Deck 9: An Introduction to Basic Macroeconomic Markets

Question 1

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.

Answer 1

more, so they are willing to spend more.

Question 2

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.

Answer 2

at lower price levels, net exports increase, causing an increase in quantity demanded of goods and services.

Question 3

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).

Answer 3

consumption plus investment plus government purchases plus (exports minus imports).

Question 4

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 5

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 6

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 7

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 8

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 9

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 10

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 less 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 11

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 12

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 13

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 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

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) an increase in the interest rate will  increase the aggregate quantity of goods and services demanded.
D) consumers purchase more domestic-made goods and fewer foreign-made goods as  the prices of domestic goods increase.

Question 16

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 17

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 18

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 19

Controlling the money supply to achieve desired macroeconomic goals is called

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

Question 20

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 21

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 22

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 23

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 24

The resource market involves transactions dealing with

A) natural resources and financial services.
B) the borrowing and lending of financial capital.
C) the buying and selling of final goods and services.
D) labor services, natural resources, and physical capital.

Question 25

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 26

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 27

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 28

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 29

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 30

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 31

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 32

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 33

Other things constant, a decrease in resource prices will lead to

A) reduced profits and a reduction in short-run aggregate supply.
B) increased profits and a reduction in short-run aggregate supply.
C) reduced profits and an increase in short-run aggregate supply.
D) increased profits and an increase in short-run aggregate supply.

Question 34

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 35

The three reasons why the aggregate demand curve slopes downward are

A) the international substitution effect, the net exports effect and the interest rate effect.
B) the interest rate effect, the short run effect and the free rider effect
C) the net exports effect, the real balance effect and the short run effect
D) the real balance effect, the international substitution effect and the interest rate effect.

Question 36

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 37

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 38

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 39

Other things constant, an increase in resource prices will

A) increase the demand for goods and services.
B) increase the cost of producing goods and services, which will lead to a higher price level.
C) reduce costs and improve profit margins, which will lead to an increase in aggregate supply in the goods and services market.
D) cause the natural rate of unemployment to rise.

Question 40

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 41

If there is a surplus of loanable funds

A) the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
B) the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
C) the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
D) the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

Question 42

If both borrowers and lenders anticipate the rate of inflation correctly, then

A) borrowers will lose real income.
B) lenders will lose real income.
C) both borrowers and lenders will lose real income.
D) neither borrowers nor lenders will lose real income.

Question 43

For a major country with extensive capital flows, what is the effect of a decrease in interest rates?

A) There will be an inflow of capital, a currency depreciation, and increased net exports.
B) There will be an inflow of capital, a currency depreciation, and reduced net exports.
C) There will be an outflow of capital, a currency depreciation, and increased net exports.
D) There will be an inflow of capital, a currency appreciation, and reduced net exports.

Question 44

What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

A) the supply of loanable funds would shift right and investment would increase.
B) the supply of loanable funds would shift left and investment would decrease.
C) the demand for loanable funds would shift right and investment would increase.
D) the demand for loanable funds would shift left and investment would decrease.

Question 45

Other things constant, a decrease in aggregate demand will

A) lead to a decrease in the demand for resources.
B) cause an increase in the general level of prices.
C) result in higher nominal wage rates.
D) reduce the rate of unemployment.

Question 46

You put money into an account. One year later you see that you have 6 percent more dollars and that your money will buy 2 percent more goods.

A) The nominal interest rate was 8 percent and the inflation rate was 6 percent.
B) The nominal interest rate was 6 percent and the inflation rate was 4 percent.
C) The nominal interest rate was 4 percent and the inflation rate was 2 percent.
D) None of the above is correct.

Question 47

Which of the following is the most accurate statement about real and nominal interest rates?

A) Real interest rates can be either positive or negative, but nominal interest rates must be positive.
B) Real interest rates and nominal interest rates must be positive.
C) Real interest rates must be positive, but nominal interest rates can be either positive or negative.
D) Real interest rates and nominal interest rates can be either positive or negative.

Question 48

If there is shortage of loanable funds, then

A) the supply for loanable funds shifts right and the demand shifts left.
B) the supply for loanable funds shifts left and the demand shifts right.
C) neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.
D) neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

Question 49

If there is a shortage of loanable funds, then

A) the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
B) the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
C) the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
D) the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

Question 50

If there is surplus of loanable funds, then

A) the supply for loanable funds shifts right and the demand shifts left.
B) the supply for loanable funds shifts left and the demand shifts right.
C) neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.
D) neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

Question 51

If expected inflation is constant, then when the nominal interest rate increases, the real interest rate

A) increases by more than the change in the nominal interest rate.
B) increases by the change in the nominal interest rate.
C) decreases by the change in the nominal interest rate.
D) decreases by more than the change in the nominal interest rate.

Question 52

Suppose, over the past year, the real interest rate was 3 percent and the inflation rate was 1 percent.

A) The dollar value of savings increased at 2 percent, and the value of savings measured in goods increased at 3 percent.
B) The dollar value of savings increased at 1 percent, and the value of savings measured in goods increased at 2 percent.
C) The dollar value of savings increased at 3 percent, and the value of savings measured in goods increased at 1 percent.
D) The dollar value of savings increased at 4 percent, and the value of savings measured in goods increased at 3 percent.

Question 53

You put money into an account. One year later you see that you have 5 percent more dollars and that your 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.

Question 54

For a major country with extensive capital flows, what is the effect of an increase in interest rates?

A) There will be an inflow of capital, a currency depreciation, and increased net exports.
B) There will be an inflow of capital, a currency depreciation, and reduced net exports.
C) There will be an outflow of capital, a currency depreciation, and increased net exports.
D) There will be an inflow of capital, a currency appreciation, and reduced net exports.

Question 55

A positive real interest rate indicates

A) how fast the number of dollars in your savings account is rising over time.
B) how fast the purchasing power of your savings account is rising over time.
C) the number of dollars in your savings account today.
D) the purchasing power of your savings account today.

Question 56

Suppose the nominal interest rate was 5 percent and the inflation rate was 3.5 percent.

A) The dollar value of savings increased at 1.5 percent, and the value of savings measured in goods increased at 3.5 percent.
B) The dollar value of savings increased at 3.5 percent, and the value of savings measured in goods increased at 1.5 percent.
C) The dollar value of savings increased at 3.5 percent, and the value of savings measured in goods increased at 5 percent.
D) The dollar value of savings increased at 5 percent, and the value of savings measured in goods increased at 1.5 percent.

Question 57

A positive nominal interest rate indicates

A) how fast the number of dollars in your savings account is rising over time.
B) how fast the purchasing power of your savings account is rising over time.
C) the number of dollars in your savings account today.
D) the purchasing power in your savings account today.

Question 58

Which of the following is the most accurate statement about nominal and real interest rates?

A) Nominal and real interest rates always move together.
B) Nominal and real interest rates never move together.
C) Nominal and real interest rates often do not move together.
D) Nominal and real interest rates always move in opposite directions.

Question 59

Other things the same, when the interest rate rises

A) people would want to lend more, making the supply of loanable funds increase.
B) people would want to lend less, making the supply of loanable funds decrease.
C) people would want to lend more, making the quantity of loanable funds supplied increase.
D) people would want to lend less, making the quantity of loanable funds supplied decrease.

Question 60

If a reform of the tax laws encourages greater saving, the result would be

A) higher interest rates and greater investment.
B) higher interest rates and less investment.
C) lower interest rates and greater investment.
D) lower interest rate and less investment.

Question 61

Which of the following events would cause the interest rate to rise?

A) a decrease in the demand for loanable funds
B) an increase in the demand for loanable funds
C) an increase in the supply for loanable funds
D) a decrease in aggregate demand

Question 62

Other things constant, an increase in the expected inflation rate will

A) decrease the inflationary premium.
B) increase money (nominal) interest rates.
C) increase the supply of loanable funds.
D) decrease the money interest rate.

Question 63

If expected inflation is constant and the nominal interest rate increased 3 percentage points, the real interest rate would

A) increase 3 percentage points.
B) increase, but by less than 3 percentage points.
C) decrease, but by less than 3 percentage points.
D) decrease by 3 percentage points.

Question 64

The "loanable funds market" is a term used by economists to describe the

A) demand for goods and services by households.
B) market that includes resources such as labor and capital.
C) supply of goods and services by firms.
D) market that coordinates the borrowing and lending of individuals and firms.

Question 65

An increase in the real interest rate will

A) lead to an increase in the expected inflation rate.
B) increase the real cost of purchasing goods and services in the current period relative to future periods.
C) encourage borrowers to demand a larger quantity of funds.
D) reduce the quantity of funds supplied to the loanable funds market.

Question 66

The difference between the money rate of interest and the real rate of interest is often called the

A) real balance effect.
B) prime interest rate.
C) inflationary premium.
D) discount rate.

Question 67

An increase in the real interest rate will

A) increase the inflationary premium.
B) decrease the inflationary premium.
C) increase the price of current consumption relative to future consumption.
D) decrease the price of current consumption relative to future consumption.

Question 68

The real rate of interest is

A) interest paid by commercial banks.
B) interest paid by the Fed.
C) equal to the money rate of interest plus the inflationary premium.
D) the money rate of interest adjusted for inflation.

Question 69

The price that a person must pay in order acquire purchasing power now rather than in the future is called

A) the interest rate.
B) the foreign exchange rate.
C) the inflationary premium.
D) the risk premium.

Question 70

The nominal (money) rate of interest

A) is the real rate of interest plus the inflationary premium.
B) can be expected to decline as inflation accelerates.
C) fell to historic lows during the 1970s when the United States experienced double-digit rates of inflation.
D) can be expected to increase when the government is running a budget surplus.

Question 71

The money rate of interest will be less than the real rate of interest when decision makers anticipate

A) stable prices in the future.
B) falling prices in the future.
C) inflation in the future.
D) that the money rate of interest will decline.

Question 72

If expected inflation is constant, then when the nominal interest rate falls, the real interest rate

A) falls by more than the change in the nominal interest rate.
B) falls by the change in the nominal interest rate.
C) rises by the change in the nominal interest rate.
D) rises by more than the change in the nominal interest rate.

Question 73

The real rate of interest equals the

A) money rate of interest minus the expected inflation rate.
B) money rate of interest plus the expected inflation rate.
C) inflationary premium.
D) nominal rate of interest.

Question 74

The real interest rate is

A) the premium that borrowers must pay in order to acquire more purchasing power.
B) the reward lenders receive in exchange for their willingness to delay consumption into the future.
C) equal to the money interest rate minus the inflationary premium.
D) all of the above.

Question 75

Suppose business decision makers become more optimistic about future economic conditions and desire additional funds to expand their plant capacity. What is the likely effect on the loanable funds market?

A) The demand for loanable funds will increase, and the interest rate will rise.
B) The demand for loanable funds will decrease, and the interest rate will fall.
C) The supply for loanable funds will increase, and the interest rate will fall.
D) The supply for loanable funds will decrease, and the interest rate will rise.

Question 76

In the loanable funds market, the price that borrowers must pay for earlier availability is the

A) inflation rate.
B) wage rate.
C) interest rate.
D) exchange rate.

Question 77

The difference between the money interest rate and the real interest rate is the

A) prime interest rate.
B) nominal interest rate.
C) exchange rate.
D) inflationary premium.

Question 78

If the expected rate of inflation is zero, the real interest rate must

A) also equal zero.
B) be greater than the money (nominal) interest rate.
C) be equal to the money (nominal) interest rate.
D) be less than the money (nominal) interest rate.

Question 79

The money interest rate may be a misleading indicator of real borrowing costs when

A) the unemployment rate is high.
B) the actual rate of unemployment exceeds the natural rate of unemployment.
C) the inflation rate is high.
D) real output is declining.

Question 80

Which of the following equations is accurate?

A) money interest rate = real interest rate − inflationary premium
B) real interest rate = money interest rate + inflationary premium
C) real interest rate = money interest rate − inflationary premium
D) real interest rate = money interest rate