Multiple Choice Answers

1. According to your text, during wars (using World War II as a good example): (Points : 2)
government budget deficits have increased significantly
unemployment has fallen
GDP has risen enormously
all of the above

2. What shape does the SAS curve have? (Points : 2)
Downward sloping: as the price level declines expenditures rise.
Upward sloping: the price level increases as output increases.
Vertical: changes in the price level have no effect on output.
Horizontal: changes in the price level have an infinite effect on output.

3. The financial sector channels saving back into the spending stream. (Points : 2)
True.
False.

4. The formula for the money multiplier (when individuals do hold cash) is: (Points : 2)
1+c/(r +c).
1/r.
c/r.
(r+c)/1.

5. Suppose total deposits in the First Bank of Commerce are $100,000 and required reserves are $10,000.  Based on this information, the required reserve ratio is: (Points : 2)
0.10.
0.9.
1.
10.

6. Every financial asset has a corresponding: (Points : 2)
financial liability.
real liability.
real asset.
financial asset.

7. The paradox of thrift occurs when: (Points : 2)
an increase in saving raises output.
an increase in saving reduces output.
saving is unrelated to output.
a decrease in saving reduces output.

8. Refer to the graph. At what level of GDP will inventories be below their desired level?
(Points : 2)

GDP0.
GDP1.
GDP2.
Inventories are never below their desired level in the graph.

9. According to Classical economists in the 1930s, a recession will end when: (Points : 2)
government creates enough jobs for all of the unemployed.
wages rise enough to eliminate unemployment.
wages fall enough to eliminate unemployment.
taxes are cut enough to stimulate private spending.

10. Monetary policy is one of the two main macroeconomic tools governments use to control the aggregate economy, the other being: (Points : 2)
fiscal policy.
foreign policy.
trade policy.
immigration policy.

11. Which of the following would increase this year’s GDP? (Points : 2)
A mother quits her job to take care of her newborn child.
A commission charged by your broker when you sold 100 shares of Borden stock.
A $10,000 inheritance from Aunt Mary.
Receipts from a yard sale.

12. If the reserve ratio is 0.10, the simple money multiplier is equal to 5. (Points : 2)
True.
False.

13. A recession is often considered to be: (Points : 2)
an economic downturn that persists for more than two consecutive quarters of the year.
an economic downturn that persists for more than four consecutive quarters of the year.
any period of more than six months in which unemployment is rising.
any period in which the unemployment rate exceeds 6%.

14. Suppose prices in the U.S. are expected to decline. This is likely to: (Points : 2)
shift the AD curve to the left.
shift the AD curve to the right.
make the AD curve flatter.
make the AD curve steeper.

15. A fall in the price level will: (Points : 2)
increase the value of money in people’s pockets.
decrease the value of money in people’s pockets.
not affect the value of money in people’s pockets.
reduce real wealth.

16. Aggregate income is the sum of: (Points : 2)
employee compensation and profits.
employee compensation, rent, and profits.
employee compensation, rent, profits, and interest.
employee compensation, rent, profits, interest, and transfer payments.

17. Using the Taylor rule, if inflation is 3 percent, desired inflation is 2 percent and output is 2 percentage points below potential, the Fed will target a Fed funds rate of: (Points : 2)
6.5
4.5
3.5
3

18. The higher the reserve ratio, the: (Points : 2)
greater the money multiplier.
the more money will be created.
the smaller the money multiplier.
the greater the level of required reserves.

19. Autonomous expenditures are defined as expenditures that: (Points : 2)
occur only in equilibrium.
equal income.
occur regardless of the level of income.
change as income changes.

20. All of the following effects cause the AD curve to slope downward except the: (Points : 2)
international effect.
interest rate effect.
substitution effect.
wealth effect.

21. GDP is the: (Points : 2)
market value of an economy’s production of final goods and services in a one year period.
sum of coins, bills, and demand deposits circulating in an economy one year period
total expenditures of the federal government over the period of one year.
market value of an economy’s production of all goods and services in a one year period.

22. Monetary policy directly affects: (Points : 2)
social spending.
tax rates.
the availability of credit.
the antitrust laws.

23. The average price of the components of GDP, relative to a base year, is called the: (Points : 2)
the price level.
producer price index.
consumer price index.
GDP deflator.

24. The categories of the fixed basket of consumer goods on which the CPI is based: (Points : 2)
represent rough percentages of input costs to producers of those items in the category
are weighted according to each component’s share of the average consumer’s expenditures
are changed each year to better reflect changing preferences
All of the above

25. The top of the business cycle is called: (Points : 2)
an expansion.
a recession.
an upturn.
a peak