## Multiple Choice questions.

1. Which of the following is true about US currency:

A. US currency is backed by gold
B. The US uses a hard-pegged exchange rate
C. The US uses a floating exchange rate
D. The US uses a soft-pegged exchange rate

2. Which of the following statements is CORRECT?
A. The labor force is equal to the number of people employed plus the number of people
unemployed
B. The working age population includes everyone over the age of 16
C. The unemployment rate is the number of persons who are unemployed divided by
the working-age population then times 100
D. The labor-force participation rate is the labor force times 100

3. Suppose the population of Tiny Town is 100 people and the labor force is 70. If 10 of these
people are unemployed, the unemployment rate in Tiny Town is
A. 10%
B. 14.3%
C. 12.5%
D. There is not enough information provided to calculate the unemployment rate

4. Suppose real GDP for a country is \$13 trillion in 2015, \$14 trillion in 2016, \$18 trillion in 2017,
and \$25 trillion in 2018. Over this time period, the real GDP growth rate is
A. increasing
B. decreasing
C. constant
D. negative

5. Suppose the growth rate of GDP in Nigeria is constant at 0.8% the GDP of this country will
double in:
A. 98 years
B. 65 years
C. 88 years
D. 8750 years

6. The key financial institutions in the United States include all of the following EXCEPT
A. The US treasury
B. The Federal Reserve
C. commercial banks, pension funds, and insurance companies

7. U.S. investment is fi nanced from
A. private saving, government budget surpluses, and borrowing from the rest of the
world.
B. private saving, government budget de ficits, and borrowing from the rest of the world.
C. private borrowing, government budget de ficits, and lending to the rest of the world.
D. private saving and borrowing from the rest of the world only.

8. For a commercial bank, the term \reserves” refers to
A. a banker’s concern (\reservation”) in making loans to an individual without a job.
B. the pro t that the bank retains at the end of the year.
C. the cash in its vaults and its deposits at the Federal Reserve.
D. the net interest that it earns on loans.

9. Which of the following expenditures associated with the production of a new high-performance
SUV will be directly included in GDP?
A. the sale of bonds to fi nance the construction of the assembly plant
B. the purchase of used welding robots to assemble to vehicles
C. the purchase of new tires to be installed on the new vehicles
D. the purchase of new machine tools to manufacture the engines

10. Which of the following is an intermediate good?
A. the memory chips in your new smart phone
B. a share of IBM stock
C. flour purchased at the store to bake cookies
D. flowers purchased at the store

11. Which of the following individuals is the best example of a structurally unemployed worker?
A. a recent college graduate who has entered the labor force
B. an individual who has been laid o from his job because of a business cycle recession
C. an automobile worker who has lost her job because of an increase in automobile
imports and does not have the skills currently needed by businesses
D. an individual who quits one job in the hope of fi nding a better job

12. If a bank’s net worth is positive, then the bank de finitely is
A. liquid.
B. insolvent.
C. illiquid.
D. solvent.

13. The quantity of real GDP supplied depends on the
A. level of aggregate demand.
B. quantity of capital, bonds, and stocks.
C. quantity of labor, the quantity of capital, and the state of technology.
D. price level, the unemployment rate, and the quantity of government expenditures on
goods and services

14. When talking about aggregate supply, it is necessary to
A. focus on the short run.
B. focus on the long run.
C. distinguish between long-run aggregate supply and short-run aggregate supply.
D. distinguish between long-run full employment and short-run full employment.

15. Aggregate demand is the relationship between the quantity of real GDP demanded and the
A. price level.
B. money wage rate.
C. real wage rate.
D. nominal GDP demanded.

16. Suppose consumers decrease their consumption expenditure because they worry about what
their income will be in the future. There is
A. a rightward shift of the aggregate demand curve.
B. an upward movement along the aggregate demand curve.
C. a downward movement along the aggregate demand curve.
D. a leftward shift of the aggregate demand curve.

17. An increase in government expenditure on goods and services
A. increases aggregate demand.
B. increases the aggregate quantity demanded.
C. decreases the aggregate quantity demanded.
D. decreases aggregate demand.

18. If aggregate demand grows only slightly faster than potential GDP, then the economy will
A. experience economic growth with high inflation.
B. experience recession.
C. experience economic growth with low inflation.
D. be at a business-cycle peak.

19. An inflationary gap occurs when
A. real GDP is less than potential GDP.
B. real GDP exceeds potential GDP.
C. real GDP equals potential GDP.
D. the economy is at full employment.

20. A consumption function shows a
A. negative (inverse) relationship between consumption expenditure and saving.
B. positive (direct) relationship between consumption expenditure and the price level.
C. negative (inverse) relationship between consumption expenditure and disposable in-
come.
D. positive (direct) relationship between consumption expenditure and disposable in-
come.

21. consumption is consumption that will occur the level of GDP and disposable
income.
A. Autonomous; independent of
B. Autonomous; depending on
C. Induced; independent of
D. None of the above answers is correct.

22. When disposable income equals consumption expenditure, then
A. saving is zero.
B. the MPC = zero.
C. the MPS = zero.
D. None of the above answers is correct.

23. If the marginal propensity to consume is 0.8, every \$10 increase in disposable income increases
A. consumption expenditure by \$0.80.
B. consumption expenditure by \$80.00.
C. saving by \$0.20.
D. consumption expenditure by \$8.00.

24. The MPC and MPS sum to
A. 1.
B. a number that exceeds 1.
C. 100.
D. zero.

25. Suppose that in a particular economy, the multiplier is equal to 5. In terms of aggregate demand
and aggregate supply, this value for the multiplier means that after an increase in investment
A. at each level of real GDP, the aggregate demand curve shifts upward by an amount
equal to 5 times the change in investment.
B. at each level of real GDP, the aggregate supply curve shifts upward by an amount
equal to 5 times the change in investment.
C. at each price level, the aggregate supply curve shifts rightward by an amount equal
to 5 times the change in investment.
D. at each price level, the aggregate demand curve shifts rightward by an amount equal
to 5 times the change in investment.

26. Demand pull inflation can be started by
A. a decrease in the quantity of money.
B. an increase in government expenditure.
C. a decrease in net exports.
D. an increase in the price of oil.

27. Initially, demand-pull inflation will
A. increase the price level and not change real GDP.
B. increase the price level and increase real GDP.
C. increase the price level and decrease real GDP.
D. shift the aggregate supply curve rightward.

28. Suppose that a shock causes the aggregate demand curve to shift rightward. If the Fed does
nothing
A. the economy will experience a temporary reduction in employment but will eventually
B. output initially will exceed potential GDP, but the economy will return to potential
GDP with a higher price level.
C. the short-run aggregate supply curve will not shift leftward and there will be continued
inflation.
D. eventually the short-run aggregate supply curve will shift leftward and there will be
continued inflation.

29. Along a short-run Phillips curve, suppose the expected inflation rate is 6 percent. If the actual
inflation rate turns out to be 8 percent, then
A. there is a movement upward along the short-run Phillips curve.
B. there is a movement downward along the short-run Phillips curve.
C. there is a downward shift of the short-run Phillips curve.
D. None of the above answers are correct.

30. Stagnation is associated with
A. cost-push inflation.
B. demand-pull inflation
C. both cost-push inflation and demand-pull inflation
D. neither cost-push inflation nor demand-pull inflation because it is a different concept
altogether.

31. For a cost-push inflation to occur, oil price increases must be accompanied by
A. decreased investment spending.
B. lower personal tax rates
C. increases in the quantity of money.
D. increases in government expenditures.

32. Suppose aggregate demand increases by more than expected. Which of the following describes
what will occur?
A. Real GDP will be greater than potential GDP.
B. The price level will increase.
C. Unemployment will fall.
D. All of the above answers are correct.

33. Prior to the Great Depression, the purpose of the federal budget was to
A. stabilize the economy.
B. Finance the activities of the government.
C. maintain low interest rates.
D. decrease unemployment

34. Fiscal policy includes
A. only decisions related to government expenditure on goods and services.
B. only decisions related to government expenditure on goods and services and the value
of transfer payments.
C. only decisions related to the value of transfer payments and tax revenue.
D. decisions related to government expenditure on goods and services, the value of trans-
fer payments, and tax revenue.

35. Changes in which of the following is included as part of fiscal policy?
A. the quantity of money
B. the level of interest rates
C. monetary policy
D. tax rates

36. The Employment Act of 1946 made it the responsibility of the federal government to
A. balance its budget because that policy would create the maximum level of employment.
B. promote maximum employment.
C. provide full employment and a stable balance of payments.
D. improve the distribution of income.

37. The Council of Economic Advisers
A. proposes the president’s budget each year.
B. approves fi scal policy changes.
C. helps the President and the public stay informed about the state of the economy.
D. helps the President make changes in monetary policy.

38. The U.S. federal budget over the past 30 years has been
A. in balance most years.
B. in defi cit most of the years.
C. in surplus most of the years.
D. in surplus about half the time and defi cit the other half.

39. Looking at the supply-side effects on aggregate supply shows that a tax hike on labor income
A. weakens the incentive to work.
B. decreases potential GDP.
C. increases potential GDP because people work more to pay the higher taxes.
D. Both answers A and B are correct.

40. An income tax potential GDP by shifting the curve .
A. increases; labor demand; rightward
B. decreases; labor demand; leftward
C. increases; labor supply; rightward
D. decreases; labor supply; leftward

41. The La er curve is the relationship between
A. government purchases and potential GDP.
B. tax rates and potential GDP.
C. tax revenue and potential GDP.
D. tax rates and tax revenue.42. During the Reagan administration in the 1980s, tax rates were and the budget de ficit
A. raised; increased
B. raised; decreased
C. cut; increased
D. cut; decreased

43. Taxes and government expenditures that change in response to changes in the level of economic
activity, without need for additional government action, are examples of
A. discretionary fiscal variables.
B. automatic fi scal policy.
C. built-in monetary stabilizers.
D. cyclically balanced budgets.

44. The aggregate demand curve shifts rightward if there is
A. an increase in tax rates.
B. a decrease in government expenditure.
C. an increase in the federal budget surplus.
D. an increase in government expenditure.

45. The Federal Reserve’s monetary policy goals include
A. ensuring banks can meet their pro t maximization objectives.
B. discount rate stability.
C. zero percent unemployment in the domestic economy.
D. price level stability.

46. The core inflation rate, measured by the core PCE deflator, measures changes in the
A. price of only two consumer goods: food and fuel.
B. prices of all consumer goods.
C. prices of consumer goods except the ones for food and fuel.
D. prices of consumer goods except the ones for health care.

47. The output gap is the
A. percentage deviation of real GDP from potential GDP.
B. difference between actual inflation and core inflation.
C. difference in graduation levels between high school and college.
D. percentage increase in the economic growth rate of real GDP.

48. The monetary policy instrument the Federal Reserve chooses to use is the
A. quantity of money.
B. exchange rate.
C. federal funds rate.
D. required reserves rate.

49. Federal Reserve open market operations directly influence
A. firms.
B. consumers.
C. banks.
D. Congress.

50. By using open market operations, the Federal Reserve
A. adjusts the supply of reserves to keep the federal funds interest rate equal to its
target.
B. adjusts the supply AND demand of reserves to keep the federal funds interest rate
equal to its target.
C. adjusts the demand of reserves to keep bank rates in line with the federal funds rate
target.
D. controls banks’ demand for reserves, thereby keeping the federal funds rate equal to
its target.

51. Monetary policy affects real GDP by
A. changing aggregate supply.
B. creating budget surpluses.
C. changing aggregate demand.
D. creating budget de ficits.

52. In the short run, an increase in the federal funds rate the real interest rate and
investment.
A. lowers; increases
B. raises; increases
C. lowers; decreases
D. raises; decreases

53. Consumer con fidence in the economy rises, and as a result, real GDP increases above potential
GDP. To move U.S. GDP back to potential GDP, the Fed should
A. lower the federal funds rate.
B. raise the federal funds rate.
C. increase the government’s budget defi cit.
D. decrease the government’s budget de ficit.

54. Based on the fi gure above
A. inequality always rises during boom years
B. inequality always falls during recessions years
C. inequality always falls during boom years
D. inequality can rise or fall during recessions

55. Which of the following statements is correct regarding the years immediately after Roosevelt
became the US president?
A. A change in the expectations of consumers of their future earnings, as a result of
the New Deal, would have contributed to an expansion in the economy aggregate
demand.
B. The real interest rate rose after 1933.
C. The value of the US dollar increased as the result of the abandonment of the gold
standard and allowed the nominal interest rate to be cut to close to zero.
D. Fiscal contraction from the increased government defi cit would have contributed to
the economy escaping from the Depression

56. During the Golden Age pro ts and wages rose together. Which of the following is correct
regarding this period?
A. The rise in real wages due to stronger trade unions and higher unemployment benefi ts
directly led to postwar innovation.
B. A rise in the real wages depresses pro ts and reduces investment. This conflict of
interest between workers and employers means that low unemployment, high pro ts,
and high investment would not have been sustainable.
C. The substantial increase in the bargaining power of trade unions and political movements allied with workers meant that they could demand the highest possible wages,
pushing the wage-setting curve to its highest possible level.
D. Continuing technological progress owing to widespread expectations of sustained high
pro ts, together with high wages resulting from the strong bargaining power of trade
unions, created a virtuous circle of high investment, rapid productivity growth, rising
wages, and low unemployment.

57. Based on the fi gure above
A. As predicted by the Phillips curve, the unemployment rate rises whenever inflation
falls and vice versa throughout the period depicted.
B. The unemployment rate and the inflation rate were consistently positively correlated
during the stagnation period of the 1970s.
C. Stagnation was caused by the shifting up of the Phillips curve, propelled by higher
inflation expectations.
D. The end of stagnation was characterized by falls in both the unemployment rate and
the inflation rate.

58. Running a budget defi cit can be good when,
A. We are in an expansion and want to stimulate the economy
B. We are in an expansion and want to slow down the economy
C. We are in a recession and want to stimulate the economy
D. We are in a recession and want to slow down the economy

59. Modern Monetary theory focuses on the idea that
A. taxes aren’t important
B. the government can print money to pay for the government budget
C. the government needs taxes to fund spending
D. we need to raise taxes

60. If we were to face a recession tomorrow caused by changes in aggregate demand:
A. Keynes would tell the government to use fi scal stimulus; Hayek would say we should
have used better policies during the boom
B. Hayek would tell the government to use fiscal stimulus; Keynes would say we should
have used better policies during the boom
C. Keynes and Hayek would tell the government to use fiscal stimulus
D. Keynes and Hayek would say we should have used better policies during the boom