Multiple Choice Answers

Question 1
Inflation increases the purchasing power of money.

True
False

Question 2
If economic policy makers can keep the economy growing at a steady pace, they can reduce

cyclical unemployment.
structural unemployment.
frictional unemployment.
seasonal unemployment.

Question 3
Unemployment that is caused by business recessions is called

structural unemployment.
cyclical unemployment.
seasonal unemployment.
frictional unemployment.

Question 4
Assuming there are 90 million people employed in the United States and 2 million people unemployed, the unemployment rate would approximately equal

4.8%.
2.17%.
3.7%.
10.1%.

Question 5
Structural unemployment results from government mandates that cause firms to reduce their demand for labor.

True
False

Question 6
If the bank advertises 5 percent interest for your checking account and the anticipated rate of inflation is 3.5 percent

the real rate of interest earned on the account is 5.0 percent.
the real rate of interest earned on the account is 2.5 percent.
the real rate of interest earned on the account is 3.5 percent.
the real rate of interest earned on the account is 1.5 percent.

Question 7
Unemployment statistics are often criticized

for overstating the number of people out of work, as it includes all low-income workers.
for overstating the number of people out of work, as retirees are included in the statistics.
for understating the number people out of work, as full-time college students are excluded.
for understating the number of people out of work, as discouraged workers are excluded.

Question 8
If there is positive, unanticipated inflation, who benefits?

rs
people on fixed nominal incomes
creditors
borrowers

Question 9
Unanticipated inflation benefits

people or businesses who owe money.
people who live on fixed nominal incomes.
people or businesses who lend money.
people with savings.
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Question 10
A person who is currently unemployed but has stopped looking for a job because he or she is convinced there is no job available is classified as a

dissatisfied worker.
depressed worker.
disgruntled worker.
discouraged worker.

Question 11
Assume a 10 percent increase in the price of all goods in 2001; if the base year is 2000, then the price index in 2001 will be

200.
1000.
110.
90.

Question 12
Table 10.3
Commodity Market Basket Quantity 2000 Price per Unit Cost of Market Basket in 2000 2003 Price per Unit Cost of Market Basket in 2003
Milk 10 gallon 2.00 20.00 2.50 25.00
Eggs 10 dozen 2.00 20.00 3.00 30.00
Bread 10 loaves 2.00 20.00 3.00 30.00

In Table 10.3 the total cost of the market basket in 2003 was

$8.50.
$60.00.
$6.00.
$85.00.

Question 13
Everything included in M1 is also included in M2.

True
False

Question 14
The Board of Governors of the Federal Reserve System has

seven members appointed by the House of Representatives.
fourteen members appointed by the U.S. Treasury secretary.
seven members appointed by the U.S. President.
fourteen members appointed by the House of Representatives.

Question 15
Table 13.1
__
Outstanding U.S. Treasury Bills $900
Currency in Circulation $500
Money Market Deposits Accounts $300
Small Denomination Time Deposits $600
Checkable Deposits $1,000
Stock Market Shares $1,000
Money Market Mutual Funds Balances $500
Savings Deposits $400
Traveler’s Checks Not Issued By Banks $200
Based on the information in Table 13.1, the value of M1 is

$2,100.
$1,700.
$3,100.
$3,000.

Question 16
Without an accepted medium of exchange

there would be no trade.
there would be no productive activity in the economy.
goods and services would be exchanged by barter.
people would have to rely on gold or silver in order to exchange goods and services.

Question 17
Checking accounts deposits are

included neither in M1 nor M2.
included in M1 but not in M2.
included both in M1 and M2.
included in M2 but not in M1.

Question 18
Which governing body determines the future growth of the U.S. money supply?

the Federal Open Market Committee
the U.S. Congress
the U.S. Treasury
the Economic Policy Committee, a body composed of the President, Treasury Secretary, and Commerce Secretary

Question 19
The M1 definition of the money supply includes all of the following EXCEPT

savings accounts.
checkable deposits.
travelers checks.
currency.

Question 20
In defining money as M1, economists exclude time deposits because

they earn interest.
they do not directly serve as a medium of exchange.
they have no intrinsic value.
they are not recognized as legal tender.

Question 21
The Federal Reserve injects reserves into the banking system by buying government securities on the open market.

True
False

Question 22
The need for a coincidence of wants occurs when

there is deflation.
a system of barter is used.
the medium of exchange is liquid.
there is inflation.

Question 23
M1 is the narrowest definition of the money supply.

True
False

Question 24
A monetary system is preferable over the barter system because it

limits cash leakages.
is easier to track by the government.
is determined by the Congress.
reduces transaction costs.

Question 25
A progressive income tax system is an automatic stabilizer.

True
False

Question 26
If your income goes up by $1,000 per week, and your consumption goes up by $800 per week, you have a marginal propensity to consume of

0.2.
1.0.
1.2.
0.8.

Question 27
If investment spending increases by $1 billion when the marginal propensity to consume is .8, national income will increase by

$5 billion.
$1 billion.
$2 billion.
$8 billion.

Question 28
The intent of discretionary fiscal policy is to smooth out fluctuations in business activity by shifting the aggregate supply curve.

True
False

Question 29
All of the following would cause the demand for investment to shift EXCEPT

a change in business taxes.
a change in the real interest rate.
a change in productive technology.
a change in producer expectations of future profit.

Question 30
The desired effect of expansionary fiscal policy is to increase aggregate demand.

True
False

Question 31
Changes in investment spending

do not affect the equilibrium level of real output.
have a multiplier effect.
do not affect aggregate demand.
affect aggregate supply, but not aggregate demand.

Question 32
If a $5,000 increase in income boosts consumption spending by $4,500, then the marginal propensity to is

.40.
.30.
.10.
.20.

Question 33
In discretionary fiscal policy, an increase in government spending is used to

dampen aggregate supply.
stimulate aggregate supply.
dampen aggregate demand.
stimulate aggregate demand.

Question 34
Contractionary fiscal policy is used when the economy is overheated.

True
False

Question 35
Table 12.1
Real Disposable Income Planned Real Consumption
0 3,000
2,000 4,400
4,000 5,800
6,000 7,200
8,000 8,600
10,000 10,000
12,000 11,400
14,000 12,800

Refer to Table 12.1. The table gives the combinations of income and consumption for a college student for a year. At what level of income is saving equal to zero?

10,000
14,000
4,000
6,000

Question 36
If the marginal propensity to consume is 0.8, the multiplier is

1.25.
0.20.
4.
5.

Question 37
The time lags encountered in implementing fiscal policy

lessen its effectiveness.
are offset by automatic stabilizers.
are offset by the crowding out effect.
are so brief as to be unnoticeable.

Question 38
Aggregate supply

is the overall wealth within an economy.
is the total amount of money circulating in an economy.
is the total of all planned production in an economy.
is the total amount of raw materials available in an economy.

Question 39
Increases in aggregate supply result in

an increase in the price level and an increase in real output.
a decrease in the price level and a reduction in real output.
an increase in the price level and a reduction in real output.
a decrease in the price level and an increase in real output.

Question 40
Consumers purchase more foreign goods when the domestic price level decreases.

True
False

Question 41
An increase in aggregate demand is shown by

a rightward shift in the aggregate demand curve.
a movement up along the aggregate demand curve.
a movement down along an aggregate demand curve.
a leftward shift in the aggregate demand curve.

Question 42
Which of the following factors causes the aggregate demand curve to slope downward and to the right?

the open economy effect
the substitution effect
the income effect
the profit motive

Question 43
An aggregate demand curve

does not shift to the right or to the left.
shifts to the right when the price level falls.
shifts to the right when a non-price level change decreases aggregate spending.
shifts to the right when a non-price level change increases aggregate spending.

Question 44
Because individual supply curves slope up, the aggregate supply curve slopes down.

True
False

Question 45
If you have $5000 and the GDP deflator decreases from 100 to 80

the $5000 will buy more of the goods and services produced by society.
the $5000 will buy less of the goods and services produced by society.
the value of the $5000 decreases.
the value of the $5000 remains constant.

Question 46
The total of all planned production for the economy is

aggregate demand.
determined only by the government.
determined only by individuals and firms.
aggregate supply.

Question 47
The model of aggregate supply and aggregate demand is based on the assumption that it is only wage changes, not price changes, that determine a firm’s production and employment plans.

True
False

Question 48
The effect of a decrease in aggregate demand is to decrease the price level and to decrease unemployment.

True
False

Question 49
When an increase in the price level reduces the purchasing power of financial assets

the amount of real goods and services people can purchase declines.
the aggregate demand curve shifts left.
the aggregate demand curve shifts right.
people work harder to regain the same initial purchasing power.

Question 50
Increases in aggregate demand

will leave real GDP unchanged.
lead to increases in the price level.
will cause aggregate supply to decrease.
will cause aggregate supply to increase