From

1. If a certain combination of goods or services lies outside the production possibilities curve
of an economy, which of the following is true.
true
(a) Effective trade barriers have reduced foreign imports into the economy.
(b) New technology is being used in production.
(c) Resources are not available to achieve that combination of goods/services.
(d) resources are not being used efficiently to achieve that combination of goods or services.
(e) Resources are being used at a more rapid rate then they were in the past.
2. Which of the following groups would most likely gain from unanticipated inflation?
inflation
Borrowers borrowed
(a) Landlords who own apartments in cities with rent controls.
dear money & paid
(b) Individuals who have fixed retirement incomes.
back cheaper money.
(c) Individuals who earn high incomes
(d) Individuals who have borrowed money at fixed interest rates
(e) Banks that have loaned all excess reserves at a fixed interest rate.
3. With a constant money supply, if the demand for money decreases, the equilibrium interest
rate and quantity of money will change in which of the following ways?
Interest Rate
Quantity of Money
(a) Increase
Decrease
(b) Increase
Not change
(c) Decrease
Decrease
(d) Decrease
Increase
(e) Decrease
Not change

PL

AD

PL1
PL2

AS AS
E1
E2
Y1Y2Real

GDP

4. According to the graph above, an increase in AS will most likely cause income and employment
to change in which of the following ways?

Income

Employment

(a) Decrease
(b) Decrease
(c) No change
(d) Increase
(e) Increase

Decrease
Increase
Increase
Decrease
Increase

5. If the exchange rate between the U.S. dollar and the British pound changed from $2 per one
pound to $3 per one pound,
pound and domestic prices in both countries stayed the same, then the
U.S. dollar would
(a) depreciate, making U.S. imports from Britain more expensive
(b) depreciate, making U.S. imports from Britain cheaper
(c) appreciate, making U.S. imports from Britain more expensive
(d) appreciate, making U.S. imports from Britain cheaper
(e) purchase 3 times more British goods than before the change occurred

6. If an economy is operating with significant unemployment, an increase in which of the following

will most likely cause employment to increase and the interest rate to decrease?
decrease
(a) Purchases of government bonds by the central bank
(b) Transfer payments
Fed buying bonds means bigger supply of money and
lower interest rates. The lower interest rates lead to more
(c) Reserve requirements
consumption and investment and increase employment.
(d) Government expenditures
(e) Investment in basic infrastructure
7. An increase in which of the following is most likely to promote economic growth?
growth
(a) Consumption spending (d) The trade deficit
Economic growth is increased with more
(b) Investment tax credits
(e) Real interest rates real capital equipment to produce things.
Investment tax credits result in more real
(c) The natural rate of unemployment
capital equipment.
8. An appropriate fiscal policy to combat a recession would be to increase which of the
following?
(a) Interest rates (d) Government spending
(b) The money supply
(e) The sale of government bonds
(c) Taxes
9. The concept of opportunity cost would no longer be relevant if
(a) poverty in an economy no longer existed
(b) the supply of all resources were unlimited
(c) resources were allocated efficiently
(d) real wages were flexible
(e) all current incomes were invested in technological research

10. An appreciation of the U.S. dollar on the foreign exchange market could be caused
by a decrease in which of the following?
(a) U.S. interest rates
(b) The U.S. consumer price index
(c) Demand for the dollar by U.S. residents Lower prices increase demand for U.S.
exports and appreciate the dollar.
(d) Exports from the U.S.
(e) The tariff on goods imported into the U.S.
11. Which of the following would indicate that economic growth has occurred?
occurred
(a) The production possibilities curve shifts to the left.
(b) The long-run aggregate supply curve shifts to the right.
(c) The AD curve shifts to the right.
Economic growth means more real
(d) The Phillips curve becomes flatter.
capital. More land, labor, and capital
(e) Business cycles no longer exist.
shift out the PPC and LRAS curve.
12. Which of the following is most likely to occur if the Federal Reserve engages in
open market operations to reduce inflation?
inflation
(a) A decrease in interest rates
(b) A decrease in reserves in the banking system
(c) A decrease in the government deficit
The Fed would sell bonds to the banks,
(d) An increase in the money supply
resulting in a smaller MS, or decrease
in reserves in the banking system.
(e) An increase in exports

13. Which Fed action can shift the AD curve to the left?
left
(a) Lowering the federal funds rate
(b) Lowering income taxes
(c) Lowering reserve requirements
(d) Raising the discount rate
(e) Raising government spending on national defense
14. Crowding out refers to the decrease in
(a) national output caused by higher taxes
(b) domestic production caused by increased imports
(c) private investment due to increased borrowing by the government
(d) employment caused by higher inflation
(e) exports caused by an appreciating currency of a country
15. If the real interest rate in the U.S. increases relative to that of the rest of the world, capital
should flow
Higher U.S. interest rates attract more
(a) into the U.S. and the dollar will depreciate
demand for our financial capital [CDs
and bonds] & financial flows of
(b) into the U.S. and the dollar will appreciate
foreign money will flow in to the U.S.
(c) out of the U.S. and the dollar will depreciate
to purchase these.
(d) out of the U.S. and the dollar will appreciate
(e) out of the U.S. and the value of the dollar will not change

16. Which of the following policy choices represents a combination of fiscal and monetary
policies designed to bring the economy out of a recession?
recession
(a) Decreasing both taxes and the money supply
(b) Increasing both taxes and the money supply
(c) Increasing government spending and decreasing the federal funds rate
(d) Increasing both taxes and the discount rate
(e) Engaging in deficit spending and government bond sales
17. Which of the following will be counted as unemployed by the U.S. Bureau of Labor Statistics?
(a) Persons who quit their previous jobs to stay at home to care for sick parents
(b) Persons who were laid off from their previous jobs and have not applied for a job in two years
(c) Persons who were fired from their previous jobs and are actively applying for work
(d) Persons who have given up looking for jobs after long searches
(e) Persons who quit their previous jobs to start their own business
18. Which of the following would occur if the Fed implemented contractionary monetary policy?
policy
(a) Interest rates increase, investment & consumption spending decrease,
AD decreases, and output and prices decrease.
(b) Interest rates increase, investment & consumption spending decrease,
AD increases, & output and prices decrease.
(c) Interest rates increase, investment and consumption spending increase,
AD decreases, & output and prices decrease.
(d) Interest rates decrease, investment and consumption spending decrease,
AD decrease, & output and prices decline.
(e) Interest rates decrease, investment and consumption spending decrease,
AD decreases, & output and prices increase.

19. Suppose that autonomous consumption is $400 and that the MPC is 0.8.
0.8
disposable income increases by $1,200,
$1,200 consumption spending will increase by
(a) $1,600
(d) $960
With an MPC of 0.8, the change in income of $1,200 will
(b) $1,360
(e) $400
result in 80% of it being consumed. 80% of $1,200 is $960.
(c) $1,200
20. In an economy in which all prices, including wages are completely flexible,
flexible an
increase in labor productivity will result in which of the following changes in
output and real wages?
wages
Output
Real Wages
(a) IncreaseIncrease
The increase in productivity will shift the SRAS
curve to the right which would increase output.
(b) IncreaseDecrease
The increase in SRAS would also lower PL which
(c) Decrease
No change
would increase the real value of the dollar,
causing an increase in real wages.
(d) Decrease
Increase
(e) Decrease
Decrease
21. When the average price level increases by 10% in a given year, which of the
following must increase by 10% for real output to remain constant?
constant
(a) Real national income
(b) Nominal national income
(c) The international value of the currency
(d) Real interest rates
(e) Nominal interest rate

22. Which of the following will occur in a competitive market when the price of a good is less than
the equilibrium?
equilibrium
(a) Price will decrease to eliminate the surplus and restore equilibrium.
(b) Price will decrease to eliminate the shortage and restore equilibrium.
(c) Price will increase to eliminate the surplus and restore equilibrium.
(d) Price will increase to eliminate the shortage and restore equilibrium.
(e) Price will remain constant, because supply will increase to eliminate the shortage.
23. A short-run Phillips curve shows an inverse relationship between
(a) interest rates and borrowing
(d) prices & QD
(b) inflation & unemployment
(e) inputs & outputs
(c) income and consumption
24. Which of the following can be expected to cause an increase in GDP in the short run?
run
The balanced budget multiplier is in effect
(a) An increase in the tax rate
here where the increase in G is stronger than
(b) An increase in the interest rate
the increase in T due to a larger multiplier.
(c) Equal increases in both imports and exports
(d) Equal increases in both taxes and government expenditures
(e) Equal decreases in both investment and government expenditures
25. If the federal government reduces its budget deficit when the economy is close to full
employment, which of the following will most likely result?
Reducing the deficit means
(a) Inflation will increase.
(b) Tax revenues will increase.
less borrowing and less
(c) Interest rates will decrease. (d) Unemployment will decrease. demand in the LFM, which
would lower interest rates.
(E) The international value of the dollar will increase.

26. Which of the following will cause the U.S. dollar to depreciate relative to the Euro?
(a) An increase in household income in the U.S.
(b) An increase in interest rates in the U.S.
(c) An increase in household income in Europe
Increasing HH income in the U.S. results
in more demand for foreign goods which
(d) A decrease in interest rates in Europe
appreciates that currency and depreciates
(e) A decrease in price level in the U.S.
the dollar.
27. Stagflation is most likely to be caused by
(a) an increase in AD
(d) a decrease in AS
(b) a decrease in AD
(e) a large increase in the MS
(c) an increase in AS
28. Assume that the nominal interest rate is 10%. If the expected inflation rate is 5%,
the real interest rate is
(a) 0.5%
(b) 2%
(c) 5%
(d) 10%
(e) 15%
29. Which of the following will lead to an increase in the U.S. GDP?
GDP
(a) More individuals prepare their own personal income tax forms.
(b) Some citizens begin working abroad as computer programmers.
(c) The government prohibits the sale of alcoholic beverages
(d) Foreign companies build new assembly plants in the U.S.
(e) Long-run AS curve to shift to the left
(f) Long-run AS curve to the right

30. An advance in technology will cause the

a. AD curve to shift to the right
b. AD curve to shift to the left
c. Short-run AS curve to shift to the left
d. Long run AS curve to shift to the left
e. Long-run AS curve to shift to the right
31. Suppose that the Fed buys $400 billion worth of government securities from
the Public. With a RR of 20%, the maximum increase in the money supply is
a. $1,600 billion
b. $1,800 billion
c. $2,000 billion
The $400 is new money in the banking system. The
d. $2,200 billion
MM of 5 will increase MS to $2,000. [5 x $400 = $2,000.
e. $2,400 billion

Grain in tons

For questions 32-34

30
Alpha
Beta
10

Betas DCC
1G=2S
1/2 G = 1 S
Alphas DCC
1G=1S
Terms of Trade
1 G = 1.5 S

Steel in tons 20
30
32. Before specialization & trade, the domestic
opportunity cost of producing 1 ton of grain in
Alpha and in Beta is which of the following?
following
Alpha
Beta
a. 1 ton of steel
1 ton of steel
b. 1 ton of steel
2 tons of steel
c. 2 tons of steel
1 ton of steel
d. 1 ton of steel
0.5 tons of steel
e. 0.33 tons of steel
1.5 tons of steel

33. The theory of comparative

advantage implies that Alpha would
find it advantageous to
a. export grain and import steel
b. export steel and import grain
c. export both grain and steel and
import nothing
d. import both grain and steel and
export nothing
e. trade 1 ton of grain for 0.5 ton
of steel
34. At what real exchange ratio, also
referred to as the terms of trade,
trade
between grain (G) and steel (S) would
both Alpha and Beta find it mutually
advantageous to specialize and trade.
a. 1 G = 3.0 S
b. 1 G = 1.5 S
c. 1 G = 1.0 S
d. 1 G = 0.5 S
e. There is no real exchange ratio
that would enable both countries to
benefit, since Alpha has an absolute
advantage in both goods.

AD
PL

LRAS SRAS SRAS

YF

Real GDP

35. According to the graph above,

above which of the following is true about the long-run
equilibrium of the economy depicted?
a. The economy is in long-run equilibrium.
b. The AD curve will shift to the left to restore long-run equilibrium.
c. The long-run AS curve will shift to the right to restore long-run equilibrium.
d. Without a fiscal policy stimulus, the economy will remain in a recession.
e. As wages increase, the SRAS curve will shift to left to restore long-run equilibrium.
36. An increase in personal income taxes will most likely cause AD and AS to
change in which of the following ways in the short run?
run
Aggregate Demand Aggregate Supply
a. Not change
Decrease
An increase in personal income taxes will make
b. Not change
Increase
consumers poorer which makes them cut back
c. Decrease
Not change on consumption, which decreases AD. Personal
income taxes are not a determinant of the AS
d. Decrease
Increase
curve but a change in business taxes would be.
e. Increase
Not change

37. Which type of unemployment would increase if workers lost their jobs
because of a recession?
recession
a. Cyclical
b. Frictional
c. Seasonal
d. Search
e. Structural
38. Which of the following is true about the marginal propensity to consume?
consume
a. It is the percentage of total income that is spent on consumption.
b. It determines the size of the simple spending multiplier.
c. It increases as incomes increase because increases in income cause people to
spend more.
d. It is the same as the m oney multiplier.
e. It is equal to the average propensity to consume for people with low incomes.
39. When an economy is operating below the full-employment level of output, an
appropriate monetary policy would be to increase which of the following?
a. The discount rate
b. The required reserve ratio
c. The international value of the dollar
d. Open market purchases of government bonds
e. Government expenditure on goods and services

40. Assume that the economy is at full employment.

employment Policymakers wish to maintain
the price level but want to encourage greater investment.
investment Which of the following
combinations of monetary and fiscal policies would best achieve this goal?
Monetary Policy
Fiscal Policy
a. No change
Contractionary
Expansionary monetary policy would result
b. Expansionary
No change
in lower interest rates, causing more
investment in real capital. To keep prices
c. Expansionary
Contractionary
from going up, policymakers could cut G or
d. Expansionary
Expansionary
raise taxes [contractionary] to prevent this.
e. Contractionary
Expansionary
41. In one year, spending on consumption, investment, and government purchases was
equal to 103% of a countrys GDP.
GDP This would be possible only if
a. the money supply increased
b. net exports were positive
We consumed more imports than we sold
c. net exports were negative
exports, which would make our spending
d. the government ran a budget surplus
greater than our GDP.
e. the government had a balanced budget

42. When firms restructure their operations to decrease production costs,

costs the AS
curve,
curve the price level,
level and real output will change in which of the following ways?

AS Curve

Price Level

a. Shift to the left

b. Shift to the left
c. Shift to the right
d. Shift to the right
e. Shift to the right

Increase
Increase
Increase
Decrease
Decrease

Real Output
Increase
Lower production costs means
No change more profits and a shift of the
AS curve to the right. That
Increase
results in lower PL and an
Increase
increase in real output.
Decrease

43. An economy is in a short-run equilibrium at a level of output that is less than fullemployment output. If there were no fiscal or monetary policy interventions,
interventions
which of the following changes in output and the price level would occur in the
long run?

Output

Price Level

a. Increase
b. Increase
c. Decrease
d. Decrease
e. No change

Decrease
Increase
Decrease
Increase
No change

With no intervention in this recession, the surpluses

would result in lower prices. Workers would then
accept lower wages. As more are hired back, output
would increase.

44. Assume that the world operates under a flexible exchange rate system. If the central
bank of Mexico increases its MS but other countries do not change theirs,
Mexicos inflation rate and the international value of the Mexican peso will most
likely change in which of the following ways?

Inflation Rate

International
Value of the Peso

a. Increase
b. Increase
c. Increase
d. Decrease
e. Decrease

Appreciate
Depreciate
No change
Appreciate
Depreciate

An increase in Mexicos MS means more pesos

chasing the same goods as before, bringing on
higher prices. This would decrease demand for
Mexicos exports, depreciating the peso.

45. The Fed decreases the federal funds rate by

a. decreasing the reserve requirement
b. decreasing the discount rate
c. increasing the discount rate
d. selling government bonds on the open market
e. buying government bonds on the open market

The Fed targets the Fed Funds

Rate by buying & selling bonds.
Buying bonds means bigger
supply of money and lower Fed
Funds Rate.

Labor Market Data for Country X (in millions of persons)

Population 180; Employed 94;
Unemployed 6; Not in Labor Force 80
46. Based on the information above, what is the unemployment rate for Country X?
X
a. 3.3% b. 4.0% c. 6.0% d. 6.38% e. 7.5%

6/100 x 100 = 6%
47.Suppose that the government decreases taxes and at the same time the central
bank decreases the discount rate.
rate The combined actions will result in
a. an increase in unemployment and a decrease in the interest rate
b. an increase in unemployment and an increase in the interest rate
c. an increase in the real GDP and a decrease in the interest rate
d. an increase in the real GDP and an increase in the interest rate
e. an increase in the real GDP and an indeterminant change in the interest rate
Decreasing taxes would increase C, increase AD and real GDP. Assuming a balanced
budget before the decrease in T means the G would have to borrow, pushing up interest
rates.
Decreasing the discount rate would also lead to more real GDP but would result in a lower
interest rate. With interest rates moving in opposite directions with the two policies, this
make them indeterminate.

48. In a closed economy with only lump-sum taxation, if the MPC is equal to 0.75,
0.75 a $70
billion increase in government spending could cause a maximum increase in output of
a. $52.5 billion b. $70 billion c. $122.5 billion d. $210 billion e. $280 billion

4 x $70 = $280
49. Which of the following is NOT a function of fiat money?
money
a. A standard of deferred payment
d. A store of value
b. A unit of account
e. A medium of exchange
c. A source of intrinsic value

50. When an economy is at full employment, which of the following will most likely create
demand-pull inflation in the short run?
a. An increase in the discount rate
d. A decrease in government spending
b. An increase in personal income taxes
e. A decrease in the money supply
c. A decrease in the real interest rate
51. Under rational expectations an announced expansion in the money supply will
change nominal and real gross domestic products (GDP) in which of the
following ways?
Nominal GDP
Real GDP
RATEX implies that people expect more
inflation with the increase in the MS. They
a. Increase
Increase
Will negotiate higher raises with this in mind.
b. Increase
Decrease
Business profits will not increase so no more
c. Increase
No change
workers will be hired. So real GDP would not
change, just nominal GDP.
d. No change
Decrease
e. No change
No change
52. A decrease in labor productivity will shift the
a. AD curve to the right
Productivity is an AS Shifter so a decrease in
b. AD curve to the left
labor productivity results in having to hire
more workers and cutting corporate profits,
c. LRAS curve to the right
therefore shifting the SRAS curve to the left.
d. SRAS curve to the right
e. SRAS curve to the left

53. In the long run, if AD decreases,

decreases real GDP and the price level will change in
which of the following ways?
Real GDP
Price Level
AD1 LRAS SRAS1
a. Decrease Decrease
AD2
b. Decrease Increase
c. No change Decrease
SRAS2
-20%
d. Increase
Decrease
$10
e. No change Increase
The decrease in AD resulted in surpluses &
caused prices to drop. Workers would now
accept lower wage increases which moved
the SRAS curve right, increasing real GDP.

$8

YR YR Y* YI

54. Suppose that all banks keep only the minimum reserves required by law and that
there are no currency drains. The legal RR is 10%. If Emilia deposits the $100 bill
she received as a graduation gift from her grandfather into her checking account,
the maximum increase in the total money supply will be
a. $10
b. $100
Remember that currency is also MS. So, the $100 bill was MS when
this began. When little Emilia deposited the $100, the composition
c. $900
of the MS didnt increase. It just changed from currency to DD.
d. $1,000
Now, with the RR at 10%, $90 was loaned by the first bank and with
e. $1,100
a MM of 10, the MS increased by $900 more as the TMS eventually
became $10,000.

55. Assuming fixed exchange rates, if Mexicos rate of inflation increases relative to its
trading partners, Mexicos imports and exports will most likely change in which of
the following ways?

Imports
a. Decrease
b. Decrease
c. Increase
d. Increase
e. No change

Exports
Decrease
Increase
Decrease
Increase
No change

A higher price level in Mexico will decrease demand for

their products, depreciating the peso. However, the
increase in the peso currency price relative to other
countries makes their goods cheaper so their imports
increase while their exports decrease as they have to
pay more pesos .

56. Which of the following household purchases will be counted as part of gross
private investment in a countrys GDP?
GDP
a. Government bonds
b. Shares of a company stock
c. Corporate bonds
d. A new car for personal use
e. A newly constructed home
The first three are purely financial transactions. The purchase of the new car
would be counted as consumption, not investment.

57. An increase in AD will cause which of the following?

a. A movement along a given short-run Phillips curve
b. The long-run Phillips curve to become horizontalAn increase in AD would move cause
c. The short-run Phillips curve to shift to the left
a movement up and to the left on the
d. The long-run Phillips curve to shift to the right SRPC. Shifts of the SRPC are caused
by supply shocks, which we didnt
d. The long-run Phillips curve to shift to the left
have here.
58. Which of the following would cause the short-run AS curve to shift to the right?
right
a. An increase in the wage rate
b. An increase in the interest rate
c. An increase in the natural rate of unemployment
d. A decrease in the capital stock
e. A decrease in the expected price level
If PL is expected to decrease, then workers will not demand as large of wage
increases as in the past. With lower resource cost [wages] anticipated, firms
will hire more workers and SRAS will shift to the right.

59. A decrease in business taxes would lead to an increase in national income by

increasing which of the following?
a. The money supply
Business taxes are determinants of both AD and AS. The decrease
b. Unemployment
in business taxes means they have more profits and will invest
c. AD only
more, increasing AD.
As far as the legal-institutional environment with the government,
d. AS only
it is more favorably so that will result in an increase in AS.
e. Both AD and AS
60. In an open economy, an increase in government budget deficit tends to cause the
international value of a countrys currency and its trade deficit to change in which of
the following ways?

Value of Currency

Trade Deficit

a. Appreciate
b. Appreciate
c. Depreciate
d. Depreciate
e. Not change

Become smaller
Become larger
Become smaller
Become larger
Not change

The budget deficit means the government is borrowing more, which pushes up the interest
rate. The higher interest rate attracts more foreign investors, increasing demand for the
dollar and appreciating the dollar. The stronger dollar makes our exports more expensive
and imports cheaper, therefore increasing the trade deficit.