Deck 9: An Introduction to Basic Macroeconomic Markets

Question 1

The macroeconomy is said to be in long-run equilibrium only if

A)the resource, loanable funds, foreign exchange, and goods and services markets are all in equilibrium.
B)prices were incorrectly estimated by decision makers.
C)the output of the economy exceeds the full-employment level of output.
D)the economy is operating along its short-run aggregate supply curve.

Answer 1

the resource, loanable funds, foreign exchange, and goods and services markets are all in equilibrium.

Question 2

In the short run, if prices were above equilibrium,

A)excess aggregate demand for goods and services would place downward pressure on prices.
B)excess aggregate supply of goods and services would place upward pressure on prices.
C)excess aggregate demand for goods and services would place upward pressure on prices.
D)excess aggregate supply of goods and services would place downward pressure on prices.

Answer 2

excess aggregate supply of goods and services would place downward pressure on prices.

Question 3

Suppose that your bank pays 5 percent interest on your savings account balance. Is this the nominal or real interest rate? What would be your real interest rate?

Answer 3

This is the nominal interest rate. The real interest rate would be the 5 percent minus the rate of inflation.

Question 4

What is the difference between short-run equilibrium and long-run equilibrium in the goods and services market?

Question 5

As prices rise, consumers and businesses will want to hold larger money balances. This will lead to

A)a reduction in the demand for resources and reduced resource prices.
B)an increase in the amount of goods and services demanded due to the real balance effect.
C)an increase in exports due to the international substitution effect.
D)a reduction in the supply of loanable funds and an increase in the interest rate.

Question 6

Fiscal policy is

A)the deliberate control of the money supply to achieve macroeconomic goals.
B)the use of the government's regulatory powers to improve economic efficiency.
C)the operation of business enterprises by the government.
D)the use of government taxation and expenditures to achieve macroeconomic goals.

Question 7

When the loanable funds and foreign exchange markets are in equilibrium,

A)there are no leakages from the circular flow of income.
B)macro equilibrium cannot occur.
C)the leakages from the circular flow will equal the injections into it.
D)injections into the circular flow will exceed leakages from it.

Question 8

What are the three reasons why the aggregate demand curve slopes downward? Give an example of each.

Question 9

Within the framework of the AS/AD model, which of the following is a true statement regarding short-run aggregate supply?

A)An increase in prices temporarily improves profit margins because important components of costs are fixed in the short run.
B)An increase in prices leads to higher interest rates, which temporarily improves profit margins.
C)An increase in prices leads to an expansion in the money supply, which stimulates additional output.
D)An increase in prices increases real wage rates and thereby expands the size of the economy's resource base.

Question 10

In 2000, a major U.S. oil company began exploration off the southeastern coast of the United States. Suppose the company discovers huge reserves of natural gas. Using the aggregate demand/ aggregate supply model, predict what shifts will occur and what will happen to output and prices in both the long and short runs.

Question 11

How does the aggregate goods and services market differ from the regular supply and demand graph in Chapter 3? Address the measures of price, quantity, and the demand and supply curve(s).

Question 12

When the economy is in macro equilibrium,

A)the sum of savings plus investment must equal the sum of imports plus exports.
B)the sum of savings plus imports plus taxes must equal the sum of investment plus government purchases plus exports.
C)the sum of savings plus government purchases must equal exports minus imports.
D)the government's budget must be in balance.

Question 13

The exchange rate is

A)the price of one nation's currency in terms of the currency of another nation.
B)the amount households will spend on imports.
C)the amount of foreign capital a nation receives when there is a trade surplus.
D)the amount charged by bankers for loanable funds

Question 14

Monetary policy can be most accurately described as

A)the use of government taxation and expenditures to achieve macroeconomic goals.
B)the use of the government's regulatory powers to improve economic efficiency.
C)the government provision of goods to improve economic efficiency.
D)the deliberate control of the money supply to achieve macroeconomic goals.

Question 15

Why do we use two supply curves in the aggregate goods and services market? What is the difference between them, and why do they have different slopes?

Question 16

As the real interest rate in the domestic loanable funds market increases,

A)the cost of purchasing goods and services during the current period will decrease.
B)the net inflow of capital from abroad will increase.
C)the inflationary premium will rise and the money rate of interest will decline.
D)a trade surplus will occur.

Question 17

Suppose that severe floods destroyed farms, homes, and businesses in the Midwest. Use the aggregate demand/aggregate supply model, to explain the changes you would expect to take place and the effects you would expect these floods to have on both output and prices. (Include both short-run and long-run effects.)

Question 18

Which of the following are leakages from the circular flow of income?

A)Savings, taxes, and imports
B)Investment, government purchases, and exports
C)Investment, taxes and bonds
D)Imports, wages and taxes

Question 19

The inflationary premium is that portion of the interest rate that reflects

A)the real return derived by lenders.
B)the rush to buy goods before prices rise.
C)the expected annual rate of decline in the purchasing power of money while a loan is outstanding.
D)the price that one must pay for earlier availability of goods and services during a period of price stability.

Question 20

A depreciation in the U.S. dollar on the foreign exchange market will

A)make U.S.exports more expensive to foreigners.
B)make imports less expensive for U.S.consumers.
C)make U.S.exports cheaper for foreign consumers.
D)encourage U.S.consumers to travel abroad.

Question 21

Under what circumstances will inflation help borrowers at the expense of lenders? Under what circumstances will both parties be unaffected? Which scenario would you expect in the long run?

Question 22

Other things constant, if the cost of labor goes down, the profits of firms will

A)increase, and short-run aggregate supply will shift to the right.
B)fall, and short-run aggregate supply will shift to the left.
C)increase, and long-run aggregate supply will shift to the right.
D)fall, and long-run aggregate supply will shift to the left.

Question 23

Answer the following questions:
a.What is a bond?
b.If bonds make fixed payments every year, explain how a reduction in market interest rates will increase the price of the bond in the market.

Question 24

As the general price level in an economy rises, the aggregate quantity demanded of goods and services falls because

A)the prices of domestic goods have risen relative to foreign goods, causing exports to fall and imports to rise.
B)higher interest rates caused by an increase in the demand for money balances causes a reduction in current investment and consumption.
C)the value of money will fall, reducing the real wealth and, thus, the consumption of persons holding money balances.
D)all of the above are correct.

Question 25

Long-run equilibrium in the goods and services market requires that

A)aggregate supply equals aggregate demand and that decision makers correctly anticipate the level of prices.
B)the unemployment rate is zero.
C)prices are neither increasing nor decreasing.
D)aggregate supply be larger than aggregate demand.

Question 26

The use of government taxation and expenditures to achieve macroeconomic goals is called

A)cyclical policy.
B)monetary policy.
C)fiscal policy.
D)industrial policy.

Question 27

If the real interest rate in the domestic loanable funds market increases,

A)firms will have an added incentive to undertake investment projects.
B)households will save less.
C)the net inflow of foreign capital will tend to increase.
D)it will be cheaper to purchase goods and services now rather than in the future.

Question 28

If the dollar price of the English pound goes from $1.50 to $1.75, the dollar has

A)appreciated, and Americans will find English goods cheaper.
B)appreciated, and Americans will find English goods more expensive.
C)depreciated, and Americans will find English goods cheaper.
D)depreciated, and Americans will find English goods more expensive.

Question 29

Which of the following provides the most accurate description of monetary policy?

A)the deliberate control of the money supply to achieve macroeconomic goals
B)the use of the government's regulatory powers to improve economic efficiency
C)the government provision of goods to improve economic efficiency
D)the use of government taxation and expenditures to achieve macroeconomic goals

Question 30

If the price level in the current period is higher than what buyers and sellers anticipated,

A)profit margins will be unattractive and firms will expand output.
B)profit margins will be unattractive and firms will reduce output.
C)profit margins will be attractive and firms will expand output.
D)profit margins will be attractive and firms will reduce output.

Question 31

Controlling the money supply to achieve desired macroeconomic goals is called

A)monetary policy.
B)cyclical policy.
C)fiscal policy.
D)industrial policy.

Question 32

The market for labor services is included in the

A)loanable funds market.
B)goods and services market.
C)resource market.
D)financial market.

Question 33

Beginning in the latter part of 1999, the Federal Reserve raised interest rates. What do you predict happened to the prices of bonds already in the market? How can you explain this behavior?

Question 34

A positive level of net exports contributes directly to

A)demand in the resources market.
B)supply in the loanable funds market.
C)demand in the loanable funds market.
D)demand in the goods and services market.

Question 35

The market that coordinates the exchange of productive inputs between the household and business sectors is the

A)stock market.
B)goods and services market.
C)resource market.
D)loanable funds market.

Question 36

Which of the following is a correct statement?

A)Fiscal policy is the use of tax and spending policies by Congress and the president.
B)Fiscal policy involves the control of the money supply by the Federal Reserve Bank.
C)Monetary policy involves the control of the money supply by Congress and the president.
D)Monetary policy is the use of tax and spending policies by the Federal Reserve Bank.

Question 37

When equilibrium is present in the foreign exchange market, which of the following will tend to be in balance?

A)the value of goods exported and the value of goods imported
B)real and nominal interest rates
C)imports plus capital outflow and exports plus capital inflow
D)tax revenues and government expenditures

Question 38

The resource market is important from a macroeconomic perspective because

A)it coordinates the allocation of productive resources and determines the costs of production.
B)it determines the interest rates faced by borrowers and lenders.
C)inflation rates are set in the resource market by the government.
D)resource prices determine the position of the long-run aggregate supply curve.

Question 39

Which of the following best characterizes the circular flow of income?

A)Households buy goods and services from businesses, and businesses sell goods and services to households.
B)The government purchases resources from businesses and households and then sells goods and services to businesses and households.
C)Businesses buy resources from the government, and households buy goods and services from businesses.
D)Businesses buy resources from households, and households use their income to buy goods and services from businesses.

Question 40

The four key markets that coordinate the circular flow of income are

A)goods and services, resources, loanable funds, and foreign exchange.
B)consumption, investment, stock, and government.
C)government, household goods, bond, and business.
D)financial, corporate, stock, and loanable funds.

Question 41

Which of the following helps explain why the aggregate demand curve slopes downward?

A)If the price level increases, the purchasing power of the fixed quantity of money decreases, causing people to buy less.
B)If the price level increases, the purchasing power of the fixed quantity of money increases, causing people to buy more.
C)If domestic prices increase, we substitute domestic goods for imported goods.
D)If domestic prices decrease, we substitute imported goods for domestic goods.

Question 42

Saving is

A)the sum of the funds people hold in their checking accounts.
B)after-tax income that is not spent on consumption.
C)always equal to consumption.
D)equal to disposable income plus consumption.

Question 43

The portion of after-tax income a consumer does not spend on consumption is called

A)investment.
B)saving.
C)supply.
D)temporary income.

Question 44

Which of the following properly describes the interest-rate effect of aggregate demand?

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.

Question 45

As prices rise, people will buy fewer goods and services because

A)the interest rate has declined.
B)aggregate demand has increased.
C)the purchasing power of the fixed quantity of money has declined.
D)the income of households has increased.

Question 46

As the U.S. price level rises relative to price levels in other countries, what would happen in the U.S.?

A)consumption and net exports would decline
B)consumption and net exports would increase
C)consumption would increase and net exports would decrease
D)consumption would decrease and net exports would increase
E)consumption and net exports would remain constant

Question 47

Other things the same, an increase in the price level makes the dollars people hold worth

A)more, so they are willing to spend more.
B)more, so they are willing to spend less.
C)less, so they are willing to spend more.
D)less, so they are willing to spend less.

Question 48

In the AD/AS model, the aggregate demand for goods and services is composed of the purchases made by

A)households and foreigners (net exports).
B)businesses, bondholders, and foreigners (net exports).
C)businesses and governments.
D)consumers, investors, governments, and foreigners (net exports).

Question 49

The actions of borrowers and lenders are coordinated by

A)the interest rate in the loanable funds market.
B)the government in the resources market.
C)businesses in the resources market.
D)the interest rate in the goods and services market.

Question 50

The aggregate demand curve slopes downward indicating that

A)an increase in the general price level will reduce the aggregate quantity of goods and services demanded.
B)an increase in the general price level will increase the aggregate quantity of goods and services demanded.
C)a change in the interest rate will alter the aggregate quantity of goods and services demanded.
D)consumers substitute between domestic-made and foreign-made goods as their relative prices change.

Question 51

The aggregate demand curve is downward sloping because

A)an increase in the price level will cause an increase in spending on goods and services.
B)at lower price levels, real wealth decreases, causing a decrease in the quantity demanded of goods and services.
C)at lower price levels, interest rates increase, causing a decrease in the quantity demanded of goods and services.
D)at lower price levels, net exports increase, causing an increase in quantity demanded of goods and services.

Question 52

Other things the same, a decrease in the price level makes the dollars people hold worth

A)more, so they are willing to spend more.
B)more, so they are willing to spend less.
C)less, so they are willing to spend more.
D)less, so they are willing to spend less.

Question 53

For an economy, aggregate demand equals

A)consumption plus investment plus government purchases plus exports.
B)consumption plus investment plus government purchases plus (exports minus imports).
C)consumption plus investment plus (taxes minus transfers) plus (exports minus imports).
D)consumption plus investment plus government purchases plus (imports minus exports).

Question 54

Within the aggregate demand/aggregate supply framework, the quantity produced and purchased in the goods and services market represents

A)nominal output or nominal GDP.
B)the interest rate.
C)real output or real GDP.
D)the consumer price index.

Question 55

Other things equal, which of the following is true?

A)A reduction in prices will increase the real wealth of those holding a fixed quantity of money.
B)A reduction in prices will lead to a decline in net exports.
C)A reduction in prices will increase the scarcity of money, raise the real interest rate, and, thereby, encourage investment and consumption.
D)A reduction in prices will increase profit margins and, thereby, stimulate additional investment.

Question 56

Which of the following helps explain why the aggregate quantity demanded of goods and services is inversely related to prices within the framework of the AD/AS model?

A)As prices fall, domestic consumers have an incentive to buy more of the cheaper goods and services.
B)As prices fall, the monetary authorities will have to increase the money supply, which will lead to an increase in the quantity of goods and services purchased.
C)As prices fall, the government will have to reduce taxes, which will lead to an increase in the quantity of goods and services purchased.
D)As prices fall, the wealth of people holding the fixed quantity of money increases, causing them to expand their purchases of goods and services.

Question 57

The change in the quantity of goods and services demanded in the U.S. is based on the logic that as the price level rises,

A)real wealth falls, interest rates rise, and net exports fall.
B)real wealth falls, interest rates rise, and net exports rise.
C)real wealth rises, interest rates fall, and net exports fall.
D)real wealth rises, interest rates fall, and net exports rise.

Question 58

The change in the aggregate quantity of goods and services demanded in the U.S. is based on the logic that as the price level falls,

A)real wealth falls, interest rates rise, and net exports fall.
B)real wealth falls, interest rates rise, and net exports rise.
C)real wealth rises, interest rates fall, and net exports fall.
D)real wealth rises, interest rates fall, and net exports rise.

Question 59

The aggregate demand curve indicates the relationship between

A)the real wage rate and the quality of resources demanded by producers of goods and services.
B)the interest rate and the amount of loanable funds demanded by borrowers.
C)the natural rate of unemployment and the demand for goods and services when the economy is in long-run equilibrium.
D)the general price level and the aggregate quantity of goods and services demanded.

Question 60

People will spend more if the price level

A)rises because rising prices increase the real value of the fixed quantity of money.
B)rises because rising prices decrease the real value of a dollar.
C)falls because falling prices increase the real value of a dollar.
D)falls because falling prices decrease the real value of a dollar.

Question 61

Because many resource prices are set by long-term contracts, in the short run

A)costs will increase by more than product prices when demand increases.
B)costs will decrease when the demand for products increases.
C)costs will increase by less than product prices when demand increases.
D)costs will decrease by more than product prices when demand decreases.

Question 62

In the short run, a price increase in the goods and services market will

A)increase the purchasing power of money.
B)improve producer profits and, thereby, induce suppliers to expand output.
C)increase resource prices, lower profits, and lead to a decline in output.
D)reduce the natural rate of unemployment.

Question 63

Resource prices that are fixed by long-term contracts help explain why, in the short run, firms will

A)increase output when product prices increase.
B)keep production levels constant when product prices decrease.
C)keep their product prices constant even if the demand for their good increases.
D)keep their product prices constant even if the demand for their good decreases.

Question 64

If the actual price level exceeds the expected price level reflected in long-term contracts,

A)firms will find production more profitable than they had expected and will decrease the quantity of output supplied
B)firms will find production less profitable than they had expected and will decrease the quantity of output supplied
C)firms will find production less profitable than they had expected and will increase the quantity of output supplied
D)unemployment will decrease

Question 65

The short-run aggregate supply curve shows the relationship between

A)the general level of prices and the quantity of goods and services purchased by all consumers in the economy.
B)the general level of prices and the quantity of goods and services that domestic firms will supply.
C)the interest rate and the quantity of goods and services that domestic firms will supply.
D)the money supply and the quantity of goods and services that domestic firms will supply.

Question 66

If prices in the United States rose, which of the following could be directly attributed to the international substitution effect?

A)Americans reduce their purchases of Japanese cars.
B)Australians buy more American surfboards.
C)Europeans purchase fewer American-made personal computers.
D)Americans sell more wheat to India.

Question 67

The short-run aggregate supply curve (SRAS) slopes upward to the right because unexpected increases in prices will

A)increase aggregate demand as consumers buy more.
B)decrease aggregate demand as consumers buy less.
C)cause firms to expand output since the higher product prices will improve profitability.
D)cause firms to reduce output since the higher product prices will decrease profit margins.

Question 68

In the context of aggregate supply, the long run is defined as the period during which

A)some prices are set by contracts and cannot be adjusted.
B)prices can change, but neither aggregate supply nor aggregate demand can shift.
C)individuals have sufficient time to modify their behavior in response to price changes.
D)quantity changes cannot occur in response to changes in relative prices.

Question 69

If the actual price level is lower than the expected price level reflected in long-term contracts,

A)many firms will find production more profitable than they had expected and will increase the quantity of output supplied
B)many firms will find production less profitable than they had expected and will decrease the quantity of output supplied
C)many firms will find production more profitable than they had expected and will decrease the quantity of output supplied
D)many firms will find production less profitable than they had expected and will increase the quantity of output supplied

Question 70

In the context of aggregate supply, the short run is defined as the period during which

A)some prices are set by contracts and cannot be adjusted.
B)prices can change, but neither aggregate supply nor aggregate demand can shift.
C)individuals have sufficient time to modify their behavior in response to price changes.
D)quantity changes cannot occur in response to changes in relative prices.

Question 71

If resource prices are fixed and the product selling price rises, then

A)profits will decrease.
B)profits will increase.
C)profits will remain constant.
D)both profits and output will decrease.

Question 72

Which of the following would generally cause firms to expand output in the short run?

A)a proportional increase in the prices of goods and services and the costs of producing them
B)higher profit margins as the result of an unexpected increase in the prices of goods and services
C)an unexpected reduction in aggregate demand
D)an increase in wages and the prices of other resources

Question 73

Ceteris paribus, a decrease in the U.S. price level will cause

A)an increase in U.S.exports.
B)an increase in U.S.imports.
C)the aggregate demand curve to shift to the right.
D)the aggregate demand curve to shift to the left.

Question 74

Which of the following explains why higher prices in the goods and services market will lead to an upward sloping short-run aggregate supply curve?

A)The higher prices will temporarily improve profit margins because many of the cost components of firms will be fixed in the short run.
B)The higher prices will reduce the purchasing power of the fixed quantity of money and, thereby, stimulate additional output.
C)The higher prices will expand the economy's resource base and, thereby, stimulate additional output.
D)The higher prices will improve technology and, thereby, stimulate additional output.

Question 75

When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the

A)interest rate effect.
B)real balance effect.
C)investment effect.
D)disinvestment effect.

Question 76

If the actual price level exceeds the expected price level reflected in long-term contracts,

A)many firms will find production more profitable than they had expected and will increase the quantity of output supplied.
B)many firms will find production less profitable than they had expected and will decrease the quantity of output supplied.
C)many firms will find production more profitable than they had expected and will decrease the quantity of output supplied.
D)many firms will find production less profitable than they had expected and will increase the quantity of output supplied.

Question 77

If scientific research produces a technological breakthrough in the production of computer memory, then

A)business costs will increase, profits will fall, and production will decrease.
B)business costs will fall, but profits will also fall, and production will decrease.
C)business costs will fall, profits will improve, and production will increase.
D)profits will increase because businesses will cut back production.

Question 78

The international substitution effect exists because a

A)higher price level will reduce interest rates and stimulate foreign investment.
B)lower price level will make domestically produced goods less expensive relative to foreign goods.
C)higher price level will reduce the purchasing power of money.
D)lower price level will encourage Americans to import more foreign goods.

Question 79

In the short run, an unexpected increase in prices will

A)reduce resource prices and increase the quantity of goods supplied.
B)decrease the productive capacity of firms and decrease the quantity of goods supplied.
C)increase the profits of firms, thereby leading them to expand output.
D)increase the profits of firms, thereby leading them to reduce output.

Question 80

The aggregate supply curve indicates the

A)relationship between prices and the aggregate quantity of goods and services purchased by consumers, investors, governments, and foreigners (net exports).
B)relationship between prices and the natural rate of unemployment.
C)relationship between the real wage rate and the quantity of labor supplied by households.
D)quantity of goods and services producers will supply at different price levels.