Multiple choice questions

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ECON 221

1. According to classical economics:
a. markets will always be in equilibrium
b. interest rates will fall whenever savings are greater than investment
c. falling prices will lead to a reduction in unemployment
d. price flexibility will bring about equilibrium in markets when interest rates do not fall enough to eliminate surplus savings
e. both a and c
f. both b and d

2. The quantity of goods and services purchased declines as the price level increases because:
a. of the foreign purchases effect
b. an increase in prices encourages individuals to reduce purchases
c. higher prices lead to higher interest rates, reducing the purchases of interest-rate sensitive goods
d. all the above

3. The interest rate effect of aggregate demand:
a. is a GDP component that accounts for interest earned on foreign bonds
b. describes a situation in which a rise in the price level increases rates, lowers consumption, and leads to lower investment in capital goods
c. describes the effect of a decrease in value of liquid assets-including cash, stocks and bonds-that tends to reduce consumption
d. is the rate at which investors will be willing to switch from investment capital to government and municipal bonds

4. The long run aggregate supply curve:
a. is based on the assumption that the economy will operate at full employment in the long run
b. when combined with aggregate demand, determines the long run price level and the equilibrium GDP
c. illustrates the maximum possible output level that an economy can achieve at any point in time
d. all the above

5. At equilibrium GDP:
a. savings equals investment and aggregate demand equals aggregate supply
b. savings slightly exceed investments, raising long run aggregate supply to meet aggregate demand
c. aggregate demand equals aggregate supply and prices are rising
d. savings equal investment and aggregate demand exceeds aggregate supply

6. Under the Keynesian approach, the economy:
a. can operate at below full employment output, but only in the short run
b. can operate above full employment output in the long run
c. always tends toward full employment
d. can operate at below full employment output for extended periods of time
e. can function only when savings and investment are equal

7. An increase in aggregate demand in the classical range of the long run average supply curve will:
a. increase real domestic output and reduce the price level
b. decrease aggregate supply and increase the price level
c. increase the price level, leaving real domestic output unchanged
d. increase the price level and increase real domestic output

8. The Keynesian model of economic equilibrium:
a. stresses changes in aggregate demand as the primary factor responsible for recessions and depressions
b. ignores the role played by the government sector
c. highlights the role of supply in determining output and employment
d. uses investment level to illustrate the variability of both output and employment in the economy

9. According to Keynes, when an economy is in dis-equilibrium, aggregate demand will always adjust to move the economy back towards equilibrium:
a. true
b. false

10. Fiscal policy:
a. has been used to moderate economic fluctuation since the beginning of the industrial revolution
b. uses increases in the money supply to stimulate the economy
c. is the manipulation of the federal budget to attain price stability, relatively full employment, and a satisfactory rate of economic growth
d. uses increased government spending and taxes to eliminate deflationary gaps
e. both a and b
f. both b and c

11. A deflationary gap:
a. exists when equilibrium GDP is smaller than full employment GDP
b. occurs when equilibrium GDP exceeds full employment GDP
c. means the economy is temporarily operating outside of its production possibilities curve
d. is controlled through increased government spending and / or a cut in taxes
e. both a and d
f. all the above

12. The economy of Country X is operating at full employment; its government decides to cut spending and consumption drops. This includes that the economy:
a. holds that any change in spending results in a multiplied change in GDP
b. increases as the MPC decreases
c. decreases as the MPS increases
d. both b and c
e. both a and c
f. all the above

13. The multiplier effect:
a. holds that any change in spending results in a multiplied change in GDP
b. increases as the MPC decreases
c. decreases as the MPS increases
d. both b and c
e. both a and c
f. all the above

14. GDP of a nation is $2,000, and the multiplier is 2.5. If consumption rises by 50, the new level of GDP is:
a. $2,002.50
b. $2,050.00
c. $2,125.00
d. $2,150.00

15. GDP in Country X for 2002 was $500 billion; consumption rose by $50 billion in 2003, and the MPC is 0.70. GDP for 2003 is:
a. $267 billion
b. $550 billion
c. $617 billion
d. $667 billion

16. If equilibrium GDP is $200 billion greater than full employment GDP, and the multiplier is 2, then there is a(n):
a. deflationary gap of $100 billion
b. deflationary gap of $400 billion
c. inflationary gap of $100 billion
d. inflationary gap of $400 billion

17. A reduction in taxes is likely to have a larger expansionary effect than an equal increase in government spending.
a. true
b. false

18. Automatic stabilizers:
a. include government transfer payments, unemployment compensation and personal savings and income taxes
b. are intended to protect the economy from the extremes of the business cycle
c. help to provide a floor under consumer spending so that economic downturns will not worsen
d. both a and b
e. all the above

19. Which of the following is an example of a discretionary fiscal policy?
a. The level of Social Security taxes collected by the government falls as income are reduced by a recession
b. Government income from corporate taxes rises sharply as profits in the industry soar during a boom
c. Six months of unemployment benefits are given to workers displaced by a recession
d. Tax rates are increased to reduce inflationary pressure within the economy

20. The government’s budget deficit:
a. reduces the amount of money available for corporations to purchase new capital stocks
b. lowers interest rates and encourages foreign investment
c. can be reduced through a reduction in taxes to stimulate private consumption
d. is most likely to be reduced by a series of reductions in government expenditures over the next decade

21. The national debt:
a. is the sum of all money owed by the US government to foreign interest
b. the cumulative total of all federal budget deficits less any surpluses
c. a result of recent government policy to dampen economic growth and reduce aggregate demand in the wake of rapidly rising inflation
d. a debt that must be paid off to induce any kind of sustained economic growth period

22. Country A runs the following series of budget deficits:
1994 200
1995 150
1996 80

During these three years, its national debt will:
a. be reduced
b. increase at a decreasing rate
c. increase at an increasing rate
d. decline at an increasing rate

23. The government reduces the federal budget deficit in year 1 from $300 billion to $200 billion, and in year 2 from $200 billion to $100 billion. During these two years the national debt will:
a. fall by $300 billion
b. fall by $200 billion
c. rise by $200 billion
d. rise by $300 billion

24. Running a budget surplus:
a. will reduce the national debt
b. will increase the national debt
c. may either increase or decrease the national debt
d. none of the above

25. Future generations will suffer as a result of continued growth of the national debt if:
a. the proportion owed to foreign investors continues to rise
b. a series of years with budget surpluses touches off a downward spiral in economic activity
c. the Treasury’s ability to roll over debt is reduced by lack of investor confidence
d. interest rates rise and choke off private investment in capital accumulation
e. both a and c
f. all the above

26. The most important function of money is as a:
a. medium of exchange
b. standard of value
c. store of value
d. standard of deferred payment

27. M2 consists of:
a. currency, demand deposits, checkable deposits, NOW accounts and traveler’s checks
b. currency, demand deposits, checkable deposits, NOW accounts, traveler’s checks, saving and money market funds
c. currency, demand deposits, checkable deposits, NOW accounts, traveler’s checks, savings, small denomination time deposits, and money market funds
d. currency, demand deposits, checkable deposits, NOW accounts, traveler’s checks, savings, all time deposits, and money market funds

28. The motive for holding money is our desire to maintain cash balances to pay for unexpected transactions.
a. transactions
b. precautionary
c. speculative

29. A rise in interest rates:
a. decrease the opportunity cost of holding money
b. increases the opportunity cost of holding money
c. leads to a reduction in the quantity of money demanded
d. leads to an increase in the quantity of money demanded
e. both a and d
f. both b and c

30. People will tend to hold less money as:
a. interest rates fall
b. credit availability is reduced
c. the rate of inflation decreases

31. People will hold large quantities of money during periods of very low interest rates. This is:
a. known as the liquidity trap
b. illustrated by the vertical transactions demand curve for money
c. reflected by the almost vertical precautionary demand curve for money
d. illustrated by the almost horizontal portion of the speculative demand curve for money
e. both a and d
f. both a and c

32. In determining the level of interest rates:
a. it is evident that there are a number of different interest rates moving in different directions at any given time
b. we notice that the rate is determined by the decree of the Federal Reserve chairman
c. the interest rate offered on deposits is always less than the rate offered on funds available for loans
d. it appears that individual banking institutions sets most rates arbitrarily
e. both a and d

33. The Federal Deposit Insurance Corporation:
a. will cover only the deposits of individual household savers in the event of a bank failure
b. was instituted to raise money to run the Federal Reserve
c. is designed to avert bank failures by guaranteeing the deposits at its member institutions
d. is in danger of being eliminated because it lacks the support of the Treasury Department

34. A bank’s primary reserves are the total dollar amount of treasury bills, bonds, notes and certificates that it holds.
a. true
b. false

35. A bank with $940.4 million in demand deposits holds $102 million in actual reserves. At the current reserve requirement:
a. it holds no excess reserves
b. it holds reserves below the legal minimum requirement
c. it holds excess reserves of approx. $7 million
d. it holds excess reserves of approx. $11 million
e. none of the above

36. In order to buy securities the Fed offers:
a. a low price and drives up interest rates
b. a low price and drives down interest rates
c. a high price and drives up interest rates
d. a high price and drives down interest rates

37. The Fed regulates the money supply through:
a. fiscal policy
b. open-market operations
c. the raising or lowering of the federal funds rate
d. manipulation of the deposit expansion multiplier

38. To reduce the money supply the Federal Reserve would:
a. buy securities on the open market and bid down interest rates, reducing demand for cash holdings
b. place a freeze on treasury money production and new bond issues
c. sell securities through open market operations, thereby bidding down the price of treasury bonds and forcing the interest rate up
d. both a and b

39. By buying securities on the open market the Fed:
a. slows the economy’s inflation rate
b. increases demand for securities and pushes up interest rates
c. increases the level of reserves of depository institutions
d. increases the deposit expansion multiplier of depository institutions

40. A change in the reserve requirements of depository institutions is the policy tool most frequently used by the Federal Reserve to influence economic activity
a. true
b. false

41. Labor problems over the past decades have resulted from:
a. a decline in the average workweek
b. a less qualified workforce than major industrial nations
c. a large percentage of the potential workforce that is dependent upon welfare
d. limitations on the number of immigrants allowed into the country over the last 70 years
e. all of the above

42. Factors that have contributed to the slow rate of economic growth in the U.S. also includes:
a. increasing energy costs
b. rising health care costs
c. reduced spending on infrastructure
d. environmental and health and safety regulations
e. all the above

43. Less developed countries face severe difficulties in industrializing their economies due to:
a. rapid population growth
b. production at subsistence levels, which leaves no room for capital information
c. extremely high levels of debt
d. disproportionate spending by governments on armaments
e. both a and b
f. all of the above

44. The basis of international trade is:
a. the law of absolute advantage
b. a strong currency
c. specialization
d. self- sufficiency

45. For a hypothetical two-product international trade system, the terms of trade:
a. describe the limits within which two nations will engage in international trade
b. will always fall between the two domestic exchange equations of the trading nations
c. exist only if both nations maintain an absolute advantage in the production of one product
d. depend upon the relative negotiating strengths of trade officials from each government
e. both a and b
f. all the above

46. On international markets, the terms of trade between two nations:
a. are influenced heavily by supply and demand within the world markets for the goods involved
b. can be pushed outside of the domestic exchange equations by a nation with a large resource advantage
c. depends upon the relative sizes of the domestic markets
d. both b and c

47. A nation is said to have a comparative advantage in the production of a good when:
a. it can produce the good at a lower cost than the nation(s) with which it trades
b. the resource needed to produce the good occurs naturally in that country
c. it has a natural advantage in distribution of the product
d. it produces the good more efficiently than another country relative to the production of another good

48. When a nation has an absolute advantage over another in the production of a good:
a. it also must have a comparative advantage in the production of the good
b. its opportunity cost for producing that good is lower than that of its trading partners
c. it can produce that good using fewer resource inputs than its trading partners
d. it produces greater absolute quantities of the good than its trading partners

Answer questions 49-54 based on the following table. For identical resource input, production levels for two goods are as follows:
Country Product OR Product
A 50 OR 120
B 20 OR 30

49. The domestic exchange equation of Country A is:
a. 2.5 units of product X= 1 unit of product Y
b. 0.5 units of product X= 1 unit of product Y
c. 2.4 units of product Y= 1 unit of product X
d. 1.5 units of product Y= 1 unit of product X

50. The domestic exchange equation of Country B is:
a. 6 units of product Y= 1 unit of product X
b. 4 units of product Y= 1 unit of product X
c. 2.4 units of product X= 1 unit of product Y
d. 0.67 units of product X= 1 unit of product Y

51. Country A will be willing to trade for 1 unit of product X:
a. between 1 and 1.5 units of product Y
b. between 2.0 and 2.4 units of product Y
c. between 2.4 and 2.5 units of product Y
d. between 1 and 2.4 units of product Y

52. Country A has a absolute advantage in the production of:
a. both goods
b. product X
c. product Y
d. neither good

53. Country B has an absolute advantage in the production of:
a. both goods
b. product X
c. product Y
d. neither good

54. Country A should:
a. not engage in trade with Country B
b. specialize in the production of product X and import product Y from Country B
c. specialize in the production of product Y and import product X from Country B
d. import both product X and product Y from Country B

55. Compared to a tariff, a quota:
a. is directed against particular foreign sellers on an arbitrary basis
b. produces no revenue for the government
c. allows relatively less efficient foreign sellers into the domestic market, while excluding relatively less efficient sellers
d. is a less efficient protection mechanism than tariffs
e. all the above

56. The imposition of a tariff or quota:
a. is necessary to help domestic industries compete against low wage competitors
b. should have been implemented during the 1950s and 1960s to protect infant domestic industries
c. will not solve the problem of unemployment caused by the importation of goods from more efficient producers
d. both a and b

57. The primary causes of the large U.S. trade deficits are:
a. foreign protection against U.S. exports
b. large trade deficits with both China and Japan
c. our growing demand for imported oil
d. Japanese firms “dumping” goods on U.S. markets
e. Both b and c
f. All the above

58. The U.S. trade balance has been affected negatively by:
a. the depreciation of the dollar on international money market
b. an increase in the number of production facilities of American corporations in other countries
c. declining investment in long term research and development
d. declining capital costs in the U.S. over the last two decades
e. both b and c
f. all the above

59. Multinational corporations have combined the competitive advantage of low wages with that of high capital.
a. true
b. false

60. The deficit may be reduced by:
a. increasing consumption and spending in the economy to spur new investments
b. increasing government spending on defense programs in an effort t boost private capital investment
c. initiating policies to encourage more individual savings and capital investment
d. both a and b
e. all the above

61. To reduce the overall U.S. trade deficit, it is necessary to:
a. raise our productivity rate and improve the quality of U.S. goods and services
b. lower dependence on oil imports
c. reduce our trade deficit with Japan
d. manage trade relations with China
e. both a and b
f. all the above

62. The balance of payments:
a. consists of the entire flow of U.S. dollars and foreign currencies into and out of the country
b. is comprised of the current account and capital account
c. will be in surplus in the next few years because the net outflow of investments is likely to be reversed
d. only balances when total imports equals total exports
e. both a and b
f. all the above

63. Monetary policy is entirely ineffective under the gold standard because:
a. it prevents the Federal Reserve from monitoring imports and exports between U.S. and its trading partners
b. the Federal Reserve could not control interest rates
c. the Federal Reserve would have no control over the money supply
d. the government could not restrict imports using tariffs

64. Problems with the U.S. balance of payments originally stem from:
a. enormous military and foreign aid spending aboard in the Post War era
b. large investment abroad by U.S. citizens
c. huge rises in the price of oil during the mid 1970s
d. increased competitiveness of foreign industry after recovery from WWII
e. all the above

65. In a free floating system, exchange rates are determined by:
a. the supply and demand of the currency on international markets
b. the relative price levels between two nations
c. the growth rates of the economies of the trading nations
d. the level of interest rates in the trading nations
e. all the above

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