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1. If a certain combination of goods or services lies outside the production possibilities curvecombination of goods or services lies outside the production possibilities curve of an economy, which of the following is truetrue.

(a) Effective trade barriers have reduced foreign imports into the economy.

(b) New technology is being used in production.

(c) Resources are not available to achieve that combination of goods/services.

(d) resources are not being used efficiently to achieve that combination of goods or services.

(e) Resources are being used at a more rapid rate then they were in the past.

2. Which of the following groups would most likely gain from unanticipated inflationgain from unanticipated inflation?

(a) Landlords who own apartments in cities with rent controls.

(b) Individuals who have fixed retirement incomes.

(c) Individuals who earn high incomes

(d) Individuals who have borrowed money at fixed interest rates

(e) Banks that have loaned all excess reserves at a fixed interest rate.

3. With a constant money supply, if the demand for money decreases, the equilibrium interest equilibrium interest rate rate and quantity of money quantity of money will change in which of the following ways?

Interest Rate Quantity of Money

(a) Increase Decrease

(b) Increase Not change

(c) Decrease Decrease

(d) Decrease Increase

(e) Decrease Not change

BorrowersBorrowers borrowed borrowed ““dear” money & paid dear” money & paid back “cheaper” money.back “cheaper” money.

Real GDPReal GDP4. According to the graph above, an increase in AS will most likely cause income and cause income and

employment to changeemployment to change in which of the following ways?

Income EmploymentEmployment(a) Decrease Decrease (b) Decrease Increase

(c) No change Increase(d) Increase Decrease

(e) Increase Increase

5. If the exchange rate between the U.S. dollar and the British pound changed from $2 per one $2 per one pound to $3 per one poundpound to $3 per one pound, and domestic prices in both countries stayed the same, then the U.S. dollar would

(a) depreciate, making U.S. imports from Britain more expensive (b) depreciate, making U.S. imports from Britain cheaper (c) appreciate, making U.S. imports from Britain more expensive (d) appreciate, making U.S. imports from Britain cheaper (e) purchase 3 times more British goods than before the change occurred

ADAD ASASPLPL

ASAS

PLPL11PLPL22

YY11 YY22

EE11

EE22

6. If an economy is operating with significant unemployment, an increase in which of the following will most likely cause employment to increase and the interest rate to decreasecause employment to increase and the interest rate to decrease?

(a) Purchases of government bonds by the central bank

(b) Transfer payments

(c) Reserve requirements

(d) Government expenditures

(e) Investment in basic infrastructure

7. An increase in which of the following is most likely to promote economic growthpromote economic growth?

(a) Consumption spending (d) The trade deficit

(b) Investment tax credits (e) Real interest rates

(c) The natural rate of unemployment

8. An appropriate fiscal policyappropriate fiscal policy to combat a recessionrecession would be to increase which of the following?

(a) Interest rates (d) Government spending

(b) The money supply (e) The sale of government bonds

(c) Taxes

9. The concept of opportunity costopportunity cost would no longer be relevant if

(a) poverty in an economy no longer existed

(b) the supply of all resources were unlimited

(c) resources were allocated efficiently

(d) real wages were flexible

(e) all current incomes were invested in technological research

Fed “buying” bonds means “bigger” supply of money andFed “buying” bonds means “bigger” supply of money andlower interest rates. The lower interestlower interest rates. The lower interest rates lead to more rates lead to moreconsumption and investment and increase employment.consumption and investment and increase employment.

Economic growth is increased with moreEconomic growth is increased with morereal capital equipment to produce things.real capital equipment to produce things.Investment tax credits result in more realInvestment tax credits result in more realcapital equipment.capital equipment.

10. An appreciation of the U.S. dollarappreciation of the U.S. dollar on the foreign exchange market could be caused by a decrease in which of the following?

(a) U.S. interest rates

(b) The U.S. consumer price index

(c) Demand for the dollar by U.S. residents

(d) Exports from the U.S.

(e) The tariff on goods imported into the U.S.

11. Which of the following would indicate that economic growth has occurredeconomic growth has occurred?

(a) The production possibilities curve shifts to the left.

(b) The long-run aggregate supply curve shifts to the right.

(c) The AD curve shifts to the right.

(d) The Phillips curve becomes flatter.

(e) Business cycles no longer exist.

12. Which of the following is most likely to occur if the Federal Reserve engages in Federal Reserve engages in open market operations to reduce inflationopen market operations to reduce inflation?

(a) A decrease in interest rates

(b) A decrease in reserves in the banking system

(c) A decrease in the government deficit

(d) An increase in the money supply

(e) An increase in exports

Lower prices increase demand for U.S.Lower prices increase demand for U.S.exports and appreciate the dollar.exports and appreciate the dollar.

Economic growth means more real Economic growth means more real capital. More land, labor, and capitalcapital. More land, labor, and capitalshift out the PPC and LRAS curve. shift out the PPC and LRAS curve.

The Fed would “sell” bonds to the banks,The Fed would “sell” bonds to the banks,resulting in a “smaller” MS, or resulting in a “smaller” MS, or decreasedecreasein reserves in the banking systemin reserves in the banking system..

13. Which Fed action can shift the AD curve to the leftFed action can shift the AD curve to the left?

(a) Lowering the federal funds rate

(b) Lowering income taxes

(c) Lowering reserve requirements

(d) Raising the discount rate

(e) Raising government spending on national defense

14. Crowding outCrowding out refers to the decrease in

(a) national output caused by higher taxes

(b) domestic production caused by increased imports

(c) private investment due to increased borrowing by the government

(d) employment caused by higher inflation

(e) exports caused by an appreciating currency of a country

15. If the real interest rate in the U.S. increasesreal interest rate in the U.S. increases relative to that of the rest of the world, capital should flow

(a) into the U.S. and the dollar will depreciate

(b) into the U.S. and the dollar will appreciate

(c) out of the U.S. and the dollar will depreciate

(d) out of the U.S. and the dollar will appreciate

(e) out of the U.S. and the value of the dollar will not change

Higher U.S. interest rates attract moreHigher U.S. interest rates attract moredemand for our financial capital [CDsdemand for our financial capital [CDsand bonds] & financial flows of and bonds] & financial flows of foreign money will flow in to the U.S.foreign money will flow in to the U.S.to purchase these. to purchase these.

16. Which of the following policy choicesfollowing policy choices represents a combination of fiscal and monetary represents a combination of fiscal and monetary policies designed to bring the economy out of a recessionpolicies designed to bring the economy out of a recession?

(a) Decreasing both taxes and the money supply

(b) Increasing both taxes and the money supply

(c) Increasing government spending and decreasing the federal funds rate

(d) Increasing both taxes and the discount rate

(e) Engaging in deficit spending and government bond sales

17. Which of the following will be counted as counted as unemployedunemployed by the U.S. Bureau of Labor Statistics?

(a) Persons who quit their previous jobs to stay at home to care for sick parents

(b) Persons who were laid off from their previous jobs and have not applied for a job in two years

(c) Persons who were fired from their previous jobs and are actively applying for work

(d) Persons who have given up looking for jobs after long searches

(e) Persons who quit their previous jobs to start their own business

18. Which of the following would occur if the Fed implemented contractionary monetary policycontractionary monetary policy?

(a) Interest rates increase, investment & consumption spending decrease, AD decreases, and output and prices decrease.

(b) Interest rates increase, investment & consumption spending decrease, AD increases, & output and prices decrease.

(c) Interest rates increase, investment and consumption spending increase, AD decreases, & output and prices decrease.

(d) Interest rates decrease, investment and consumption spending decrease, AD decrease, & output and prices decline.

(e) Interest rates decrease, investment and consumption spending decrease, AD decreases, & output and prices increase.

19. Suppose that autonomous consumption is $400autonomous consumption is $400 and that the MPC is 0.8MPC is 0.8.

disposable income increases by $1,200disposable income increases by $1,200, consumption spendingconsumption spending will increase by

(a) $1,600 (d) $960

(b) $1,360 (e) $400

(c) $1,200

20. In an economy in which all prices, including wages are completely flexiblewages are completely flexible, an increase in labor productivity will result in which of the following changes in changes in output and real wagesoutput and real wages?

OutputOutput Real WagesReal Wages

(a) Increase Increase

(b) Increase Decrease

(c) Decrease No change

(d) Decrease Increase

(e) Decrease Decrease

21. When the average price level increases by 10%price level increases by 10% in a given year, which of the following must increase by 10% for real output to remain constantmust increase by 10% for real output to remain constant?

(a) Real national income

(b) Nominal national income

(c) The international value of the currency

(d) Real interest rates

(e) Nominal interest rate

With an MPC of 0.8, the change in income of $1,200 will With an MPC of 0.8, the change in income of $1,200 will result in 80% of it being consumed. 80% of $1,200 is result in 80% of it being consumed. 80% of $1,200 is $960$960..

The increase in productivity will shift the SRASThe increase in productivity will shift the SRAScurve to the right which would curve to the right which would increase outputincrease output..The increase in SRAS would also lower PL whichThe increase in SRAS would also lower PL whichwould increase the real value of the dollar, would increase the real value of the dollar, causing an causing an increase in real wagesincrease in real wages..

22. Which of the following will occur in a competitive market when the price of a good is less than price of a good is less than the equilibriumthe equilibrium?

(a) Price will decrease to eliminate the surplus and restore equilibrium.

(b) Price will decrease to eliminate the shortage and restore equilibrium.

(c) Price will increase to eliminate the surplus and restore equilibrium.

(d) Price will increase to eliminate the shortage and restore equilibrium.

(e) Price will remain constant, because supply will increase to eliminate the shortage.

23. A short-run Phillipsshort-run Phillips curve shows an inverse relationship between

(a) interest rates and borrowing (d) prices & QD

(b) inflation & unemployment (e) inputs & outputs

(c) income and consumption

24. Which of the following can be expected to cause an increase in GDPcause an increase in GDP in the short runin the short run?

(a) An increase in the tax rate

(b) An increase in the interest rate

(c) Equal increases in both imports and exports

(d) Equal increases in both taxes and government expenditures

(e) Equal decreases in both investment and government expenditures

25. If the federal government reduces its budget deficitfederal government reduces its budget deficit when the economy is close to full employment, which of the following will most likely result?

(a) Inflation will increase. (b) Tax revenues will increase.

(c) Interest rates will decrease. (d) Unemployment will decrease.

(E) The international value of the dollar will increase.

The “balanced budget multiplier” is in effect The “balanced budget multiplier” is in effect here where the increase in G is stronger than here where the increase in G is stronger than the increase in “T” due to a larger multiplier.the increase in “T” due to a larger multiplier.

Reducing the deficit means Reducing the deficit means less borrowing and lessless borrowing and lessdemand in the LFM, which demand in the LFM, which would would lower interest rateslower interest rates..

26. Which of the following will cause the U.S. dollar to depreciatecause the U.S. dollar to depreciate relative to the Euro?

(a) An increase in household income in the U.S.

(b) An increase in interest rates in the U.S.

(c) An increase in household income in Europe

(d) A decrease in interest rates in Europe

(e) A decrease in price level in the U.S.

27. StagflationStagflation is most likely to be caused by

(a) an increase in AD (d) a decrease in AS

(b) a decrease in AD (e) a large increase in the MS

(c) an increase in AS

28. Assume that the nominal interest rate is 10%.nominal interest rate is 10%. If the expected inflation rate is 5%, inflation rate is 5%, the real interest ratereal interest rate is

(a) 0.5% (b) 2% (c) 5% (d) 10% (e) 15%

29. Which of the following will lead to an increase in the U.S. GDPincrease in the U.S. GDP?

(a) More individuals prepare their own personal income tax forms.

(b) Some citizens begin working abroad as computer programmers.

(c) The government prohibits the sale of alcoholic beverages

(d) Foreign companies build new assembly plants in the U.S.

(e) Long-run AS curve to shift to the left

(f) Long-run AS curve to the right

Increasing HH income in the U.S. results Increasing HH income in the U.S. results in more demand for foreign goods which in more demand for foreign goods which appreciates that currency and depreciatesappreciates that currency and depreciatesthe dollar.the dollar.

30. An advance in technologyadvance in technology will cause the

a. AD curve to shift to the right

b. AD curve to shift to the left

c. Short-run AS curve to shift to the left

d. Long run AS curve to shift to the left

e. Long-run AS curve to shift to the right

31. Suppose that the FedFed buys $400 billion worth of government securities from buys $400 billion worth of government securities from thethe PublicPublic. With a RR of 20%, the maximum increase in the money supply is

a. $1,600 billion

b. $1,800 billion

c. $2,000 billion

d. $2,200 billion

e. $2,400 billion

The $400 is new money in the banking system. The The $400 is new money in the banking system. The

MMM of 5 will increase MS to M of 5 will increase MS to $2,000$2,000. [5 x $400 = $2,000.. [5 x $400 = $2,000.

32. Before specialization & trade, the domestic

opportunity cost of producing 1 ton of grain in 1 ton of grain in

Alpha and in Beta is which of the followingAlpha and in Beta is which of the following?

AlphaAlpha BetaBeta

a. 1 ton of steel 1 ton of steel

b. 1 ton of steel 2 tons of steel

c. 2 tons of steel 1 ton of steel

d. 1 ton of steel 0.5 tons of steel

e. 0.33 tons of steel 1.5 tons of steel

Gra

in in

ton

s

Beta

20

10

30

30 Alpha

33. The theory of comparative comparative advantageadvantage implies that AlphaAlpha wouldfind it advantageous to a. export grain and import steel b. export steel and import grain c. export both grain and steel and import nothing d. import both grain and steel and export nothing e. trade 1 ton of grain for 0.5 ton of steel

34. At what real exchange ratio, also referred to as the terms of tradeterms of trade, between grain (G) and steel (S) would both Alpha and Beta find it mutuallyadvantageous to specialize and trade. a. 1 G = 3.0 S b. 1 G = 1.5 S c. 1 G = 1.0 S d. 1 G = 0.5 S e. There is no real exchange ratiothat would enable both countries tobenefit, since Alpha has an absolute advantage in both goods.

Steel in tons

For questions 32-34For questions 32-34 Beta’s DCC1 G = 2 S

1/2 G = 1 SAlpha’s DCC

1 G = 1 S

Terms of Trade1 G = 1.5 S

Real GDPReal GDP35. According to the graph abovegraph above, which of the following is true about the long-run long-run

equilibriumequilibrium of the economy depicted? a. The economy is in long-run equilibrium. b. The AD curve will shift to the left to restore long-run equilibrium. c. The long-run AS curve will shift to the right to restore long-run equilibrium. d. Without a fiscal policy stimulus, the economy will remain in a recession. e. As wages increase, the SRAS curve will shift to left to restore long-run equilibrium.

36. An increase in personal income taxesincrease in personal income taxes will most likely cause AD and AS to cause AD and AS to change in which of the following ways in the short runchange in which of the following ways in the short run?Aggregate DemandAggregate Demand Aggregate SupplyAggregate Supplya. Not change Decreaseb. Not change Increase

c. Decrease Not changed. Decrease Increasee. Increase Not change

ADAD SRASSRASPLPL

SRASSRASLRASLRAS

YYFF

An increase in personal income taxes will makeAn increase in personal income taxes will makeconsumers poorer which makes them cut backconsumers poorer which makes them cut backon consumption, which on consumption, which decreases ADdecreases AD. Personal . Personal income taxes are income taxes are not a determinant of the ASnot a determinant of the AS curve but a change in business taxes would be.curve but a change in business taxes would be.

37. Which type of unemployment would increase if workers lost their jobs workers lost their jobs because of a recessionbecause of a recession?

a. Cyclical b. Frictional c. Seasonal d. Search e. Structural

38. Which of the following is true about the marginal propensity to consumemarginal propensity to consume?

a. It is the percentage of total income that is spent on consumption.

b. It determines the size of the simple spending multiplier.

c. It increases as incomes increase because increases in income cause people to spend more.

d. It is the same as the m oney multiplier.

e. It is equal to the average propensity to consume for people with low incomes.

39. When an economy is operating below the full-employment levelbelow the full-employment level of output, an appropriate monetary policyappropriate monetary policy would be to increase which of the following?

a. The discount rate

b. The required reserve ratio

c. The international value of the dollar

d. Open market purchases of government bonds

e. Government expenditure on goods and services

40. Assume that the economy is at full employmentat full employment. Policymakers wish to maintain maintain the price level but want to encourage greater investmentthe price level but want to encourage greater investment. Which of the following combinations of monetary and fiscal policiescombinations of monetary and fiscal policies would best achieve this goal?

Monetary PolicyMonetary Policy Fiscal PolicyFiscal Policy

a. No change Contractionary

b. Expansionary No change

c. Expansionary Contractionary

d. Expansionary Expansionary

e. Contractionary Expansionary

41. In one year, spendingspending on consumption, investment, and government purchases was was equal to 103% of a country’s GDPequal to 103% of a country’s GDP. This would be possible only if

a. the money supply increased

b. net exports were positive

c. net exports were negative

d. the government ran a budget surplus

e. the government had a balanced budget

ExpansionaryExpansionary monetary policy would result monetary policy would result in lower interest rates, causing more in lower interest rates, causing more investment in real capital. To keep prices investment in real capital. To keep prices from going up, policymakers could cut G or from going up, policymakers could cut G or raise taxes [raise taxes [contractionarycontractionary] to prevent this.] to prevent this.

We consumed more imports than we sold We consumed more imports than we sold exports, which would make our spendingexports, which would make our spendinggreater than our GDP.greater than our GDP.

42. When firms restructure their operations to decrease production costsdecrease production costs, the ASAS curvecurve, the price levelprice level, and real outputreal output will change in which of the following ways?

AS CurveAS Curve Price LevelPrice Level Real OutputReal Output

a. Shift to the left Increase Increase

b. Shift to the left Increase No change

c. Shift to the right Increase Increase

d. Shift to the right Decrease Increase

e. Shift to the right Decrease Decrease

43. An economy is in a short-run equilibrium at a level of output that is less than full-output that is less than full-employmentemployment output. If there were no fiscal or monetary policy interventionsno fiscal or monetary policy interventions, which of the following changes in output and the price levelchanges in output and the price level would occur in the long run?

OutputOutput Price LevelPrice Levela. Increase Decrease

b. Increase Increase

c. Decrease Decrease

d. Decrease Increase

e. No change No change

Lower production costs meansLower production costs meansmore profits and a shift of themore profits and a shift of theAS curve to the rightAS curve to the right. That . That results in results in lower PLlower PL and an and an increase in real outputincrease in real output..

With no intervention in this recession, the surplusesWith no intervention in this recession, the surpluseswould result in would result in lower priceslower prices. Workers would then. Workers would thenaccept lower wages. As more are hired back, accept lower wages. As more are hired back, outputoutputwould increasewould increase..

44. Assume that the world operates under a flexible exchange rate system. If the central bank of Mexico increases its MSMexico increases its MS but other countries do not change theirs, Mexico’s inflation rateMexico’s inflation rate and the international value of the Mexican pesovalue of the Mexican peso will most likely change in which of the following ways?

InternationalInternational

Inflation RateInflation Rate Value of the PesoValue of the Pesoa. Increase Appreciate

b. Increase Depreciate

c. Increase No change

d. Decrease Appreciate

e. Decrease Depreciate

45. The Fed decreases the federal funds rateFed decreases the federal funds rate by

a. decreasing the reserve requirement

b. decreasing the discount rate

c. increasing the discount rate

d. selling government bonds on the open market

e. buying government bonds on the open market

An increase in Mexico’s MS means “more pesosAn increase in Mexico’s MS means “more pesoschasing the same goods” as before, bringing onchasing the same goods” as before, bringing onhigher prices. This would decrease demand forhigher prices. This would decrease demand forMexico’s exports, depreciating the peso.Mexico’s exports, depreciating the peso.

The Fed “targets” the Fed FundsThe Fed “targets” the Fed FundsRate by buying & selling bonds.Rate by buying & selling bonds.““BuyingBuying” bonds means “bigger”” bonds means “bigger”supply of money and lower Fedsupply of money and lower FedFunds Rate.Funds Rate.

Labor Market Data for Country X (in millions of persons)Labor Market Data for Country X (in millions of persons)

Population – 180; Employed – 94; Population – 180; Employed – 94;

Unemployed – 6; Not in Labor Force – 80Unemployed – 6; Not in Labor Force – 80

46. Based on the information above, what is the unemployment rate for Country Xunemployment rate for Country X?

a. 3.3% b. 4.0% c. 6.0% d. 6.38% e. 7.5%

47.Suppose that the government decreases taxesdecreases taxes and at the same time the central bank decreases the discount ratedecreases the discount rate. The combined actions will result in

a. an increase in unemployment and a decrease in the interest rate

b. an increase in unemployment and an increase in the interest rate

c. an increase in the real GDP and a decrease in the interest rate

d. an increase in the real GDP and an increase in the interest rate

e. an increase in the real GDP and an indeterminant change in the interest rate

6/100 x 100 = 6%6/100 x 100 = 6%

Decreasing taxes would increase Decreasing taxes would increase CC, increase , increase ADAD and and real GDPreal GDP. Assuming a balanced . Assuming a balanced

budget before the decrease in budget before the decrease in TT means the means the GG would have to borrow, pushing up interest would have to borrow, pushing up interest rates. rates. Decreasing the discount rate would also lead to more real GDP but would result in a lowerDecreasing the discount rate would also lead to more real GDP but would result in a lowerinterest rate. With interest rates moving in opposite directions with the two policies, this interest rate. With interest rates moving in opposite directions with the two policies, this make them indeterminate.make them indeterminate.

48. In a closed economy with only lump-sum taxation, if the MPC is equal to 0.75MPC is equal to 0.75, a $70$70

billion increase in government spendingbillion increase in government spending could cause a maximum increasemaximum increase in output of

a. $52.5 billion b. $70 billion c. $122.5 billion d. $210 billion e. $280 billion

49. Which of the following is NOT a function of fiat moneyNOT a function of fiat money?

a. A standard of deferred payment d. A store of value

b. A unit of account e. A medium of exchange

c. A source of intrinsic value

4 x $70 = $2804 x $70 = $280

50. When an economy is at full employment, which of the following will most likely create demand-pull inflationdemand-pull inflation in the short run?

a. An increase in the discount rate d. A decrease in government spending

b. An increase in personal income taxes e. A decrease in the money supply

c. A decrease in the real interest rate

51. Under rational expectationsrational expectations an announced expansion in the money supplyannounced expansion in the money supply will change nominal and real gross domestic productsnominal and real gross domestic products (GDP) in which of the following ways?

Nominal GDPNominal GDP Real GDPReal GDP

a. Increase Increase

b. Increase Decrease

c. Increase No change

d. No change Decrease

e. No change No change

52. A decrease in labor productivitydecrease in labor productivity will shift the

a. AD curve to the right

b. AD curve to the left

c. LRAS curve to the right

d. SRAS curve to the right

e. SRAS curve to the left

RATEX implies that people “expect” moreRATEX implies that people “expect” moreinflation with the increase in the MS. They inflation with the increase in the MS. They Will negotiate higher raises with this in mind. Will negotiate higher raises with this in mind. Business profits will not increase so no moreBusiness profits will not increase so no moreworkers will be hired. So real GDP would notworkers will be hired. So real GDP would notchange, just nominal GDP. change, just nominal GDP.

Productivity is an AS Shifter so a decrease inProductivity is an AS Shifter so a decrease inlabor productivity results in having to hirelabor productivity results in having to hiremore workersmore workers and and cutting corporate profits, cutting corporate profits,therefore shifting the SRAS curve to the left.therefore shifting the SRAS curve to the left.

-20-20%%

$10$10$8$8

YYRR Y YRR Y*Y* YYII

SRASSRAS11

SRASSRAS22

ADAD11ADAD22

LRASLRAS

53. In the long run, if AD decreasesAD decreases, real GDP and the price level will changereal GDP and the price level will change in which of the following ways?Real GDPReal GDP Price LevelPrice Levela. Decrease Decrease

b. Decrease Increase c. No change Decrease d. Increase Decrease

e. No change Increase

54. Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal RR is 10%RR is 10%.. If Emilia deposits the $100 billEmilia deposits the $100 bill she received as a graduation gift from her grandfather into her checking account, the maximum increase in the total money supplyincrease in the total money supply will be

a. $10 b. $100 c. $900 d. $1,000 e. $1,100

The decrease in AD resulted in surpluses &The decrease in AD resulted in surpluses &caused prices to drop. Workers would now caused prices to drop. Workers would now accept lower accept lower wage increases which movedwage increases which movedthe SRAS curve right, increasing real GDP.the SRAS curve right, increasing real GDP.

Remember that currency is also MS. So, the $100 bill was MS whenRemember that currency is also MS. So, the $100 bill was MS whenthis began. When little Emilia deposited the $100, the compositionthis began. When little Emilia deposited the $100, the compositionof the MS didn’t increase. It just changed from currency to DD.of the MS didn’t increase. It just changed from currency to DD.Now, with the RR at 10%, $90 was loaned by the first bank and withNow, with the RR at 10%, $90 was loaned by the first bank and with

a a MMMM of 10, the MS of 10, the MS increased by $900increased by $900 more as the TMS eventually more as the TMS eventuallybecame $10,000.became $10,000.

55. Assuming fixed exchange rates, if Mexico’s rate of inflation increasesinflation increases relative to its trading partners, Mexico’s imports and exportsimports and exports will most likely change in which of the following ways?

ImportsImports ExportsExports

a. Decrease Decrease

b. Decrease Increase

c. Increase Decrease

d. Increase Increase

e. No change No change

56. Which of the following household purchaseshousehold purchases will be counted as part of gross counted as part of gross private investmentprivate investment in a country’s GDPGDP?

a. Government bonds

b. Shares of a company stock

c. Corporate bonds

d. A new car for personal use

e. A newly constructed home

The first three are purely financial transactions. The purchase of the new carThe first three are purely financial transactions. The purchase of the new carwould be counted as consumption, not investment.would be counted as consumption, not investment.

A higher price level in Mexico will decrease demand forA higher price level in Mexico will decrease demand fortheir products, depreciating the peso. However, thetheir products, depreciating the peso. However, theincrease in the peso currency price relative to other increase in the peso currency price relative to other countries makes their goods cheaper so their importscountries makes their goods cheaper so their importsincrease while their exports decrease as they have toincrease while their exports decrease as they have topay more pesos .pay more pesos .

57. An increase in ADincrease in AD will cause which of the following?

a. A movement along a given short-run Phillips curve

b. The long-run Phillips curve to become horizontal

c. The short-run Phillips curve to shift to the left

d. The long-run Phillips curve to shift to the right

d. The long-run Phillips curve to shift to the left

58. Which of the following would cause the short-run AS curve to shift to the rightcause the short-run AS curve to shift to the right?

a. An increase in the wage rate

b. An increase in the interest rate

c. An increase in the natural rate of unemployment

d. A decrease in the capital stock

e. A decrease in the expected price level

If PL is expected to decrease, then workers will not demand as large of wageIf PL is expected to decrease, then workers will not demand as large of wageincreases as in the past. With lower resource cost [wages] anticipated, firmsincreases as in the past. With lower resource cost [wages] anticipated, firmswill hire more workers and SRAS will shift to the right.will hire more workers and SRAS will shift to the right.

An increase in AD would move causeAn increase in AD would move causea movement up and to the left ona movement up and to the left on the theSRPC. Shifts of the SRPC are causedSRPC. Shifts of the SRPC are causedby supply shocks, which we didn’tby supply shocks, which we didn’thave here.have here.

59. A decrease in business taxesdecrease in business taxes would lead to an increase in national income by increasing which of the following?

a. The money supply

b. Unemployment

c. AD only

d. AS only

e. Both AD and AS

60. In an open economy, an increase in government budget deficitincrease in government budget deficit tends to cause the international value of a country’s currency and its trade deficit to change in which of the following ways?

VValue of alue of CCurrencyurrency Trade DeficitTrade Deficita. Appreciate Become smaller

b. Appreciate Become larger

c. Depreciate Become smaller

d. Depreciate Become larger

e. Not change Not change

Business taxes are determinants of both AD and AS. The decreaseBusiness taxes are determinants of both AD and AS. The decreasein business taxes means they have more profits and will investin business taxes means they have more profits and will investmore, more, increasing ADincreasing AD. . As far as the legal-institutional environment with the government,As far as the legal-institutional environment with the government,it is more favorably so that will result in an it is more favorably so that will result in an increase in ASincrease in AS..

The budget deficit means the government is borrowing more, which pushes up the interestThe budget deficit means the government is borrowing more, which pushes up the interestrate. The higher interest rate attracts more foreign investors, increasing demand for therate. The higher interest rate attracts more foreign investors, increasing demand for thedollar and appreciating the dollar. The stronger dollar makes our exports more expensive dollar and appreciating the dollar. The stronger dollar makes our exports more expensive and imports cheaper, therefore increasing the trade deficit.and imports cheaper, therefore increasing the trade deficit.