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BASIC ECON REVIEW QUESTIONS

Chapter 5

1)When nominal GDP is \$800 billion and, on average, each dollar is spent four times in the economy over a year, the quantity of money demanded for transactions purposes will be:

1. \$200 billion.
2. \$400 billion.
3. \$800 billion.
4. \$3200 billion.

1. A wealthy executive is holding money for a good time to invest in the stock market. This action would be an example of the:
1. transactions demand for money.
2. asset demand for money.
3. creation of fiat money.
4. use of money as a medium of exchange.

1. An increase in nominal GDP will:
1. increase the transactions demand and total demand for money.
2. decrease the transactions demand and total demand for money.
3. increase the transactions demand for money but decrease the total demand for money.
4. decrease the transactions demand for money but increase the total demand for money.

1. 404.

Refer to the above graph, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The transactions demand for money in this money market is:

A. \$125.

B. \$175.

C. \$250.

D. \$325.

1. 405.

Refer to the above table. Suppose the transactions demand for money is equal to 20 percent of the nominal GDP, the supply of money is \$800 billion, and the asset demand for money is that shown in the table. If the nominal GDP is \$2000 billion, the equilibrium interest rate is:

1. 4 percent.
2. 5 percent.
3. 6 percent.
4. 7 percent.

1. 406.

Refer to the above graph, which shows the supply and demand for money where Dm1, Dm2, and Dm3 represent different demands for money and Sm1, Sm2, and Sm3 represent different levels of the money supply. The initial equilibrium point is A. What will be the new equilibrium point following an increase in the money supply?

1. C.
2. D.
3. G.
4. H.

1. 407.

Refer to the above graph. If the supply of money was \$250 billion, the interest rate would be:

1. 1 percent.
2. 2 percent.
3. 3 percent.
4. 4 percent.

1. 408.

Refer to the above graph. If the interest rate is 5 percent, the supply of money would be:

1. \$50 billion.
2. \$100 billion.
3. \$150 billion.
4. \$200 billion.

1. 409.

Refer to the above graph. If the interest rate falls from 4 percent to 3 percent, the supply of money would have:

1. increased by \$50 billion.
2. increased by \$100 billion.
3. increased by \$150 billion.
4. decreased by \$50 billion.

1. The interest rate will fall when the:
1. quantity of money demanded exceeds the quantity of money supplied.
2. quantity of money supplied exceeds the quantity of money demanded.
3. demand for money increases.
4. supply of money decreases.

1. The conduct of monetary policy in the United States is the main responsibility of the:
1. U.S. Treasury.
2. Federal Reserve.
3. Bureau of the Public Debt.
4. Bureau of Economic Analysis.

1. Which one of the following is a tool of monetary policy for altering the reserves of commercial banks?
1. Reserve ratio.
2. Treasury deposits.
3. Federal Reserve Notes.
4. Budget surplus or budget deficit.

1. If the Fed buys government securities from the public in the open market:

A the Fed gives the securities to the public; the public pays for the securities by writing checks that when cleared will increase

. commercial bank reserves at the Fed.

B.the Fed gives the securities to the public; the public pays for them by writing checks that when cleared will decrease commercial bank reserves at the Fed.

C the public gives the securities to the Fed; the Fed pays for the securities by check, which when deposited at commercial

. banks will increase their reserves at the Fed.

D the public gives the securities to the Fed; the Fed pays for the securities by check, which when deposited at commercial

. banks will decrease their reserves at the Fed.

1. Which increases the excess reserves of commercial banks?
1. The central banks sell bonds to the public.
2. The central banks sell bonds to commercial banks.
3. The central banks buy bonds from commercial banks.
4. The Board of Governors increases the discount rate.

1. Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys \$4 billion worth of government securities. If the securities are purchased from the public, this action has the potential to increase bank lending by a maximum of:
1. \$4 billion, but only by \$1 billion if the securities are purchased directly from commercial banks.
2. \$4 billion, but by \$16 billion if the securities are purchased directly from commercial banks.
3. \$12 billion, and also by \$16 billion if the securities are purchased directly from commercial banks.
4. \$20 billion, and also by \$20 billion if the securities are purchased directly from commercial banks.

1. Raising the reserve ratio:
1. decreases the discount rate.
2. increases the discount rate.
3. decreases the amount of excess reserves banks must keep.
4. changes excess reserves to required reserves.

1. Lowering the discount rate has the effect of:
1. changing required into excess reserves.
2. changing excess into required reserves.
3. making it less expensive for commercial banks to borrow from the central banks.
4. forcing commercial banks to call in outstanding loans from their best customers.

1. 418.

Refer to the above graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point B on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output Qfin the economy, the Fed should:

1. decrease the interest rate from 10 to 8 percent.
2. decrease the interest rate from 8 to 6 percent.
3. decrease the interest rate from 6 to 4 percent.
4. increase investment spending from \$30 to \$60 billion.

1. The Federal Reserve can increase aggregate demand by:
1. increasing taxes.
2. raising the discount rate.
3. raising the reserve requirement.
4. buying government securities in the open market.

1. 420.

Refer to the above diagrams, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The interest rate in the economy is 4 percent. What should the Fed do to achieve a noninflationary full-employment level of real GDP (Qf)?

1. Increase the money supply from \$75 to \$150 billion.
2. Increase the money supply from \$150 to \$225 billion.
3. Decrease the money supply from \$225 to \$150 billion.
4. Make no change in the money supply.

1. 421.

Refer to the above diagrams, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. What is the desired level of investment spending in this economy if it is to achieve a noninflationary full-employment level of real GDP (Qf)?

A. \$50.

B. \$100.

C. \$150.

D. \$225.

1. The economy is experiencing a low rate of economic growth and the Fed decides to pursue an expansionary money policy. Which set of actions by the Fed would be most consistent with this policy?
1. Selling government securities and lowering the discount rate.
2. Selling government securities and raising the discount rate.
3. Buying government securities and raising the discount rate.
4. Buying government securities and lowering the discount rate.

1. Suppose the economy is at full employment with a high inflation rate. Which combination of government policies is most

likely to reduce the inflation rate?

1. Buy government securities in the open market and increase taxes.
2. Buy government securities in the open market and decrease taxes.
3. Sell government securities in the open market and increase government spending.
4. Sell government securities in the open market and decrease government spending.

1. In the chain of cause and effect between changes in the excess reserves of commercial banks and the resulting changes in output and employment in the economy:
1. a decrease in aggregate demand will increase output and employment.
2. a decrease in the rate of interest will decrease aggregate demand.
3. an increase in the money supply will decrease the rate of interest.
4. an increase in excess reserves will decrease the money supply.

1. What is one of the advantages of monetary policy over fiscal policy?
1. Its control over the size of federal budget deficits.
2. The quickness with which it can be used.
3. The opportunity for broad political influence.
4. Its domination of major sectors of the economy.

1. A Federal Reserve official notes: "A restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an expansion of the economy." The official has described the problem of the:
1. inflexibility of monetary policy tools.
2. change in taxes on monetary policy.
3. cyclical asymmetry of monetary policy.
4. political acceptability of monetary policy.

1. The Fed directly sets:
1. the prime interest rate but not the Federal funds rate.
2. both the Federal funds rate and the prime interest rate.
3. neither the Federal funds rate nor the prime interest rate.
4. the discount rate and the prime interest rate.

1. In 2010, the trade deficit in goods for the United States was about:
1. \$55 billion.
2. \$107 billion.
3. \$455 billion.
4. \$646 billion.

1. In 2010, U.S. exports of services        U.S. imports of services by about      .
1. exceeded; \$146B
2. fell short of; \$146B
3. exceeded; \$257B
4. fell short of; \$257B

1. The best example of a land-intensive commodity is:
1. tractors.
2. DVD players.
3. wheat.
4. chemicals.

1. According to the principle of comparative advantage, worldwide output and consumption levels will be highest when goods are produced in nations where:
1. domestic opportunity costs are lowest.
2. inflation rates are low.
3. the balance of trade is in a surplus position.
4. the exchange rate is falling.

1. The principal concept behind comparative advantage is that a nation should:
1. compare its volume of trade with other nations.
2. use tariffs and quotas to protect the production of vital products for the nation.
3. concentrate production on those products for which it has the lowest domestic opportunity cost.
4. make the nation self-sufficient in the production of essential goods and services.

1. The production possibilities for country X are either 6000 bushels of soybeans or 10,000 bushels of wheat. The production possibilities for country Y are 2000 bushels of soybeans and 4000 bushels of wheat. Which of the following is true?
1. Country Y should specialize in the growing of soybeans according to the principle of comparative advantage.
2. Country X is the least-cost producer of wheat.
3. The domestic opportunity cost of wheat production is lower in country Y.
4. The high cost producer of soybeans is country X.

1. The table below shows points from straight-line production possibilities schedules for two countries and indicates that:

1. country B can produce more meat than country A.
2. country A has a comparative advantage in producing meat.
3. country B can produce more houses than country A.
4. country A has a comparative advantage in producing houses and meat.

1. Suppose the world economy is composed of just two countries: A and B. Each can produce steel or chemicals but at different levels of economic efficiency. The domestic production possibilities curves are shown in the graphs below.

Refer to the above graphs and information. It can be seen that:

1. country B has a comparative advantage in chemicals.
2. country B can produce more of both goods than A.
3. country A has a comparative advantage in both commodities.
4. it is more costly in terms of resources to produce steel in country A.

1. 436.

Refer to the above diagrams. Assume that prior to specialization and trade Italy and Greece preferred points I and G on their production possibilities curves. As a result of complete specialization according to comparative advantage, the resulting gains in output will be:

1. 5X and 15Y.
2. 10Y.
3. 15X and 5Y.
4. 25X.

1. Answer the next question on the basis of the following production possibilities data for two countries, Alpha and Beta, which have populations of equal size.

Beta:

1. should specialize in catching fish and trade with Alpha for chips.
2. should specialize in producing chips and trade with Alpha for fish.
3. will not realize gains from specialization and trade.
4. will export both fish and chips to Alpha.

1. Answer the next question on the basis of the following table, which indicates the dollar price of libras, the currency used in the hypothetical nation of Libra. Assume that a system of freely floating exchange rates is in place.

The equilibrium dollar price of libras is:

A. \$5.

B. \$4.

C. \$3.

D. \$2.

1. If an American can purchase 40,000 British pounds for \$90,000, the dollar rate of exchange for the pound is: A. \$1.40.

B. \$2.00.

C. \$2.25.

D. \$6.00.

1. The following are hypothetical exchange rates: \$1 = 140 yen; 1 Swiss franc = \$.10. We can conclude that:
1. 1 yen = 280 Swiss francs.
2. 1 yen = 14 Swiss francs.
3. 1 Swiss franc = 28 yen.
4. 1 Swiss franc = 14 yen.

1. If the equilibrium exchange rate changes so that fewer dollars are needed to buy a South Korean won, then:
1. Americans will buy fewer Korean goods and services.
2. the won has appreciated in value.
3. fewer U.S. goods and services will be demanded by the South Koreans.
4. the dollar has depreciated in value.

1. The U.S. demand for British pounds is:
1. downsloping because a higher dollar price of pounds means British goods are cheaper to Americans.
2. downsloping because a lower dollar price of pounds means British goods are more expensive to Americans.
3. upsloping because a lower dollar price of pounds means British goods are cheaper to Americans.
4. downsloping because a lower dollar price of pounds means British goods are cheaper to Americans.

1. The following diagram is a flexible exchange market for foreign currency:

Other things equal, a rightward shift of the demand curve would:

1. depreciate the dollar.
2. appreciate the dollar.
3. reduce the equilibrium quantity of euros.
4. depreciate the euro.

1. A protective tariff will:
1. increase the sales of foreign exporters.
2. increase the price and sales of domestic producers.
3. increase the welfare of domestic consumers.
4. create an efficiency gain in the domestic economy.

1. Which of the following arguments comes closest to constituting a legitimate economic exception to the case for free trade?
1. The increase-domestic-employment argument
2. The cheap-foreign-labor argument
3. The diversification-for-stability argument
4. The infant-industry argument

1. As used in strategic trade policy, tariffs are a variation of the:
1. military self-sufficiency argument for tariffs.
2. increased-domestic-employment argument for tariffs.
3. diversification-for-stability argument for tariffs.
4. infant-industry argument for tariffs.

1. Dumping is the sale of a product in a foreign market:
1. at a price below its domestic price or cost of production.
2. that does not meet the quality standards in the domestic market.
3. and is the principal means used to enforce nontariff barriers.
4. and is encouraged by voluntary export restraints.

1. Which is a likely result of imposing tariffs to increase domestic employment?
1. A decrease in consumer prices
2. A decrease in the tariff rates of foreign nations
3. An increase in the number of jobs
4. An increase in the possibility of retaliatory tariffs

1. Which is not commonly offered as a reason to support protectionism and abandon free trade?
1. Maintaining military self-sufficiency
2. Increasing domestic employment
3. Allowing infant industries to mature and become competitive
4. Promoting specialization and increasing worldwide production levels

1. The bulk of U.S. exports and imports are with developing nations. True False