Additional Practice Questions:Chapters 11 to 13, 15 and 16

DO NOT FORGET TO REVIEW THE PRACTICE EXAMS FOR TERM TESTS TO PREPARE FOR THE

FINAL EXAM.

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

1. Money

a. is more efficient than barter. b. makes trades easier. c. allows greater specialization. d. All of the above are correct.

2. When Arnold use dollars to record his income and expenses, he is using money as a

a. unit of account. b. means of payment. c. store of value. d. medium of exchange.

3. Which of the following best illustrates the medium of exchange function of money?

a. You keep some money hidden in your shoe. b. You keep track of the value of your assets in terms of currency. c. You pay for your double latte using currency. d. None of the above is correct.

4. Which list ranks assets from most to least liquid?

a. currency, fine art, stocks b. currency, stocks, fine art c. fine art, currency, stocks d. fine art, stocks, currency

5. Which type of currency has intrinsic value?

a. commodity money b. fiat money c. both commodity money and fiat money d. neither commodity money nor fiat money

6. Which of the following is included in M2 but not in M1?

a. currency b. demand deposits c. savings deposits d. All of the above are included in both M1 and M2

7. Demand deposits are included in

a. M1 but not M2. b. M2 but not M1. c. M1 and M2.

d. neither M1 nor M2.

Type of Money Amount

Large time deposits $80 billion

Small time deposits $75 billion

Demand deposits $75 billion

Other checkable deposits $40 billion

Savings deposits $10 billion

Travelers' checks $1 billion

Money market mutual funds $15 billion

Currency $100 billion

SDRs $10 billion

Miscellaneous categories of M2 $25 billion

8. Use the table above. What is the M2 money supply?

a. $125 billion b. $341 billion c. $421 billion d. $431 billion

9. When Bank of Canada conducts open market purchases,

a. it buys Treasury securities, which increases the money supply. b. it buys Treasury securities, which decreases the money supply. c. it borrows from member banks, which increases the money supply. d. it lends money to member banks, which decreases the money supply.

10. In a 100-percent-reserve banking system,

a. banks can create money by issuing currency. b. banks can create money by lending out reserves. c. Bank of Canada can increase the money supply with open market sales. d. banks hold as many reserves as they hold deposits.

11. If you deposit $3,000 into First Hawkeye Bank, the

a. bank's required reserves increase by the reserve ratio times $3,000. b. bank will be able to lend out $3,000 times the reserve ratio. c. bank initially sees reserves increase by $0. d. All of the above are correct.

Use the balance sheet for the following 3 questions.

First Bank of Mason City Assets Liabilities Required Reserves $20.00 Deposits $100.00 Loans $80.00

12. The reserve ratio is

a. 0 percent.

b. 20 percent. c. 80 percent. d. 100 percent.

13. If $1,000 is deposited into the First Bank of Mason City,

a. total reserves will initially increase by $200. b. liabilities will decrease by $1,000. c. assets will increase by $1,000. d. required reserves will increase by $800.

14. If $400 is deposited into the First Bank of Mason City,

a. the bank will be able to make additional loans totaling $320. b. excess reserves initially increase by $320. c. required reserves initially increase by $80. d. All of the above are true.

15. If the reserve ratio increased from 10 percent to 20 percent, the money multiplier would

a. rise from10 to 20. b. rise from 5 to 10. c. fall from 10 to 5. d. not change.

16. Which list contains only actions that increase the money supply?

a. make open market purchases, raise the reserve requirement ratio b. make open market purchases, lower the reserve requirement ratio c. make open market sales, raise the reserve requirement ratio d. make open market sales, lower the reserve requirement ratio

17. If reserve requirements are increased, the reserve ratio

a. increases, the money multiplier increases, and the money supply increases. b. increases, the money multiplier decreases, and the money supply decreases. c. decreases, the money multiplier increases, and the money supply increases. d. decreases, the money multiplier decreases, and the money supply increases.

18. If the reserve ratio is 10 percent, banks do not hold excess reserves, and people do not hold currency, then

when Bank of Canada purchases $20 million of government bonds, bank reserves a. increase by $20 million and the money supply eventually increases by $200 million. b. decrease by $20 million and the money supply eventually increases by $200 million. c. increase by $20 million and the money supply eventually decreases by $200 million. d. decrease by $20 million and the money supply eventually decreases by $200 million.

19. During recessions, banks typically choose to hold more excess reserves relative to their deposits. This action

a. increases the money multiplier and increases the money supply. b. decreases the money multiplier and decreases the money supply. c. does not change the money multiplier, but increases the money supply. d. does not change the money multiplier, but decreases the money supply.

20. At one time, the country of Freedonia had no banks, but had currency of $40 million. Then a banking system was established with a reserve requirement of one-third. The people of Freedonia now keep half their money in the form of currency and half in the form of bank deposits. If banks do not hold excess reserves, how much currency do the people of Freedonia now hold? a. $13.33 million b. $20 million c. $30 million d. $36.36 million

21. The classical theory of inflation

a. is also known as the quantity theory of money. b. was developed by some of the earliest economic thinkers. c. is used by most modern economists to explain the long-run determinants of the inflation

rate. d. All of the above are correct.

22. When the value of money rises, the number of dollars needed to buy a representative basket of goods

a. increases, and so the price level rises. b. increases, and so the price level falls. c. decreases, and so the price level rises. d. decreases, and so the price level falls.

23. When the money market is drawn with the value of money on the vertical axis, as the price level increases the

quantity of money a. demanded increases. b. demanded decreases. c. supplied increases. d. supplied decreases.

24. When the money market is drawn with the value of money on the vertical axis, the price level increases if

a. either money demand or money supply shifts right. b. either money demand or money supply shifts left. c. money demand shifts right or money supply shifts left. d. money demand shifts left or money supply shifts right.

25. A decrease in the money supply creates an excess

a. supply of money that is eliminated by rising prices. b. supply of money that is eliminated by falling prices. c. demand for money that is eliminated by rising prices. d. demand for money that is eliminated by falling prices.

26. Use the graph above. If the money supply is MS2 and the value of money is 2, there is excess

a. demand equal to the distance between A and C. b. demand equal to the distance between A and B. c. supply equal to the distance between A and C. d. supply equal to the distance between A and B.

27. Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes

a. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased.

b. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage decreased.

c. your real wage increase. If your real wage rose by a greater percentage than the price level, then your nominal wage also increased.

d. your real wage decrease. If your real wage rose by a greater percentage than the price level, then your nominal wage decreased.

28. According to the classical dichotomy, which of the following increases when the money supply increases?

a. the real interest rate b. real GDP c. the real wage d. None of the above increases.

29. According to the classical dichotomy, when the money supply doubles which of the following double?

a. the price level and nominal GDP b. the price level and real GDP c. only real GDP d. only the price level

30. Last year, Tealandia produced 50,000 bags of green tea, which sold at 4 units each of Tealandia's currency-the

Leaf. Tealandia's money supply was 10,000. What was the velocity of money in Tealandia? a. 20 b. 5 c. 1/20 d. 1/5

31. Velocity in the country of Nemedia is always stable. In 2001, the money supply was $100 billion and real

GDP was $300 billion. In 2002, the money supply increased by 10 percent, real GDP increased by 5 percent and nominal GDP equaled $660 billion. By how much did the price level increase between 2001 and 2002?

a. 10 percent b. 9.5 percent c. 4.76 percent d. There is not enough information to answer the question.

32. Which of the following is not implied by the quantity equation?

a. If velocity is stable, an increase in the money supply creates a proportional increase in nominal output.

b. If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in the price level.

c. With constant money supply and output, an increase in velocity creates an increase in the price level.

d. With constant money supply and velocity, an increase in output creates a proportional increase in the price level.

33. Arnold puts money into an account. One year later he checks and sees that he has 5 percent more dollars and

that his money will buy 6 percent more goods. a. The nominal interest rate was 11 percent and the inflation rate was 5 percent. b. The nominal interest rate was 6 percent and the inflation rate was 5 percent. c. The nominal interest rate was 5 percent and the inflation rate was -1 percent. d. None of the above is correct.

34. Suppose that velocity and output are constant, and that the quantity theory and Fisher effect are both correct.

If nominal interest rates are 6 percent and inflation is 2.5 percent, it follows that the a. money supply growth rate is 2.5 percent. b. real interest rate is 8.5 percent. c. real interest rate is 2.5 percent. d. money supply growth rate is 6 percent.

35. Shoeleather costs refer to

a. the cost of more frequent price changes induced by higher inflation. b. the distortion in resource allocation created by distortions in relative prices due to

inflation. c. resources used to maintain lower money holdings when inflation is high. d. the distortion in incentives created by inflation by taxes that do not adjust for inflation.

36. Menu costs refers to

a. resources used by people to maintain lower money holdings when inflation is high. b. the distortion in resource allocation created by uncertainty concerning relative price

changes created by inflation. c. the distortion in incentives created by inflation when taxes do not adjust for inflation. d. the cost of more frequent price changes induced by higher inflation.

37. You buy a stock and its price rises less than the price level, so before taxes you made

a. a nominal and real gain, and you pay taxes on the nominal gain. b. a nominal gain and a real loss, and you don't have to pay taxes since you gained less than

the change in the price level. c. a nominal and a real gain, and you pay taxes on the real gain. d. a nominal gain and a real loss, and you pay taxes on the nominal gain.

38. You put money in an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your

marginal tax rate is 20 percent. What is your after-tax real rate of interest? a. 1.2 percent b. 2.8 percent c. 4.8 percent d. None of the above is correct.

39. Indexing the tax system to take into account the effects of inflation would

a. mean that only real interest earnings were taxed. b. mean an end to taxing capital gains. c. mean an increase average tax rates. d. All of the above are correct.

40. High and unexpected inflation has a greater cost

a. for those who borrow than those who save. b. for those who hold a little money than for those who hold a lot of money. c. for those whose wages increase by as much as inflation, than those who are paid a fixed

nominal wage. d. for savers in high income tax brackets than for savers in low income tax brackets.

41. Which of the following is accurate?

a. Monetary policy is neutral in both the short run and the long run. b. Though monetary policy is neutral in the long run, it may have effects on real variables in

the short run. c. Monetary policy has profound effects on real variables in both the short run and the long

run. d. Monetary policy has profound effects on real variables in the long run, but is neutral in the

short run.

42. When Dee, a U.S. citizen, purchases a designer dress made in Milan, the purchase is

a. both a U.S. and Italian import. b. U.S. export and an Italian import. c. a U.S. import and an Italian export. d. neither an export nor an import for either country.

43. In 2001, Cote d'Ivore had $1.2 billion of net exports and bought $2.4 billion of goods from foreign countries.

Cote d'Ivore had a. $3.6 billion of exports and $2.4 billion of imports. b. $3.6 billion of imports and $2.4 billion of exports. c. $2.4 billion of exports and $1.2 billion of imports. d. $2.4 billion of imports and $1.2 billion of exports.

44. A country's trade balance

a. must be zero. b. must be greater than zero. c. is greater than zero only if exports are greater than imports. d. is greater than zero only if imports are greater than exports.

45. Net capital outflow measures a. foreign assets held by domestic residents minus domestic assets held by foreign residents. b. the imbalance between the amount of foreign assets bought by domestic residents and the

amount of domestic assets bought by foreigners. c. the imbalance between the amount of foreign assets bought by domestic residents and the

amount of domestic goods and services sold to foreigners. d. None of the above is correct.

46. Which of the following would be U.S. foreign direct investment?

a. Your U.S. based mutual fund buys stock in Eastern European companies. b. A U.S. citizen opens a guitar store in Hong Kong. c. A Swiss bank buys a U.S. government bond. d. A German tractor factory opens a plant in Peoria.

47. Which of the following would be U.S. foreign portfolio investment?

a. Disney builds a new amusement park near Rome, Italy. b. Your economics professor buys stock in companies located in Eastern European countries. c. A Dutch hotel chain opens a new hotel in the United States. d. A citizen of Singapore buys a bond issued by a U.S. corporation.

48. Judy, a U.S. citizen, opens an ice cream store in Bermuda. Her expenditures are U.S.

a. foreign portfolio investment that increase U.S. net capital outflow. b. foreign portfolio investment that decrease U.S. net capital outflow. c. foreign direct investment that increase U.S. net capital outflow. d. foreign direct investment that decrease U.S. net capital outflow.

49. When Canada sells chocolate to the United States, U.S. net exports

a. increase, and U.S. net capital outflow increases. b. increase, and U.S. net capital outflow decreases. c. decrease, and U.S. net capital outflow increases. d. decrease, and U.S. net capital outflow decreases.

50. A Russian flour mill buys wheat from Canada and pays for it with rubles. Other things the same, Russian

a. net exports increase, and Canadian net capital outflow increases. b. net exports increase, and Canadian net capital outflow decreases. c. net exports decrease, and Canadian net capital outflow increases. d. net exports decrease, and Canadian net capital outflow decreases.

51. A U.S. firm buys apples from New Zealand with U.S. currency. The New Zealand firm than uses this money

to buy packaging equipment from a U.S. firm. Which of the following increases? a. New Zealand net capital outflow and New Zealand net exports b. only New Zealand net exports c. only New Zealand net capital outflow d. neither New Zealand net exports nor New Zealand capital outflow

52. A country has $100 million of net exports and $170 million of saving. Net capital outflow is

a. $70 million and domestic investment is $170 million. b. $70 million and domestic investment is $270 million. c. $100 million and domestic investment is $70 million.

d. None of the above is correct.

53. Which of the following, other things the same, would induce a trade deficit?

a. a decline in saving, but not a rise in investment b. a rise in investment, but not a decline in saving c. both a decline in saving and a rise in investment d. neither a decline in saving nor a rise in investment

54. If the exchange rate changes from 35 Thai bhat per dollar to 40 Thai bhat per dollar, the dollar has

a. appreciated and so buys more Thai goods. b. appreciated and so buys fewer Thai goods. c. depreciated and so buys more Thai goods. d. depreciated and so buys fewer Thai goods.

55. In the United States, a cup of hot chocolate costs $5. In Australia, the same hot chocolate costs $10 Australian

dollars. If the exchange rate is $2 Australian dollars per U.S. dollar, what is the real exchange rate? a. 1/2 cup of Australian hot chocolate per cup of U.S. hot chocolate b. 1 cup of Australian hot chocolate per cup of U.S. hot chocolate c. 2 cups of Australian hot chocolate per cup of U.S. hot chocolate d. None of the above is correct.

56. Suppose that the real exchange rate between the United States and Kenya is defined in terms of baskets of

goods. Which of the following will increase the real exchange rate (that is increase the number of baskets of Kenyan goods a basket of U.S. goods buys)? a. an increase in the number of Kenyan shillings that can be purchased with a dollar b. an increase in the price of U.S. baskets of goods c. a decrease in the price in Kenyan shillings of Kenyan goods d. All of the above are correct.

57. If purchasing-power parity holds, a dollar will buy

a. more goods in foreign countries than in the United States. b. as many goods in foreign countries as it does in the United States. c. fewer goods in foreign countries than it does in the United States. d. None of the above is implied by purchasing-power parity.

58. The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs

$40, how many florins must a basket of goods in Aruba cost for purchasing power parity to hold? a. 20 florin b. 40 florin c. 80 florin d. 100 florin

59. When a country's central bank increases the money supply, its

a. price level rises and its currency appreciates relative to other currencies in the world. b. price level rises and its currency depreciates relative to other currencies in the world. c. price level falls and its currency appreciates relative to other currencies in the world. d. price level falls and its currency depreciates relative to other currencies in the world.

60. According to purchasing-power parity, if prices in the United States increase by a larger percentage than prices in Algeria, then a. the real exchange defined as Algerian goods per unit of U.S. goods rises. b. the real exchange defined as Algerian goods per unit of U.S. goods falls. c. the nominal exchange rate defined as Algerian currency per dollar rises. d. the nominal exchange rate defined as Algerian currency per dollar falls.

61. Which of the following statements is correct for an open economy with a trade surplus?

a. The trade surplus cannot last for very many years. b. The trade surplus must be offset by negative net capital outflow. c. The trade surplus implies that the country's national saving is greater than domestic

investment. d. None of the above is correct.

62. Which of the following typically rises during a recession?

a. garbage collection b. unemployment c. corporate profits d. automobile sales

63. In 2001, Canada was in recession. Which of the following things would you expect not to have happened?

a. layoffs and firings b. a higher rate of bankruptcy c. increased claims for unemployment insurance d. increased investment spending

64. Most economists believe that classical economic theory is a good description of the world

a. in neither the short nor long run. b. in the short run and in the long run. c. in the short run, but not in the long run. d. in the long run, but not in the short run.

65. Which of the sentences concerning the aggregate demand and aggregate supply model is correct?

a. The aggregate demand and supply model is nothing more than a large version of the model of market demand and supply.

b. The price level adjusts to bring aggregate demand and supply into balance. c. The aggregate supply curve shows the quantity of goods and services that households,

firms, and the government want to buy at each price. d. All of the above are correct.

66. Which of the following is not included in aggregate demand?

a. purchases of stock and bonds b. purchases of services such as visits to the doctor c. purchases of capital goods such as equipment in a factory d. purchases by foreigners of consumer goods produced in Canada

67. If the price level rises, the value of money

a. rises while foreign exchange rates and interest rates rise. b. rises while foreign exchanger rates and interest rates fall.

c. falls while foreign exchange rates and interest rate rise. d. falls while foreign exchange rates and interest rates fall.

68. A decrease in the price level induces people to hold

a. less money, so they lend less, and the interest rate rises. b. less money, so they lend more, and the interest rate falls. c. more money, so they lend more, and the interest rate rises. d. more money, so they lend less, and the interest rate falls.

69. An increase in the price level causes the interest rate to

a. increase, the dollar to depreciate, and net exports to increase. b. increase, the dollar to appreciate, and net exports to decrease. c. decrease, the dollar to depreciate, and net exports to increase. d. decrease, the dollar to appreciate, and net exports to decrease.

70. The aggregate demand curve slopes

a. downward because higher prices cause the exchange rate to depreciate. b. downward because higher prices cause real wealth to decrease and interest rates to

increase. c. upward because higher prices cause people to increase their production. d. upward because higher prices cause real wealth to increase and interest rates to decrease.

71. Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to

a. decrease consumption, shown as a movement to the left along a given aggregate demand curve.

b. increase consumption, shown as a movement to the right along a given aggregate demand curve.

c. decrease consumption, shifting the aggregate demand curve to the left. d. increase consumption, shifting the aggregate demand curve to the right.

72. If the dollar appreciates, perhaps because of speculation or government policy, then Canadian net exports

a. increase and aggregate demand shifts right. b. increase and aggregate demand shifts left. c. decrease and aggregate demand shifts right. d. decrease and aggregate demand shifts left.

73. Which of the following does not determine the long-run level of real GDP?

a. the price level b. the supply of labour c. available natural resources d. available technology

74. The long-run aggregate supply curve would shift right if the government were to

a. increase the minimum-wage law. b. make unemployment benefits more generous. c. raise taxes on investment spending. d. None of the above is correct.

75. According to misperceptions theory, if a firm thought that inflation was going to be 5 percent and actual inflation was 6 percent, the firm would believe that the relative price of what they produce had a. increased, so they would increase production. b. increased, so they would decrease production. c. decreased, so they would increase production. d. increased, so they would decrease production.

76. The sticky wage theory of the short-run aggregate supply curve says that when prices fall unexpectedly, the

real wage a. rises, so employment rises. b. rises, so employment falls. c. falls, so employment rises. d. falls, so employment falls.

77. The effects of an increase in the price level that is greater than expected are shown by

a. shifting the short-run aggregate supply curve right. b. shifting the short-run aggregate supply curve left. c. moving to the right along a given aggregate supply curve. d. moving to the left along a given aggregate supply curve.

78. Which of the following shifts short-run aggregate and long-run aggregate supply left?

a. a decrease in the price level b. a decrease in the expected price level c. a decrease in the capital stock d. a decrease in the money supply

79. An economic contraction caused by a shift in aggregate demand remedies itself over time as the expected

price level a. rises, shifting aggregate demand right. b. rises, shifting aggregate demand left. c. falls, shifting aggregate supply right. d. falls, shifting aggregate supply left.

80. Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic

contraction caused by a shift in aggregate supply could use policy to shift a. aggregate supply to the right. b. aggregate supply to the left. c. aggregate demand to the right. d. aggregate demand to the left.

81. Which of the following would cause stagflation?

a. aggregate demand shifts right b. aggregate demand shifts left c. aggregate supply shifts right d. aggregate supply shifts left

82. Which of the following is not a response that would result from a decrease in the price level and so help to

explain the slope of the aggregate demand curve? a. When interest rates fall, Sleepwell Hotels decides to build some new hotels.

b. The exchange rate falls, so French restaurants in Paris buy more Iowa pork. c. Janet feels wealthier because of the price drop and so she decides to remodel her

bathroom. d. With prices down and wages fixed by contract, Gatekeeper Computers decides to lay off

workers.

83. According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in

a. the price level. b. the interest rate. c. the exchange rate. d. real wealth.

84. According to liquidity preference theory, the money supply curve would shift right

a. if the money demand curve shifted right. b. only if Bank of Canada chose to increase it. c. if the interest rate increased. d. if the price level fell or the interest rate decreased.

85. When the interest rate increases, the opportunity cost of holding money

a. increases, so the quantity of money demanded increases. b. increases, so the quantity of money demanded decreases. c. decreases, so the quantity of money demanded increases. d. decreases, so the quantity of money demanded decreases.

86. According to liquidity preference theory, if the quantity of money demanded is greater than the quantity

supplied, the interest rate will a. increase and the quantity of money demanded will decrease. b. increase and the quantity of money demanded will increase. c. decrease and the quantity of money demanded will decrease. d. decrease and the quantity of money demanded will increase.

87. Which of the following is correct?

a. Both liquidity preference and classical theory assume the interest rate adjusts to bring the money market into equilibrium.

b. Both liquidity preference and classical theory assume the price level adjusts to bring the money market into equilibrium.

c. Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium. Classical theory assumes the price level adjusts to bring the money market into equilibrium.

d. Liquidity preference theory assumes the price level adjusts to bring the money market into equilibrium. Classical theory assumes the interest rate adjusts to bring the money market into equilibrium.

88. Assume the money market is initially in equilibrium. If the price level increases, according to liquidity

preference theory there is an excess a. supply of money until the interest rate increases. b. supply of money until the interest rate decreases. c. demand for money until the interest rate increases. d. demand for money until the interest rate decreases.

89. Which of the following properly describes the interest rate effect?

a. A higher price level leads to higher money demand, higher money demand leads to higher interest rates, a higher interest rate increases the quantity of goods and services demanded.

b. A higher price level leads to higher money demand, higher money demand leads to lower interest rates, a higher interest rate reduces the quantity of goods and services demanded.

c. A lower price level leads to lower money demand, lower money demand leads to lower interest rates, a lower interest rate reduces the quantity of goods and services demanded.

d. A lower price level leads to lower money demand, lower money demand leads to lower interest rates, a lower interest rate increases the quantity of goods and services demanded.

90. Open-market purchases

a. increase the price level and real GDP. b. decrease the price level and real GDP. c. increases the price level and decreases real GDP. d. decreases the price level and increases real GDP.

91. Which of the following shifts aggregate demand right?

a. an increase in government expenditures or a decrease in the price level b. a decrease in government expenditures or an increase in the price level c. an increase in government expenditures, but not a change in the price level d. a decrease in the price level, but not an increase in government expenditures

92. The government buys a bridge. The owner of the company that builds the bridge pays her workers. The

workers increase their spending. Firms that the workers buy goods from increase their output. This type of effect on spending illustrates a. the multiplier effect. b. the crowding-out effect. c. the marginal propensity to consume effect. d. None of the above is correct.

93. The marginal propensity to consume (MPC) is defined as the fraction of

a. extra income that a household consumes rather than saves. b. extra income that a household either consumes or saves. c. total income that a household consumes rather than saves. d. total income that a household either consumes or saves.

94. If the multiplier is 5, the MPC is

a. 0.05. b. 0.5. c. 0.6. d. 0.8.

95. Which of the following correctly explains the crowding-out effect?

a. An increase in government expenditures decreases the interest rate and so increases investment spending.

b. An increase in government expenditures increases the interest rate and so reduces investment spending.

c. A decrease in government expenditures increases the interest rate and so increases

investment spending. d. A decrease in government expenditures decreases the interest rate and so reduces

investment spending.

96. Assume that the MPC is 0.75. Assume that there is a multiplier effect and that the total crowding-out effect is

$6 billion. An increase in government purchases of $10 billion will shift aggregate demand a. left by $24 billion. b. left by $36 billion. c. right by $34 billion. d. right by $36 billion.

97. The multiplier effect

a. and the crowding-out effect both amplify the effects of an increase in government expenditures.

b. and the crowding-out effect both diminish the effects of an increase in government expenditures.

c. diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects.

d. amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.

98. Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change

smaller than otherwise? a. the multiplier effect b. the crowding-out effect c. the accelerator effect d. None of the above is correct.

99. Which of the following policy alternatives would be an appropriate response to an increase in investment

demand by a government that wants to stabilize output? a. increase taxes b. increase the money supply c. increase government expenditures d. All of the above are correct.

100. Automatic stabilizers

a. increase the problems that lags cause in using fiscal policy as a stabilization tool. b. are changes in taxes or government spending that increase aggregate demand without

requiring policy makers to act when the economy goes into recession. c. are changes in taxes or government spending that policy makers quickly agree to when the

economy goes into recession. d. All of the above are correct.

DO NOT FORGET TO REVIEW THE PRACTICE EXAMS FOR TERM TESTS TO PREPARE FOR THE

FINAL EXAM.

Additional Practice Questions:Chapters 11 to 13, 15 and 16

Answer Section

MULTIPLE CHOICE

1. ANS: D REF: 226

2. ANS: A REF: 227

3. ANS: C REF: 227

4. ANS: B REF: 227

5. ANS: A REF: 228

6. ANS: C REF: 231

7. ANS: C REF: 231

8. ANS: B REF: 231

9. ANS: A REF: 239

10. ANS: D REF: 235

11. ANS: A REF: 236

12. ANS: B REF: 235

13. ANS: C REF: 235

14. ANS: D REF: 240

15. ANS: C REF: 236

16. ANS: B REF: 239

17. ANS: B REF: 240

18. ANS: A REF: 240

19. ANS: B REF: 240

20. ANS: C REF: 236

21. ANS: D REF: 249

22. ANS: D REF: 249

23. ANS: A REF: 251

24. ANS: D REF: 251

25. ANS: D REF: 251

26. ANS: D REF: 251

27. ANS: A REF: 254

28. ANS: D REF: 254

29. ANS: A REF: 254

30. ANS: A REF: 255

31. ANS: C REF: 255

32. ANS: D REF: 256

33. ANS: C REF: 259

34. ANS: A REF: 259

35. ANS: C REF: 262

36. ANS: D REF: 263

37. ANS: D REF: 264

38. ANS: B REF: 264

39. ANS: A REF: 264

40. ANS: D REF: 267

41. ANS: B REF: 268

42. ANS: C REF: 278

43. ANS: A REF: 278

44. ANS: C REF: 278

45. ANS: B REF: 281

46. ANS: B REF: 281

47. ANS: B REF: 281

48. ANS: C REF: 281

49. ANS: D REF: 282

50. ANS: C REF: 282

51. ANS: D REF: 282

52. ANS: C REF: 283

53. ANS: C REF: 282

54. ANS: A REF: 287

55. ANS: B REF: 287

56. ANS: D REF: 290

57. ANS: B REF: 292

58. ANS: C REF: 292

59. ANS: B REF: 293

60. ANS: D REF: 292

61. ANS: C REF: 285

62. ANS: B REF: 333

63. ANS: D REF: 335

64. ANS: D REF: 338

65. ANS: B REF: 338

66. ANS: A REF: 340

67. ANS: C REF: 342

68. ANS: B REF: 342

69. ANS: B REF: 343

70. ANS: B REF: 342

71. ANS: C REF: 342

72. ANS: D REF: 343

73. ANS: A REF: 344

74. ANS: D REF: 346

75. ANS: A REF: 350

76. ANS: B REF: 349

77. ANS: C REF: 351

78. ANS: C REF: 351

79. ANS: C REF: 354

80. ANS: C REF: 359

81. ANS: D REF: 359

82. ANS: D REF: 368

83. ANS: B REF: 369

84. ANS: B REF: 369

85. ANS: B REF: 370

86. ANS: A REF: 372

87. ANS: C REF: 372

88. ANS: C REF: 373

89. ANS: D REF: 375

90. ANS: A REF: 376

91. ANS: C REF: 383

92. ANS: A REF: 383

93. ANS: A REF: 385

94. ANS: D REF: 385

95. ANS: B REF: 387

96. ANS: C REF: 387

97. ANS: D REF: 387

98. ANS: B REF: 394

99. ANS: A REF: 398

100. ANS: B REF: 397