2. Which one of the following statements about official unemployment statistics is correct?
A. Official unemployment statistics include cyclical and structural unemployment, but not frictional unemployment.
B. Official unemployment statistics understate unemployment because individuals receiving unemployment compensation are counted as employed.
C. Official unemployment statistics understate unemployment because discouraged workers aren’t counted as unemployed.
D. Official unemployment statistics overstate unemployment because workers who are involuntarily working part time are counted as being employed.
3. The industries or sectors of the economy in which business cycle fluctuations tend to affect output the most are
A. military goods and capital goods.
B. services and nondurable consumer goods.
C. capital goods and durable consumer goods.
D. clothing and education.
4. Strong property rights are important for modern economic growth because
A. business cycle fluctuations will be smaller and less likely to disrupt investment patterns.
B. they ensure an equitable distribution of income.
C. people are less likely to invest if they’re fearful that others can take their returns on investment without compensation.
D. they allow governments to extract the gains from private citizens’ investments.
5. The total amount of income earned by U.S. resource suppliers in a year, plus taxes on production and imports, is measured by
A. disposable income.
B. national income.
C. personal income.
D. gross domestic product.
6. Which one of the following statements about national income is correct?
A. National income is the income received by households less personal taxes.
B. National income is the before-tax income received by households.
C. National income is the income earned by U.S. resource suppliers plus taxes on production and imports and imports.
D. National income is the market value of the annual output net of consumption of fixed capital.
7. Which one of the following statements correctly describes real GDP?
A. Real GDP measures the total dollar value of all goods and services produced within the borders of a country using current prices.
B. Real GDP measures the total dollar value of all goods and services consumed within the borders of a country, adjusted for price changes.
C. Real GDP measures the value of final goods and services produced within the borders of a country, corrected for price changes.
D. Real GDP measures the value of all goods and services produced in the world, using current prices.
8. Given the annual rate of economic growth, the “rule of 70” allows one to
A. determine the accompanying rate of inflation.
B. calculate the number of years required for real GDP to double.
C. calculate the size of the GDP gap.
D. determine the growth rate of per capita GDP.
9. Which one of the following statements best explains why prices tend to be inflexible even when demand changes?
A. Firms may be reluctant to change prices for fear of setting off a price war or losing customers to rivals.
B. Government regulations limit the number of times a firm can change prices in a year.
C. In most industries, the profit-maximizing price doesn’t change even when demand changes.
D. Production costs don’t tend to change when a firm varies its level of output.
10. Modern economic growth refers to countries that have experienced an increase in
A. real output spread evenly across all sectors of the economy.
B. real output per person.
C. real GDP over time.
D. nominal GDP over time.
11. Which one of the following is the correct definition of inflation?
A. Inflation is the rate of growth in nominal GDP.
B. Inflation is an increase in the overall level of prices.
C. Inflation is the growth phase of the business cycle.
D. Inflation is a situation in which all prices in the economy rise simultaneously.
12. Net exports are negative when
A. a nation’s imports exceed its exports.
B. a nation’s exports exceed its imports.
C. the economy’s stock of capital goods is declining.
D. depreciation exceeds domestic investment.
13. Which one of the following represents the smallest dollar amount in the United States?
A. Disposable income
B. National income
C. Gross domestic product
D. Personal income
14. The two topics of primary concern in macroeconomics are
A. monopoly power of corporations, and small business profitability.
B. short-run fluctuations in output and employment, and long-run economic growth.
C. oil prices and housing markets.
D. unemployment, and wage rates in labor markets.
15. Other things equal, which one of the following would increase the rate of economic growth, as measured by changes in real GDP?
A. A decline in the amount of capital per worker
B. A decrease in the labor force participation rate
C. An increase in the size of the working-age population
D. A decline in the average length of the work week
16. Which one of the following statements about demand shocks is correct?
A. Demand shocks are unexpected changes in the desires of households and businesses to buy goods and services.
B. Demand shocks cause fewer short-run fluctuations than supply shocks.
C. Demand shocks always have a negative impact on the economy.
D. Demand shocks are unexpected changes in the ability of firms to produce and sell goods and services.
17. Which one of the following best defines disposable income?
A. All income earned by resource suppliers for their current contributions to production
B. The before-tax income received by households
C. The market value of the annual output net of consumption of fixed capital
D. Income received by households less personal taxes
18. In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates?
19. Which one of the following statements about competitive market systems is correct?
A. A competitive market system encourages growth by ensuring that everyone in society will receive a decent standard of living.
B. A competitive market system discourages growth because firms busy competing have no time to innovate or invest.
C. A competitive market system discourages growth unless government protects domestic firms from foreign competition.
D. A competitive market system encourages growth by allowing producers to make profitable investment decisions based on market signals.
20. Unemployment involving a mismatch of the skills of unemployed workers and the skills required for available jobs is called _______ unemployment.
21. The public debt is the amount of money that
A. the federal government owes to taxpayers.
B. Americans owe to foreigners.
C. state and local governments owe to the federal government.
D. the federal government owes to holders of U.S. securities.
22. Suppose that the economy is in the midst of a recession. Which one of the following policies would most likely end the recession and stimulate output growth?
A. A reduction in federal tax rates on personal and corporate income
B. A postponement of a highway construction program
C. A reduction in agricultural subsidies and veterans’ benefits
D. A Congressional proposal to incur a federal surplus to be used for the retirement of public debt
23. Which one of the following is the best example of public investment?
A. Salaries of Senators and Representatives
B. Funding of regulatory agencies
C. Government expenditures on food stamps
D. Construction of highways
24. In building the aggregate expenditures model, Keynes believed that
A. government intervention into the economy is the primary cause of business cycle fluctuations.
B. massive unemployment of labor and capital created conditions where sudden demand changes are unlikely to change prices.
C. changes in aggregate expenditures are unable to affect the level of real output in the economy.
D. economies are normally at full employment and thus frequently susceptible to bouts of inflation.
25. The relationship between investment and GDP is shown by the _______ schedule.
D. consumption of fixed capital
26. Exports have the same effect on the current size of GDP as
27. Which one of the following statements about the standardized budget is correct?
A. The standardized budget refers to the number of workers who are underemployed when the level of unemployment is 4 to 5 percent.
B. The standardized budget refers to the inflationary impact that the automatic stabilizers have in a full-employment economy.
C. The standardized budget refers to that portion of a full-employment GDP that isn’t consumed in the year it’s produced.
D. The standardized budget refers to the size of the federal government’s budgetary surplus or deficit when the economy is operating at full employment.
28. The recessionary expenditure gap associated with the recession of 2001 resulted from
A. a major increase in personal and corporate taxes.
B. a rapid decline in investment spending.
C. the government’s attempt to control hyperinflation.
D. a rapid increase in imports resulting from large tariff reductions.
29. An economist who favored expanded government would recommend
A. tax cuts during recession and reductions in government spending during inflation.
B. tax cuts during recession and tax increases during inflation.
C. increases in government spending during recession and tax increases during inflation.
D. tax increases during recession and tax cuts during inflation.
30. Which one of the following statements about fiscal policy is correct?
A. Fiscal policy refers to the manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.
B. Fiscal policy refers to the fact that equal increases in government spending and taxation will be contractionary.
C. Fiscal policy refers to the manipulation of government spending and taxes to achieve greater equality in the distribution of income.
D. Fiscal policy refers to the altering of the interest rate to change aggregate demand.
31. The crowding-out effect of expansionary fiscal policy suggests that
A. saving is increasing at the expense of investment.
B. government spending is increasing at the expense of private investment.
C. private investment is increasing at the expense of government spending.
D. imports are replacing domestic production.
32. The federal budget surplus is found by
A. cumulating the difference between government spending and tax revenues over all years since the nation’s founding.
B. subtracting government revenue plus government borrowing from government spending in a particular year.
C. subtracting government revenues from government spending on noninvestment goods in a particular year.
D. subtracting government spending from government tax revenue in a particular year.
33. Investment spending in the United States tends to be unstable because
A. investment spending is affected by interest rates.
B. capital wears out quickly and must be replaced often.
C. the price level fluctuates rapidly.
D. profits are highly variable.
34. Which one of the following represents the most expansionary fiscal policy?
A. A $10 billion increase in government spending
B. A $10 billion tax increase
C. A $10 billion decrease in government spending
D. A $10 billion tax cut
35. The political business cycle refers to the possibility that
A. there’s more inflation during Democratic administrations than during Republican administrations.
B. politicians will manipulate the economy to enhance their chances of being reelected.
C. incumbent politicians will be reelected regardless of the state of the economy. D. recessions coincide with election years.
36. The amount by which government expenditures exceed revenues during a particular year is the
B. budget deficit.
C. GDP gap.
D. public debt.
37. The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will
A. shift the aggregate supply curve leftward.
B. shift the aggregate demand curve leftward.
C. decrease U.S. exports and increase U.S. imports.
D. increase U.S. exports and decrease U.S. imports.
38. An economist who favors smaller government would recommend _______ during recession and _______ during inflation.
A. increases in government spending; tax increases
B. tax cuts; tax increases
C. tax increases; tax cuts
D. tax cuts; reductions in government spending
39. Which one of the following was not a contributing cause of the decline in investment and thus the recessionary expenditure gap occurring during the U.S. recession of 2001?
A. Low interest rates
B. Pessimism relating to the stock market crash
C. Overcapacity in major industries
D. The collapse of numerous Internet-related start-up firms
40. An appropriate fiscal policy for severe demand-pull inflation is
A. a reduction in interest rates.
B. a tax rate increase.
C. an increase in government spending.
D. depreciation of the dollar.
41. Wally owns 100 shares of stock in Mammoth Corporation that he purchased for $20 per share. Every year he has received, from company profits, $1 for each share he owns. If Wally sells all his shares at a price of $30 per share, he’ll receive a
A. total capital gain of $10.
B. dividend of $10 per share.
C. a capital gain of $30 per share.
D. total capital gain of $1,000.
42. The line that depicts the relationship between the average expected rate of return and the risk level of a financial asset is known as the
A. Risk Premium Line.
B. Security Market Line.
C. Beta Line.
D. Risk-Return Line.
43. When economists say that money serves as a medium of exchange, they mean that it’s
A. a monetary unit for measuring and comparing the relative values of goods.
B. declared as legal tender by the government.
C. a way to keep wealth in a readily spendable form for future use.
D. a means of payment.
44. The opportunity cost of holding money
A. varies inversely with the level of economic activity.
B. varies inversely with the interest rate.
C. is zero, because money isn’t an economic resource.
D. varies directly with the interest rate.
45. When a commercial bank has excess reserves,
A. its actual reserves are less than its required reserves.
B. it’s charging too high an interest rate on its loans.
C. its reserves exceed its assets.
D. it’s in a position to make additional loans.
46. Firms whose central business is to offer security advice and buy and sell individual stocks and bonds for clients are known as
A. securities firms.
B. pension fund companies.
D. insurance companies.
47. Which one of the following statements about the Fed is correct?
A. The Fed directly sets the prime interest rate but not the federal funds rate.
B. The Fed directly sets neither the federal funds rate nor the prime interest rate.
C. The Fed directly sets the discount rate and the prime interest rate.
D. The Fed directly sets both the federal funds rate and the prime interest rate.
48. The primary purpose of the legal reserve requirement is to
A. prevent commercial banks from earning excess profits.
B. provide a dependable source of interest income for commercial banks.
C. provide a means by which the monetary authorities can influence the lending ability of commercial banks.
D. prevent banks from hoarding too much vault cash.
49. Reserves must be deposited in the Federal Reserve Banks by
A. federally chartered commercial banks only.
B. only commercial banks which are members of the Federal Reserve System.
C. all depository institutions, that is, all commercial banks and thrift institutions.
D. state chartered commercial banks only.
50. Other things equal, if the supply of money is reduced,
A. investment spending will increase.
B. the demand for money will increase.
C. the interest rates will fall.
D. bond prices will fall.
51. Checkable deposits are classified as money because
A. banks hold currency equal to the value of their checkable deposits.
B. they’re ultimately the obligations of the Treasury.
C. they can be readily used in purchasing goods and paying debts.
D. they earn interest income for the depositor.
52. Which one of the following statements about diversification is correct?
A. Investors diversify portfolios because diversified portfolios pay the highest rates of return.
B. Investors diversify portfolios because diversified portfolios are guaranteed not to lose money.
C. Investors diversify portfolios to reduce the risk of losing their investment.
D. Investors diversify portfolios to guarantee minimum returns on their investment.
53. Which one of the following statements about the money supply is correct?
A. The money supply is backed dollar-for-dollar with gold and silver.
B. The money supply is backed by the government’s ability to control the supply of money and therefore to keep its value relatively stable.
C. The money supply is backed dollar-for-dollar with gold bullion.
D. The money supply is backed by government bonds.
54. The Standard and Poor’s 500 Index measures prices of the 500
A. most-purchased consumer goods in the United States.
B. stocks of the largest companies in the United States.
C. largest index funds trading in the United States.
D. largest bonds trading in the United States.
55. Denny buys a rare coin for $200 and sells the coin 1 year later for $220. Denny’s rate of return is
A. 20 percent.
B. 91 percent.
C. 110 percent.
D. 10 percent.
56. The interest rate at which the Federal Reserve Banks lend to commercial banks is called the _______ rate.
A. federal funds
57. Which one of the following statements about default is correct?
A. “Default” occurs when bond purchasers fails to pay full price for a bond.
B. “Default” occurs when stocks are not federally insured.
C. “Default” occurs when corporations go bankrupt and stock becomes worthless. D. “Default” occurs when bond issuers fails to make promised payments.
58. The Security Market Line depicts the relationship between the
A. risk level of a financial asset and the prime interest rate.
B. average expected rate of return of a financial asset and the discount rate.
C. average expected rate of return and risk level of a financial asset.
D. average expected rate of return on stocks and the average expected rate of return on bonds.
59. The basic policy-making body in the U.S. banking system is the
A. Federal Open Market Committee (FOMC).
B. Federal Monetary Authority.
C. Board of Governors of the Federal Reserve.
D. Council of Economic Advisers.
20. The four main tools of monetary policy are
B. tax rate changes, the discount rate, open-market operations, and the federal funds rate.
C. changes in government expenditures, the reserve ratio, the federal funds rate, and the discount rate.
D. tax rate changes, changes in government expenditures, open-market operations, and the term auction facility.