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1) Ceteris paribus, as real GDP growth ________, investment spending ________.
A) increases; decreases B) increases; increases
C) decreases; increases D) changes; does not usually change
2) Accelerator theory refers to the theory of:
A) investment that emphasizes that current investment spending depends positively on the expected future growth of GDP.
B) investment that emphasizes that current investment spending depends positively on the expected future growth of government spending.
C) consumption that emphasizes that increases in consumption spending will result, through the multiplier effect, in greater increases in GDP.
D) consumption that emphasizes that current consumer spending depends positively on the expected future growth of GDP.
3) Procyclical variables ________ during expansions and ________ during recessions.
A) rise; rise B) fall; fall C) fall; rise D) rise; fall
4) When investors reduce their investment spending, it is a sign that they are ________ about the economy.
A) optimistic B) ill-advised C) pessimistic D) taking risks
5) Suppose that a firm can invest $100 today in a project and receive $105 a year from today. There is no inflation, and the annual interest rate in the economy is 6%. The firm should:
A) not invest in the project because the opportunity cost is greater than the return on the investment.
B) invest in the project because the opportunity cost is less than the return on the investment.
C) invest in the project because the opportunity cost is greater than the return on the investment.
D) invest in the project because the opportunity cost is the same as the return on the investment.
6) Present value is calculated as:
A) K – i / (1 + i)t. B) K / (1 – i)k. C) K / (K + i)t. D) K / (1 + i)t.
7) If you want to purchase a swimming pool in five years for $25,000, how much would you need to have in your bank account now, so after five years you will have $25,000 to buy the swimming pool? Assume your bank pays 8 percent interest.
A) $12,255 B) $19,846 C) $15,348 D) $17,014
8) If the nominal interest rate is 6 percent and the inflation rate is 4 percent, then the real rate of interest is:
A) 2 percent. B) 6 percent. C) 10 percent. D) -2 percent.
9) Suppose you have $200 to invest at a nominal interest rate of 9 percent. If the inflation rate is 3 percent, then the real return on your investment is:
A) $18. B) $12. C) $24. D) $6.
10) As the real interest rate ________, the real investment spending ________.
A) increases; decreases B) decreases; decreases
C) increases; increases D) changes; does not change
11) If a project costs $200 today and pays a return of $220 next year, what is the highest interest rate at which the project should be undertaken?
A) 10 percent B) 9 percent C) 10.5 percent D) 8 percent
Returns on Investment
Investment Cost Returns
A $100 101
B $100 103
C $200 210
D $200 214
E $100 109
Table 12.2
12) Referring to Table 12.2, if the nominal interest rate is 4 percent and there is no inflation, which investments will be undertaken?
A) E B) E, D, and C C) E and D D) E, D, C, and B
13) Diversification ________ the risks of investing in the stock market.
A) can reduce but not eliminate B) eliminates
C) increases D) is unrelated to
14) The opportunity cost of holding money is:
A) the return that could have been earned from holding wealth in other assets.
B) the ease of conducting everyday business.
C) the probability of theft or loss.
D) heavy and awkward.
15) At lower interest rates the:
A) quantity of money demanded is higher. B) money supply is indeterminate.
C) money supply is lower. D) quantity of money demanded is lower.
16) A decrease in the price level in the economy leads to:
A) a leftward movement along the demand for money curve.
B) a rightward movement along the demand for money curve.
C) a leftward shift in the demand for money curve.
D) a rightward shift in the demand for money curve.
17) An increase in the level of real GDP in the economy leads to:
A) a rightward movement along the demand for money curve.
B) a rightward shift in the demand for money curve.
C) a leftward movement along the demand for money curve.
D) a leftward shift in the demand for money curve.
21) A decrease in the discount rate:
A) increases the cost of reserves borrowed from the Fed.
B) reduces the cost of borrowing from the Fed.
C) signals the Fed’s desire to decrease the money supply.
D) signals the Fed’s desire to reduce lending to commercial banks.
22) A decrease in the discount rate will:
A) increase the money supply.
B) have an unclear effect on the money supply.
C) not affect the money supply.
D) decrease the money supply.
23) If the Federal Reserve conducts an open market sale the:
A) interest rate will not change. B) interest rate will increase.
C) money supply is increased. D) interest rate will decrease.
24) The Federal Reserve influences the level of interest rates in the short run by changing the:
A) supply of money through changes in stock market operations.
B) demand for money through changes in reserve requirements.
C) supply of money through changes in open market operations.
D) demand for money through open market operations.
25) Based on the model of the money market, when real income increases, the equilibrium interest rate should:
A) increase.
B) stay the same.
C) decrease.
D) increase to the same extent that the supply of money increases.
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26) Based on the model of the money market, if the Federal Reserve decreases the reserve requirement, the equilibrium interest rate should:
A) stay the same.
B) decrease.
C) increase.
D) increase to the same extent that the demand for money increases.
27) An open market sale by the Fed:
A) increases interest rates and decreases output.
B) increases interest rates and increases output.
C) decreases interest rates and increases output.
D) decreases interest rates and decreases output.
28) If the Fed wished to increase GDP, it could:
A) increase the reserve requirement or conduct an open market sale.
B) decrease the reserve requirement or conduct an open market sale.
C) decrease the reserve requirement or conduct an open market purchase.
D) increase the reserve requirement or conduct an open market purchase.
29) If the Fed wished to decrease inflation, it could:
A) increase the reserve requirement or conduct an open market purchase.
B) decrease the reserve requirement or conduct an open market sale.
C) decrease the reserve requirement or conduct an open market purchase.
D) increase the reserve requirement or conduct an open market sale.
30) Higher U.S. interest rates cause the value of the dollar to:
A) fall, making U.S. goods relatively cheaper on world markets.
B) fall, making U.S. goods relatively more expensive on world markets.
C) rise, making U.S. goods relatively more expensive on world markets.
D) rise, making U.S. goods relatively cheaper on world markets.
31) A U.S. company that wishes to sell more to other countries would favor:
A) an appreciation of the dollar.
B) higher interest rates.
C) a depreciation of the dollar.
D) neither an appreciation nor a depreciation of the dollar.
32) Suppose GDP exceeds the level of potential output. We would expect to see:
A) low unemployment, rising wages, and falling prices.
B) high unemployment, rising wages, and rising prices.
C) low unemployment, rising wages, and rising prices.
D) high unemployment, falling wages, and falling prices.
33) When GDP is below potential output, prices fall because:
A) firms find it difficult to hire and retain workers and can offer higher wages, which decreases the costs of production.
B) firms can easily find new workers and can offer lower wages, which decreases the costs of production.
C) firms can easily find new workers and are forced to offer higher wages, which decreases the costs of production.
D) firms find it difficult to hire and retain workers and are forced to offer higher wages, which increases the costs of production.
34) Suppose that an economy has been experiencing 3 percent annual inflation. If output is less than potential output at the natural level of unemployment, prices generally will rise at:
A) a rate less than 3 percent. B) a rate greater than 3 percent.
C) a rate of 3 percent. D) a rate of 0 percent.
35) Wages and prices throughout an economy will rise above previous inflation rates when:
A) fewer goods are exported abroad. B) unemployment has highs and lows.
C) output exceeds potential output. D) imports increase dramatically.
36) The long-run aggregate supply curve is vertical because:
A) in the short run, prices are flexible but output is equal to potential output.
B) in the long run, prices are flexible but output is equal to potential output.
C) in the long run, prices are fixed and output is equal to potential output.
D) in the short run, prices are fixed but output may be above, below, or equal to potential output.
37) Assuming a short-run aggregate supply curve, a decrease in government spending results in ________ in output and ________ in prices.
A) an increase; an increase B) no change; an increase
C) an increase; no change D) a decrease; a slight decrease
38) If the unemployment rate is above the natural rate, then we expect to see:
A) falling wages cause the short-run aggregate supply curve to shift up.
B) increasing wages cause the short-run aggregate supply curve to shift down.
C) falling wages cause the short-run aggregate supply curve to shift down.
D) increasing wages cause the short-run aggregate supply curve to shift up.

40) If the economy were operating below full employment, it could return to full employment:
A) through open market purchases.
B) by itself, through falling wages and prices.
C) through increases in government spending or tax cuts.
D) all of the above
43) Suppose that the unemployment rate is below the natural rate. We would expect:
A) prices to rise, money demand to rise, interest rates to rise, and total demand to fall.
B) prices to fall, money demand to rise, interest rates to fall, and total demand to fall.
C) prices to rise, money demand to fall, interest rates to fall, and total demand to fall.
D) prices to fall, money demand to fall, interest rates to fall, and total demand to fall.
44) An increase in the money supply causes:
A) no changes in the level of output.
B) a short-run increase in the level of output.
C) a long-run increase in the level of output.
D) both a long-run and short-run increase in the level of output.
45) Crowding in leads to:
A) lower prices.
B) lower levels of real income and wages in the future.
C) higher levels of real income and wages in the future.
D) no effects on real income and wages.