1. If free trade is opened between two countries, then one country must gain at the other
country's expense. False
2. A country has a comparative advantage in producing a good when it has the lowest
opportunity cost of producing that good. True
3. Protectionist policies such as tariffs and quotas are beneficial to the nation imposing
those trade barriers. False
4. A country's imports of goods minus its exports of goods is reported in the goods balance.
False

Moderate

5. Absolute advantage governs the potential for gains from trade. False
 6. A country's balance on current account will always equal its balance on capital account.
True
7. Under a fixed exchange rate system, a government is at risk of running out of foreign
currency reserves when the country's imports exceed its exports. True
8. If the U.S. dollar appreciates relative to the British pound, then we pay fewer dollars for a
pound. True

Challenging

9. One reason why we might want to impose restrictions on free trade is to protect infant
domestic industry in the formative stages of development and thus unable to compete yet
on world markets. True
10. It is possible for the balance of trade to be negative, and the current account to be
positive. True