Chapter 9-14 Practice Set

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Chapter 9-14 Practice Set
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Chapter 9-14 Practice Set Principles of Macroeconomics
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  1. The experience of the Great Depression in the 20th century provided support for the Classical model of the macroeconomy.True/False
    False
  2. If the demand for loanable funds decreases, we would expect the interest rate to fall and the quantity of funds loaned to decrease. True/ false
    True
  3. Suppose that Paul’s income increases from $40,000 per year to $44,000 per year. At the same time, his consumption increases from $36,000 to $39,000 per year. Paul’s marginal propensity to consume is thus 0.75. True / False
    true
  4. Suppose the marginal propensity to consume in an economy is 0.5. The Keynesian multiplier in this economy would be 2.0. True/ False
  5. True
  6. Which one of the following situations is LEAST likely to cause a change in the consumption function in the Keynesian model of the macroeconomy?
    A change in business investor confidence
  7. This question refers to the following Keynesian cross diagram: In the above Keynesian cross diagram the solid line labeled “A” represents what curve?
    Aggregate demand
  8. According to the Keynesian macroeconomic model, consumption is a function of which three variables?
    Autonomous consumption, the marginal propensity to consume, and income
  9. Classical economists during the Great Depression encouraged the government to decrease interest rates to encourage more business investment. true/ False
    fa;se
  10. Which one of the following statements is TRUE?
    In the closed economy Keynesian model with no government, aggregate demand is the sum of intended business investment and household consumption.
  11. According to the Keynesian macroeconomic model, massive unemployment is possible when an economy is in a state of equilibrium. True/ False
    True
  12. If intended business investment declines by $100 the Keynesian multiplier effect implies that total income will decrease by more than $100. True/ false
    True
  13. Okun’s Law posits a relationship between which two variables?
    The unemployment rate and real GDP
  14. According to the Keynesian macroeconomic model, an increase in the interest rate may increase or decrease savings. true/false
    true
  15. Suppose that Jane’s income increases from $30,000 per year to $35,000. At the same time, her consumption changes from $26,000 per year to $29,000 per year. What is Jane’s marginal propensity to save?
    0.4
  16. Suppose the marginal propensity to consume in an economy is 0.9. What would be the Keynesian multiplier in this economy?
    10
  17. Suppose the demand for loanable funds increases. According to the classical macroeconomic model, what would happen to the quantity of funds loaned and the interest rate?
    The quantity of funds loaned would increase and the interest rate would increase.
  18. According to the classical macroeconomic model discussed in the text, the key variable which adjusts to keep the economy in equilibrium when leakages are not equal to injections is …
    the interest rate.
  19. According to the text, income (Y) will be equal to aggregate demand (AD) only when …
    actual business investment is equal to intended investment.
  20. In the case of insufficient aggregate demand, household savings is greater than …
    intended investment.
  21. According to the Keynesian macroeconomic model, the level of intended business investment depends upon the inflation rate.true/false
    False
  22. According to the Keynesian macroeconomic model, the level of intended investment depends upon …
    the level of optimism or pessimism among investors.
  23. This question refers to the following Keynesian cross diagram: In the above Keynesian cross diagram which one of the following is TRUE at an income level of 300?
    Businesses will experience excess inventory accumulation.
  24. Which one of the following statements BEST describes the relationship between interest rates and savings in the Keynesian macroeconomic model?
    Higher interest rates may lead to higher or lower savings – the effect is ambiguous.
  25. According to the Keynesian model, injections will be kept equal to leakages through adjustment in the market for loanable funds.true/false
    fasle
  26. Suppose that Jane’s income increases from $30,000 per year to $35,000. At the same time, her consumption changes from $26,000 per year to $29,000 per year. What is Jane’s marginal propensity to consume?
    0.6
  27. Okun’s Law posits a relationship between the growth of real GDP and the rate of inflation. true/false
    false
  28. Suppose that autonomous investment increases in the Keynesian macroeconomic model. What will happen to the aggregate demand curve?
    The entire aggregate demand curve will shift up.
  29. In the Keynesian macroeconomic model aggregate demand is equal to the sum of consumption and income. true/false
    false
  30. The Keynesian consumption function depends on autonomous consumption and intended investment.true/false
    false
  31. Which one of the following variables is classified as a leakage in the output-income-spending flow model presented in the text?
    Household saving
  32. According to the classical macroeconomic model discussed in the text, whenever injections are not equal to leakages the wage rate will adjust to keep the macroeconomy in equilibrium. true/false
    false
  33. What is the main difference between classical and Keynesian views about the principal determinant of consumption and saving levels?
    Classical economists believe consumption and saving rates are mainly determined by the interest rate while Keynesians believe these vary according to income levels.
  34. The multiplier in the Keynesian macroeconomic model is a function of which variable?
    The marginal propensity to consume
  35. Which one of the following variables is classified as an injection in the output-income-spending flow model presented in the text?
    Intended investment
  36. The tax multiplier is always one-half the value of the regular income/spending multiplier. True/ False
    False
  37. This question refers to the following Keynesian cross diagram. Which of the following could cause the shift shown in the above Keynesian cross diagram?
    A increase in (lump-sum) taxes
  38. Suppose the government increases taxes by a lump sum of $500 million. If the marginal propensity to consume is 0.8, how much would the equilibrium level of output decrease according to the macroeconomic model presented in the text?
    $2,000 million
  39. Which of the following is NOT true about the U.S. federal debt?
    Someday, the debt will have to all be paid off.
  40. Which one of the following impacts is LEAST likely to occur as a result of expansionary fiscal policy?
    An increase in unemployment
  41. The automatic stabilization effect of fiscal policy refers to the fact that …
    government spending tends to go down during economic expansions.
  42. In a macroeconomic model with all three injections and all three leakages present, the economy is always in equilibrium. True/ False
    False
  43. The United States federal debt is currently a larger percentage of the national economy than it was during World War II. True/ False
    False
  44. What are the two main sources of inflows of funds to the federal government in the United States?
    Personal income taxes and social security taxes
  45. Suppose government spending increases by $50 million and the marginal propensity to consume is 0.9. According to the Keynesian macroeconomic model, this will cause equilibrium output to increase by $500 million. True/ False
    False
  46. As described in the text, what is the primary belief behind supply-side economics?
    Tax cuts will encourage more work and investment, leading to higher output and tax revenues.
  47. Suppose the marginal propensity to consume is 0.8. According to the model in the text, how much would equilibrium output go up if the government increased spending by $500 million (assuming all other factors are held constant)?
    $2,500 million
  48. Suppose the government increases spending by $200 million but at the same time increases taxes by $200 million. According to the macroeconomic model presented in the text, by how much would equilibrium output change?
    Output would increase by $200 million
  49. Which one of the following statements is TRUE about the federal government surplus or deficit, expressed as a percentage of GDP, in the United States over the last few decades?
    Except for a few years around 2000, the government has run a budget deficit.
  50. According to the text, the largest source of federal outlays in the United States is national defense. True/ False
    False
  51. The presence of international trade will tend to increase multiplier effects. True/False
    False
  52. The three leakages in the macroeconomic model presented in the text are savings, taxes, and imports. True/False
    True
  53. Expansionary fiscal policy would be a potential means to counteract a high inflation rate. True/False
    False
  54. Which one of the following statements is TRUE?
    The use of fiscal policy for “fine-tuning” the economy was discredited in the 1970s due to problems with inflation and time-lags.
  55. Suppose an economy experiences a lump-sum increase in exports of $20 million. If the multiplier is 4.0, then according to the macroeconomic model presented in the text what will be the change in the equilibrium level of output?
    Output will increase by $80 million.
  56. What is the equation for the tax multiplier for a lump sum tax?
    – mult × mpc
  57. Which one of the following statements is FALSE?
    Total federal government outlays in the United States have generally declined as a percentage of GDP in recent decades.
  58. Suppose government spending increases by $1 million. The multiplier effect implies that income (Y) will increase by less than $1 million. True/ False
    False
  59. In 2006 (the most recent year discussed in your textbook), about how large was the federal debt in the United States as a percentage of GDP?
    40%
  60. According to the logic of supply-side economics, a tax cut may actually lead to an increase in government revenues. True/ False
    True
  61. Supply-side economics uses increases in government spending to increase to supply of goods and services in the economy. True/ False
    False
  62. Which one of the following statements is TRUE?
    A growing percentage of the U.S. federal government debt is owed to foreign bond holders.
  63. Suppose that the marginal propensity to consume is 0.9. What is the tax multiplier for a lump sum tax in this case?
    - 9
  64. The time it takes Congress to debate and agree upon a tax policy change is referred to as …
    a legislative lag.
  65. Decreasing taxes is an example of expansionary fiscal policy. True/ False
    True
  66. The data from the United States demonstrates that economic growth is always higher when the government is running a budget surplus. True/ False
    False
  67. The most likely economic situation in which a government would implement contractionary fiscal policy is …
    high inflation.
  68. Disposable income is the income available after people have paid for necessary items like food and shelter. True/ False
    False
  69. Which one of the following statements is TRUE?
    The fact that people tend to spend some of their money on imported goods tends to reduce the multiplier effect as compared to an economy without a foreign sector.
  70. Suppose that in an economy real GDP is $100, the price level index is 4, and the money supply is $50. What would the velocity of money be in this economy?
    8
  71. The federal funds rate is the rate the Fed charges banks for short-term loans. True/ False
    False.
  72. What tends to be the relationship between the prime rate and the federal funds rate in the United States?
    The prime rate tends to be three percentage points higher than the federal funds rate.
  73. The discount rate is the interest rate determined in the private market for overnight loans of reserves among banks. True./ False
    False
  74. What is the main policy recommendation of monetarists?
    The Fed should keep the growth rate of the money supply constant.
  75. With output held constant, hyperinflation is likely to occur under which of the following conditions?
    An increase in both the money supply and the velocity of money
  76. Which one of the following statements is FALSE?
    “Tight money” policies tend to increase the money supply growth rate.
  77. Money neutrality implies that …
    increasing the money supply will not affect the level of output.
  78. The theory of monetarism states that the money supply should grow at a constant rate. True/False
    True
  79. Which one of the following statements best summarizes the Federal Reserve’s monetary policy over the years 2000-2006?
    The Federal Reserve initially lowered the federal funds rate to avoid a recession but then increased the federal funds rate to avoid inflation.
  80. Money neutrality means that changes in the money supply won’t change the rate of inflation. True/ False
    False
  81. When the Federal Reserve buys government bonds from a private bank, the private bank’s reserves at the Federal Reserve will increase. True/ False
    True
  82. Which one of the following is NOT likely to be a result of a high rate of inflation?
    People will be more likely to postpone major purchases.
  83. The United States data from 2000-2003 indicate that as the Fed lowered the federal funds rate, business investment increased. True/False
    False
  84. Suppose the federal funds rate is currently at its target level. Then suppose the demand for federal funds increases. Which one of the following statements is TRUE?
    The Fed would likely respond by increasing the supply of federal funds to keep the federal funds rate at its target level.
  85. Which one of the following is NOT included in the M2 measure of money?
    The value of credit card balances
  86. Contractionary monetary policy would most likely be implemented when the inflation rate is considered to be too high. True/ False
    True
  87. Suppose the demand for federal funds increases, but the Fed’s target level remains unchanged. Which one of the following statements is MOST LIKELY to be TRUE?
    The Federal Reserve would act to keep the interest rate unchanged, but the amount of federal funds lent would increase.
  88. The Fed can increase the supply of money using open market operations by selling government bonds. True/False
    False
  89. How does the Federal Reserve affect the supply of money using open market operations?
    The Fed buys government bonds from banks, which increases the banks’ reserves with the Fed and allows them to make new loans.
  90. The quantity equation states that M/V = P × Y (True/False)
    False
  91. The quantity theory of money assumes that the money supply is directly related to what variable?
    The price level
  92. Which one of the following statements best describes the chain of events that causes expansionary monetary policy to increase GDP?
    Expansionary monetary policy lowers interest rates, which increases investment, which increases aggregate demand, which increases GDP
  93. If the supply of federal funds decreases and the Fed does nothing in response, the federal funds rate would tend to decrease. True/False
    False
  94. Which one of the following is NOT likely to be a result of deflation?
    Wealth will be redistributed from creditors to debtors.
  95. An increase in the quantity of imports will always lower the rate of inflation. True/ False
    False
  96. The difference between the M1 and M2 measures of money is that M2 includes the value of credit card balances while M1 doesn’t. True/False
    False
  97. The difference between the M1 and M2 measures of money is that M2 includes the value of credit card balances while M1 doesn’t. True/False
    False
  98. The quantity theory of money states that increases in prices must lead to increases in real GDP. True/False
    False
  99. What does Classical monetary theory state will happen with an increase in the money supply?
    Prices will rise and GDP will remain the same
  100. What is the main difference between M1 and M2 as measures of money?
    M2 includes the value of savings accounts while M1 does not.
  101. With GDP and the money supply constant, an increase in the velocity of money will tend to put upward pressure on prices.True/False
    True
  102. The accelerator principle implies that the best predictor of business investment growth is which of the following variables?
    Increases in GDP
  103. The quantity theory of money assumes that the velocity of money (V) is constant. True/ False
    True
  104. Which one of the following statements best describes why the aggregate demand equilibrium (ADE) curve slopes downward?
    As inflation rises the Fed will tend to raise interest rates, which reduces investment and aggregate demand.
  105. Which one of the following descriptions BEST describes the chain of events that, according to the “Fed reaction rule,” occurs when the Fed observes a rise in the rate of inflation?
    The Fed raises interest rates, which discourages investment, which decreases aggregate demand, which lowers output
  106. A change in expectations about inflation will shift the ASR curve. True/ False
    True
  107. Which of the following could explain the shifts shown in the graph below?
    Fed efforts to bring inflation down to a lower target rate, and a fall in people’s expectations of inflation.
  108. A supply shock can increase or decrease the maximum capacity output in an economy. True/ False
    True
  109. A change in inflationary expectations will shift the position of the ASR curve.
    Which one of the following statements is TRUE?
  110. Suppose an economy is currently in a recession. Assume the government then undertakes expansionary fiscal policy, but not enough to move the economy to the full employment level of output. Based on the ADE/ASR model, what would we expect to be the most likely outcome of this policy in the short run?
    An increase in output but little change in inflation
  111. What would be the expected effect of expansionary fiscal policy using the Classical ASR curve?
    An increase in inflation and no change in output
  112. Under what conditions is a wage-price spiral most likely to occur?
    When the economy is near the maximum capacity output
  113. Mortality rates tend to rise when the economy is doing well. True/ False
    True
  114. Suppose people’s expectation of inflation goes down over time. Holding everything else constant, how would this change the position of the aggregate supply response (ASR) curve?
    The curve will shift down, but not to the right or left
  115. Which one of the following statements best describe why the aggregate supply response (ASR) curve slopes upward?
    As firms run into “bottlenecks” in the supply of some resources, they will big prices up more quickly, causing inflation to rise
  116. Based on the Classical ASR curve, we would expect that the economy will normally be at the full employment level of output. True/ False
    True
  117. Which of the following could explain the shift shown in the graph below?
    An increase in investor confidence.
  118. The aggregate demand equilibrium (ADE) shows which of the following relationships?
    Higher rates of inflation are associated with lower levels of output.
  119. In the Keynesian view of macroeconomics the economy does not automatically return to the full employment level of output. True/False
    True
  120. The ADE/ASR model assumes that the Fed’s two primary goals are to stabilize output and prices. True/False
    True
  121. Based on the ADE/ASR model, in which of the following situations is stagflation most likely to occur?
    The government is undertaking contractionary fiscal policy and people have come to expect higher levels of inflation.
  122. The government is undertaking contractionary fiscal policy and people have come to expect higher levels of inflation.
    An increase in inflation but little change in output
  123. The curve on the graph below represents:
    The Fed Reaction Rule
  124. Suppose that people lower their expectations about inflation in an economy in a recession. At the same time, the government undertakes expansionary fiscal policy. Based on the ADE/ASR model, what would we expect to be the result of these two changes?
    Output will increase but inflation could go up or down.
  125. The aggregate demand equilibrium (ADE) curve plots the relationship between interest rates and aggregate demand. True/ False
    False
  126. The Classical aggregate supply curve is horizontal. True/ False
    False
  127. As discussed in the text, what is the Fed Reaction Rule?
    As inflation rises the Fed will tend to raise interest rates, and vice versa.
  128. Stagflation is a situation of both increasing prices and increasing unemployment. True/ False
    True
  129. The ASR curve is vertical in the full-employment range. True/ False
    False
  130. Suppose the Fed decides to increase the target level of inflation from 3% to 4%. What change would we expect to occur in the ADE/ASR model in the short run as a result of this change in policy?
    The ADE curve would shift upwards
  131. Expansionary fiscal policy would shift the ADE curve to the right. True/ False
    True
  132. The stagflation of the 1970s most likely occurred because of contractionary fiscal policy combined with increasing expectations about inflation. True/ False
    True
  133. Suppose the ADE curve remains stable but technology increases the productive capacity of an economy at full employment. Based on the ADE/ASR model, what would we expect to be the most likely outcome of this situation?
    An increase in output and a decrease in inflation
  134. Which of the following could explain the shifts shown in the graph below?
    An adverse supply shock.
  135. Suppose the Fed changes its target rate of inflation. Holding everything else constant, how would this, immediately, change the position of the aggregate supply response (ASR) curve?
    The ASR curve would not shift immediately
  136. Based on the ADE/ASR model, if people lower their expectations of inflation but the government undertakes contractionary fiscal policy, it is possible that inflation could increase. True/ False
    False
  137. Based on the ADE/ASR model, stagflation is most likely to occur if the government is undertaking expansionary fiscal policy and people have come to expect higher levels of inflation. True/ False
    False
  138. A loan from the World Bank to a poor nation would be an example of bilateral development assistance. True/ False
    False
  139. What two factors of production are included in the Solow growth model?
    Manufactured capital and labor
  140. According to the Solow growth model, if the growth rate of manufactured capital per worker is 10% per year and the growth rate of total factor productivity is 3% per year, what will be the growth rate of output per worker?
    6
  141. Which one of the following countries experienced the highest average annual growth rate of GDP per capita over the period 1990-2005?
    China
  142. Suppose a country has a growth rate of GDP of 6% annually and a population growth rate of 2% annually. What is the growth rate of GDP per capita in this country?
    4%
  143. Which one of the following statements is FALSE?
    Economic growth rates in recent decades are less varied for low-income nations than high-income nations.
  144. According to the Solow growth model what are the two main ways to increase per capita income?
    Increase manufactured capital per worker and technological innovation
  145. Japan’s rapid economic growth was primarily a function of promoting domestic aggregate demand. True / False
    False
  146. Typically, one could add economic growth to the ADE/ASR model by showing:
    The ADE curve, ASR curve, and maximum capacity all shifting to the right.
  147. The Solow growth model is Y = A K0.3 L0.7.(True/False)
    True
  148. Suppose the growth rate of the population of a country is 2% per year. Also, the growth rate of GDP per capita in the country is 3%. Therefore, the growth rate of GDP must be 1%. (True/False)
    False
  149. About how much of the world’s income goes to the richest 20% of households?
    74%
  150. Which one of the following is an example of multilateral development assistance?
    The IMF loans money to Ethiopia to expand its banking system.
  151. Economic growth in both Japan and the United States has been characterized by high savings rates. True/ False
    False
  152. Increasing a country’s reliance on imports seems to be a universally successful strategy for economic growth. True/ False
    False
  153. One characteristic of the Industrial Revolution is that England increasingly relied upon colonies as sources of natural resources. True/ False
    True
  154. Which one of the following statements is FALSE?
    According to conventional economic thinking, low-income nations have a competitive advantage producing high-tech goods.
  155. Countries in Sub-Saharan Africa have generally not seen significant economic growth in the last few decades. True/ False
    True
  156. For most developing countries domestic investment is significantly higher than foreign direct investment. True/ False
    True.
  157. The performance of the economies of Sub-Saharan Africa does not support the theory of economic convergence across countries. True/ False
    True
  158. What is the equation for the Solow growth model?
    Y = A K0.3 L0.7
  159. Suppose the growth rate of total factor productivity in an economy is 4% per year. Also, the growth rate of manufactured capital per worker is 2% per year. According to the Solow growth model, the growth rate of output per worker must therefore be 6%. (True/False)
    False
  160. Economic growth is the ADE/ASR model does not necessarily imply a change in the inflation rate. True/ False
    True
  161. Which one of the following variables has grown the most in the last several decades?
    Gross world product
  162. In recent years, what is the greatest source of capital flows to developing countries?
    Private flows
  163. About how much of the world’s income goes to the poorest 40% of households?
    5%
  164. Suppose a country has a real GDP in Year 1 of $10 trillion and a real GDP in Year 2 of $11 trillion. What is the growth rate of GDP in this country?
    10%
  165. Since the late 1990s developing countries have increased their reliance upon workers’ remittances as a source of financial capital. True/False
    True
  166. Conventional economic thinking implies that developing countries should have a competitive advantage in high-technology goods. True/False
    False
  167. About what percentage of GDP do developed nations give to developing countries as official development aid?
    Less than 1%
  168. Much of the support for economic convergence comes from rapid economic growth in China. True/False
    True
  169. Which one of the following was NOT associated with the Industrial Revolution?
    A decreased reliance on colonization
  170. Suppose a country has a real GDP growth rate of 5% per year, and that the growth rate of real GDP per capita is 2% per year. What is the population growth rate in this country?
    3%
  171. Bilateral development assistance is defined as …
    Aid or loans given by one country to another.

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