Final Exam Practice Questions 12/10/2021 PDF

## Practice questions for the final exam ### Chapter 12 1. The classical theory of inflation - is also known as the quantity theory of money. - was developed by some of the earliest economic thinkers. - is used by most modern economists to explain the long-run determinants of the infla...

## Practice questions for the final exam ### Chapter 12 1. The classical theory of inflation - is also known as the quantity theory of money. - was developed by some of the earliest economic thinkers. - is used by most modern economists to explain the long-run determinants of the inflation rate. - All of the above are correct. **ANS: D** 3. To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the - quantity theory of money. - price-index theory of money. - theory of hyperinflation. - disequilibrium theory of money and inflation. **ANS: A** 4. When the price level falls, the number of dollars needed to buy a representative basket of goods - increases, so the value of money rises. - increases, so the value of money falls. - decreases, so the value of money rises. - decreases, so the value of money falls. **ANS: C** 9. Suppose an economy produces only ice cream cones. If the price level rises, the value of currency - rises, because one unit of currency buys more ice cream cones. - rises, because one unit of currency buys fewer ice cream cones. - falls, because one unit of currency buys more ice cream cones. - falls, because one unit of currency buys fewer ice cream cones. **ANS: D** 14. With the value of money on the vertical axis, the money supply curve is - upward-sloping. - downward-sloping. - horizontal. - vertical. **ANS: D** 16. The supply of money increases when - the value of money increases. - the interest rate increases. - the Fed makes open-market purchases. - None of the above is correct. **ANS: C** 17. Money demand refers to - the total quantity of financial assets that people want to hold. - how much income people want to earn per year. - how much wealth people want to hold in liquid form. - how much currency the Federal Reserve decides to print. **ANS: C** 18. Money demand depends on - the price level and the interest rate. - the price level but not the interest rate. - the interest rate but not the price level. - neither the price level nor the interest rate. **ANS: A** 29. When the money market is drawn with the value of money on the vertical axis, - money demand slopes upward and money supply is horizontal. - money demand slopes downward and money supply is horizontal. - money demand slopes upward and money supply is vertical. - money demand slopes downward and money supply is vertical. **ANS: D** 39. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes the equilibrium value of money - and equilibrium quantity of money to increase. - and equilibrium quantity of money to decrease. - to increase, while the equilibrium quantity money decreases. - to decrease, while the equilibrium quantity of money increases. **ANS: D** 54. When the money market is drawn with the value of money on the vertical axis, if money demand shifts leftward, then initially there is an - excess demand for money which causes the price level to rise. - excess demand for money which causes the price level to fall. - excess supply of money which causes the price level to rise. - excess supply of money which causes the price level to fall. **ANS: C** ### Figure 17-1 61. Refer to Figure 17-1. If the money supply is MS2 and the value of money is 2, then there is an excess - demand for money that is represented by the distance between points A and C. - demand for money that is represented by the distance between points A and B. - supply of money that is represented by the distance between points A and C. - supply of money that is represented by the distance between points A and B. **ANS: D** 62. Refer to Figure 17-1. If the money supply is MS2 and the value of money is 2, then - the quantity of money demanded is greater than the quantity supplied; the price level will rise. - the quantity of money demanded is greater than the quantity supplied; the price level will fall. - the quantity of money supplied is greater than the quantity demanded; the price level will rise. - the quantity of money supplied is greater than the quantity demanded; the price level will fall. **ANS: D** 63. Refer to Figure 17-1. When the money supply curve shifts from MS1 to MS2, - the demand for goods and services decreases. - the economy's ability to produce goods and services increases. - the equilibrium price level decreases. - None of the above is correct. **ANS: D** 64. Refer to Figure 17-1. When the money supply curve shifts from MS1 to MS2, - the equilibrium value of money decreases. - the equilibrium price level decreases. - the supply of money has decreased. - the demand for goods and services will decrease. **ANS: A** 65. Refer to Figure 17-1. If the current money supply is MS1, then - there is no excess supply or excess demand if the value of money is 2. - the equilibrium is at point C. - there is an excess supply of money if the value of money is 1. - None of the above is correct. **ANS: A** ### Figure 17-2 66. Refer to Figure 17-2. What quantity is measured along the horizontal axis? - the price level - the real interest rate - the value of money - the quantity of money **ANS: D** 67. Refer to Figure 17-2. If the relevant money-demand curve is the one labeled MD1, then the equilibrium value of money is - 0.5 and the equilibrium price level is 2. - 2 and the equilibrium price level is 0.5. - 0.5 and the equilibrium price level cannot be determined from the graph. - 2 and the equilibrium price level cannot be determined from the graph. **ANS: A** 68. Refer to Figure 17-2. If the relevant money-demand curve is the one labeled MD1, then - when the money market is in equilibrium, one dollar purchases one-half of a basket of goods and services. - when themoney market is in equilibrium, one unit of goods and services sells for 2 dollars. - there is an excess demand for money if the value of money in terms of goods and services is 0.375. - All of the above are correct. **ANS: D** 69. Refer to Figure 17-2. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2? - an increase in the value of money - a decrease in the price level - an open-market purchase of bonds by the Federal Reserve - None of the above is correct. **ANS: D** 70. Refer to Figure 17-2. Suppose the relevant money-demand curve is the one labeled MD1; also suppose the velocity of money is 3. If the money market is in equilibrium, then the economy's real GDP amounts to - 5,000. - 7,500. - 10,000. - 15,000. **ANS: B** 71. Refer to Figure 17-2. Suppose the relevant money-demand curve is the one labeled MD1; also suppose the economy's real GDP is 30,000 for the year. If the money market is in equilibrium, then how many times per year is the typical dollar bill used to pay for a newly produced good or service? - 4 - 6 - 8 - 12 **ANS: D** 72. Refer to Figure 17-2. At the end of 2009 the relevant money-demand curve was the one labeled MD2. At the end of 2010 the relevant money-demand curve was the one labeled MD1. Assuming the economy is always in equilibrium, what was the economy's approximate inflation rate for 2010? - -43 percent - -57 percent - 57 percent - 75 percent **ANS: D** 101. According to the classical dichotomy, which of the following is affected by monetary factors? - nominal wages - the price level - nominal GDP - All of the above are correct. **ANS: D** 112. According to the classical dichotomy, when the money supply doubles which of the following doubles? - the price level and nominal GDP - the price level and real GDP - only real GDP - only the price level **ANS: A** 116. Monetary neutrality implies that an increase in the quantity of money will - increase employment. - increase the price level. - increase the incentive to save. - not increase any of the above. **ANS: B** 122. The velocity of money is - the rate at which the Fed puts money into the economy? - the same thing as the long-term growth rate of the money supply. - the money supply divided by nominal GDP. - the average number of times per year a dollar is spent. **ANS: D** 123. Velocity is computed as - (P x Y)/M. - (P x M)/Y. - (Y x M)/P. - (Y x M)/V. **ANS: A** 125. If M = 3,000, P = 2, and Y = 12,000, what is velocity? - 1/2 - 2 - 4 - 8 **ANS: D** 126. If M = 5,000, P = 3, and Y = 10,000, what is velocity? - 6 - 1.5 - 2/3 - 1/6 **ANS: A** 131. Based on the quantity equation, if M = 100, V = 3, and Y = 200, then P = - 1. - 1.5. - 2. - None of the above is correct. **ANS: B** 132. Based on the quantity equation, if M = 150, V = 4, and Y = 200, then P = - 1/3. - 1/2. - 2. - 3. **ANS: D** 134. Based on the quantity equation, if Y = 3,000, P = 4, and V = 3, then M = - $4,000. - $2,250. - $250. - $36,000. **ANS: A** 135. If velocity = 5, the price level =1.5, and the real value of output is 2,500, then the quantity of money is - 333.33. - 750.00. - 1,050.00. - 8,333.33. **ANS: B** 138. According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then - nominal and real GDP would rise by 5 percent. - nominal GDP would rise by 5 percent; real GDP would be unchanged. - nominal GDP would be unchanged; real GDP would rise by 5 percent. - neither nominal GDP nor real GDP would change. **ANS: B** 141. If P = 4 and Y = 450, then which of the following pairs of values are possible? - M=800, V = 4 - M=600, V=3 - M=400, V =2 - M=200, V=1 **ANS: B** 142. If P = 2 and Y = 1000, then which of the following pairs of values are possible? - M = 5oo, V = 4 - M=1500, V = 3 - M=2000, V = 2 - M=500, V = 1 **ANS: A** 171. The source of hyperinflations is primarily - lower output growth. - continuing declines in velocity. - increases in money-supply growth. - continuing increases in money demand. **ANS: C** 172. Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a reasonable guess? - The country has high money supply growth. - Inflation is acting like a tax on everyone who holds money. - The government is printing money to finance its expenditures. - All of the above are correct. **ANS: D** 173. The inflation tax - is an alternative to income taxes and government borrowing. - taxes most those who hold the most money. - is the revenue created when the government prints money. - All of the above are correct. **ANS: D** 174. The inflation tax refers to - the revenue a government creates by printing money. - higher inflation which requires more frequent price changes. - the idea that, other things the same, an increase in the tax rate raises the inflation rate. - taxes being indexed for inflation. **ANS: A** 177. Printing money to finance government expenditures - causes the value of money to rise. - imposes a tax on everyone who holds money. - is the principal method by which the U.S. government finances its expenditures. - None of the above is correct. **ANS: B** 183. The nominal interest rate is 4.5 percent and the inflation rate is 0.9 percent. What is the real interest rate? - 5.4 percent - 5 percent - 4.1 percent - 3.6 percent **ANS: D** 184. If the nominal interest rate is 7 percent and expected inflation is 4.5 percent, then what is the expected real interest rate? - 11.5 percent - 7 percent - 4.5 percent - 2.5 percent **ANS: D** 185. If a bank posts a nominal interest rate of 11 percent, and inflation is expected to be 4 percent, then - the expected real interest rate is 11 percent. - the expected real interest rate is 7 percent. - the expected real interest rate is 4 percent. - the expected real interest rate is 15 percent. **ANS: B** 195. In which case below is the real interest rate the highest? - the nominal interest rate = 4% and inflation = 3% - the nominal interest rate = 3% and inflation = 1% - the nominal interest rate = 2% and inflation = -2% - the nominal interest rate = 1% and inflation = -4% **ANS: D** 196. In which case below does a person's purchasing power from saving increase the least? - the nominal interest rate = 10% and inflation = 8% - the nominal interest rate = 9% and inflation = 6% - the nominal interest rate = 8% and inflation = 4% - the nominal interest rate = 7% and inflation = 2% **ANS: A** 9. The shoeleather cost of inflation refers to - the redistributional effects of unexpected inflation. - the time spent searching for low prices when inflation rises. - the waste of resources used to maintain lower money holdings. - the increased cost to the government of printing more money. **ANS: C** 15. Which of the following is an example of menu costs? - deciding on new prices - printing new price lists - advertising new prices - All of the above are examples of menu costs. **ANS: D** 28. Higher inflation - causes firms to change prices less frequently and makes relative prices less variable. - causes firms to change prices less frequently and makes relative prices more variable. - causes firms to change prices more frequently and makes relative prices less variable. - causes firms to change prices more frequently and makes relative prices more variable. **ANS: D** ### Chapter 13 1. International trade - raises the standard of living in all trading countries. - lowers the standard of living in all trading countries. - leaves the standard of living unchanged. - raises the standard of living for importing countries and lowers it for exporting countries. **ANS: A** 2. Net exports of a country are the value of - goods and services imported minus the value of goods and services exported. - goods and services exported minus the value of goods and services imported. - goods exported minus the value of goods imported. - goods imported minus the value of goods exported. **ANS: B** 3. A country sells more to foreign countries than it buys from them. It has - a trade surplus and positive net exports. - a trade surplus and negative net exports. - a trade deficit and positive net exports. - a trade deficit and negative net exports. **ANS: A** 4. One year a country has negative net exports. The next year it still has negative net exports and imports have risen more than exports. - its trade surplus fell. - its trade surplus rose. - its trade deficit fell. - its trade deficit rose. **ANS: D** ### Table 18-1 5. Refer to Table 18-1. What are Bolivia’s exports? - $60 billion - $35 billion - $10 billion - None of the above are correct. **ANS: B** 6. Refer to Table 18-1. What are Bolivia’s imports? - $60 billion - $35 billion - $40 billion - None of the above are correct. **ANS: A** 7. Refer to Table 18-1. What are Bolivia’s net exports? - $30 billion - $5 billion - -$5 billion - -$25 billion **ANS: D** 8. The increase in international trade in the United States is partly due to - improvements in transportation. - advances in telecommunications. - increased trade of goods with a high value per pound. - All of the above are correct. **ANS: D** 9. Net capital outflow is defined as the purchase of - foreign assets by domestic residents minus the purchase of domestic assets by foreign residents. - foreign assets by domestic residents minus the purchase of foreign goods and services by domestic residents. - domestic assets by foreign residents minus the purchase of domestic goods and services by foreign residents. - domestic assets by foreign residents minus the purchase of foreign assets by domestic residents. **ANS: A** 10. If U.S. residents purchase $500 billion of foreign assets and foreigners purchase $1300 billion of U.S. assets, - U.S. net capital outflow is $800 billion; capital is flowing into the U.S. - U.S. net capital outflow is $800 billion; capital is flowing out of the U.S. - U.S. net capital outflow is -$800 billion; capital is flowing into the U.S. - U.S. net capital outflow is -$800 billion; capital is flowing out of the U.S. **ANS: C** 11. The purchase of U.S. government bonds by Egyptians is an example of - U.S. imports. - U.S. exports. - foreign portfolio investment by Egyptians. - foreign direct investment by Egyptians. **ANS: C** 12. Which of the following is an example of U.S. foreign direct investment? - A Swedish car manufacturer opens a plant in Tennessee. - A Dutch citizen buys shares of stock in a U.S. company. - A U.S. based restaurant chain opens new restaurants in India. - A U.S. citizen buys stock in companies located in Japan. **ANS: C** 13. Which of the following is an example of U.S. foreign portfolio investment? - Disney builds a new amusement park near Barcelona, Spain. - A U.S. citizen buys bonds issued by the British government. - A Dutch hotel chain opens a new hotel in the United States. - A citizen of Singapore buys a bond issued by a U.S. corporation. **ANS: B** 14. Which of the following equations is correct? - SI+C - SI-NX - SI+NCO - SNX-NCO. **ANS: C** 15. Which of the following is correct? - NCONX - NCO+I= NX - NX+NCO = Y - Y=NCO-1 **ANS: A** 16. If saving is greater than domestic investment, then - there is a trade deficit and Y > C+I+G. - there is a trade deficit and Y <C+I+G. - there is a trade surplus and Y > C + I + G. - there is a trade surplus and Y < C + I + G. **ANS: C** 17. If a country has Y > C + I + G, then - S > I and it has a trade surplus. - SI and it has a trade deficit. - S <I and it has a trade surplus. - SI and it has a trade deficit. **ANS: A** 18. If a country has a trade surplus - it has positive net exports and positive net capital outflow. - it has positive net exports and negative net capital outflow. - it has negative net exports and positive net capital outflow. - it has negative net exports and negative net capital outflow. **ANS: A** 19. Other things the same, if a country saves more, then - net capital outflow rises, so net exports rise. - net capital outflow rises, so net exports fall. - net capital outflow falls, so net exports rise. - net capital outflow falls, so net exports fall. **ANS: A** 20. Other things the same, if a country has a trade deficit and saving rises, - net capital outflow rises, so the trade deficit increases. - net capital outflow rises, so the trade deficit decreases. - net capital outflow falls, so the trade deficit increases. - net capital outflow falls, so the trade deficit decreases. **ANS: B** 21. The nominal exchange rate is the: - nominal interest rate in one country divided by the nominal interest rate in the other country. - the ratio of a foreign country's interest rate to the domestic interest rate. - rate at which a person can trade the currency of one country for another. - the real exchange rate minus the inflation rate. **ANS: C** 22. If the exchange rate is .60 British pounds = $1, a bottle of ale that costs 3 pounds costs - $1.80. - $4.80. - $5. - None of the above is correct. **ANS: C** 23. If the exchange rate were 5 Egyptian pounds per U.S. dollar, a watch that costs $25 US dollars would cost - 125 Egyptian pounds - 50 Egyptian pounds - 5 Egyptian pounds - None of the above is correct. **ANS: A** 24. Other things the same, if the dollar depreciates relative to the Japanese yen, then - the exchange rate falls. It will cost fewer yen to travel in the U.S. - the exchange rate falls. It will cost more yen to travel in the U.S. - the exchange rate rises. It will cost fewer yen to travel in the U.S. - the exchange rate rises. It will cost more yen to travel in the U.S. **ANS: A** 25. Other things the same, if the dollar appreciates relative to the Japanese yen, then - the exchange rate falls. It will cost fewer yen to travel in the U.S. - the exchange rate falls. It will cost more yen to travel in the U.S. - the exchange rate rises. It will cost fewer yen to travel in the U.S. - the exchange rate rises. It will cost more yen to travel in the U.S. **ANS: D** 26. The real exchange rate is the nominal exchange rate, defined as foreign currency per dollar, times - U.S. prices minus foreign prices. - prices in the United States divided by foreign prices. - foreign prices divided by U.S. prices. - None of the above is correct. **ANS: B** 27. If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as - e(P*/P). - e(P/P*). - e + P*/P. - e-P/P*. **ANS: B** 28. A depreciation of the U.S. real exchange rate induces U.S. consumers to buy - fewer domestic goods and fewer foreign goods. - more domestic goods and fewer foreign goods. - fewer domestic goods and more foreign goods. - more domestic goods and more foreign goods. **ANS: B** 29. An appreciation of the U.S. real exchange rate induces U.S. consumers to buy - fewer domestic goods and fewer foreign goods. - more domestic goods and fewer foreign goods. - fewer domestic goods and more foreign goods. - more domestic goods and more foreign goods. **ANS: C** 30. If the U.S. real exchange rate appreciates, U.S. exports - increase and U.S. imports decrease. - decrease and U.S. imports increase. - and U.S. imports both increase. - and U.S. imports both decrease. **ANS: B** 31. The law of one price states that - a good must sell at the price fixed by law. - a good must sell at the same price at all locations. - a good cannot sell for a price greater than the legal price ceiling. - nominal exchange rates will not vary. **ANS: B** 32. If purchasing-power parity holds, then the value of the - real exchange rate is equal to one. - nominal exchange rate is equal to one. - real exchange rate is equal to the nominal exchange rate. - real exchange rate is equal to the difference in inflation rates between the two countries. **ANS: A** 33. If purchasing-power parity holds, a dollar will buy - more goods in foreign countries than in the United States. - as many goods in foreign countries as it does in the United States. - fewer goods in foreign countries than it does in the United States. - None of the above is implied by purchasing-power parity. **ANS: B** ### Chapter 15 1. Which of the following explains why production rises in most years? - increases in the labor force - increases in the capital stock - advances in technological knowledge - All of the above are correct. **ANS: D** 2. A relatively mild period of falling incomes and rising unemployment is called a(n) - depression. - recession. - expansion. - business cycle. **ANS: B** 3. During a recession the economy experiences - rising employment and income. - rising employment and falling income. - rising income and falling employment. - falling employment and income. **ANS: D** 5. Most economists use the aggregate demand and aggregate supply model primarily to analyze - short-run fluctuations in the economy. - the effects of macroeconomic policy on the prices of individual goods. - the long-run effects of international trade policies. - productivity and economic growth. **ANS: A** When we say that economic fluctuations are "irregular and unpredictable," we mean that - the relationship between output and unemployment is erratic and difficult to characterize. - when one macroeconomic variable that measures income or spending is falling. other macroeconomic variables that measure income or spending are likely to be rising. - recessions do not occur at regular intervals. - All of the above are correct. **ANS: C** 5. Which of the following is most commonly used to monitor short-run changes in economic activity? - the inflation rate - real GDP - aggregate demand - aggregate supply **ANS: B** 7. During recessions - sales and profits fall. - sales and profits rise. - sales rise, profits fall. - profits fall, sales rise. **ANS: A** 10. During recessions which type of spending falls? - consumption and investment - investment but not consumption - consumption but not investment - neither consumption nor investment **ANS: A** 12. During recessions investment - falls by a larger percentage than GDP. - falls by about the same percentage as GDP. - falls by a smaller percentage than GDP. - falls but the percentage change is sometimes much larger and sometimes much smaller. **ANS: A** 18. Recession come at - regular intervals. During recessions consumption spending falls relatively more than investment spending. - regular intervals. During recessions investment spending falls relatively more than consumption spending. - irregular intervals. During recessions consumption spending falls relatively more than investment spending. - irregular intervals. During recessions investment spending falls relatively more than consumption spending. **ANS: D** 20. Real GDP - moves in the same direction as unemployment. - is not adjusted for inflation. - measures economic activity and real income. - All of the above are correct. **ANS: C** 1. The classical dichotomy refers to the separation of - variables that move with the business cycle and variables that do not. - changes in money and changes in government expenditures. - decisions made by the public and decisions made by the government. - real and nominal variables. **ANS: D** 4. According to classical macroeconomic theory, changes in the money supply affect - real GDP and the price level. - real GDP but not the price level. - the price level, but not real GDP. - neither the price level nor real GDP. **ANS: C** 7. Economic variables are most often expressed in - nominal terms, and that's what's important. - nominal terms, but real variables are what's important. - real terms, and that's what's important. - real terms, but nominal variables are what's important. **ANS: B** 12. Most economists believe that in the short run - real and nominal variables are determined independently and that money cannot move real GDP away from its long-run trend. - real and nominal variables are determined independently but that money can temporarily move real GDP away from its long-run trend. - real and nominal variables are highly intertwined but that money cannot more real GDP away from its long-run trend. - real and nominal variables are highly intertwined but that money can temporarily move real GDP away from its long-run trend. **ANS: D** 19. The model of short-run economic fluctuations focuses on the price level and - real GDP. - economic growth. - the neutrality of money. - None of the above is correct. **ANS: A** The average price level is measured by - any real variable. - the rate of inflation. - the level of the money supply. - the CPI or the GDP deflator. **ANS: D** The aggregate demand and aggregate supply graph has - the price level on the horizontal axis. The price level can be measured by the GDP deflator. - the price level on the horizontal axis. The price level can be measured by real GDP. - the price level on the vertical axis. The price level can be measured by the GDP deflator. - the price level on the vertical axis. The price level can be measured by GDP. **ANS: C** The model of aggregate demand and aggregate supply explains the relationship between - the price and quantity of a particular good. - unemployment and output. - wages and employment. - real GDP and the price level. **ANS: D** 28. Aggregate demand includes - only the quantity of goods and services households want to buy. - only the quantity of goods and services households and firms want to buy. - only the quantity of goods and services households, firms, and the government want to buy. - the quantity of goods and services households, firms, the government, and customer abroad want to buy. **ANS: D** 29. Which of the following would not be included in aggregate demand? - additions of newly produced goods to inventory - purchases of U.S. services by foreigners - the purchase of newly produced capital goods - government transfer payments such as Social Security payments **ANS: D** 2. The aggregate-demand curve shows that a decrease in the price level - decreases the dollar value of g**ANT** and services