Macroeconomics

Practice Exam #2

1 If a country’s economy is currently operating 4 A decrease in which of the following is most
inside of its production possibilities curve, likely to increase long run economic growth?
what must be true? (A) Federal student loan programs
(A) The country’s (B) The money supply
resources are fully employed. (C) Interest rates
(B) The country’s resources are fully (D) The marginal propensity to save
employed, but the labor force participation (E) Personal income tax rates
rate is less than 100%.
(C) The country’s resources are not fully 5 If disposable income is $5,000 billion, personal
employed. taxes are $1,000 billion, and the marginal
(D) The country’s natural and capital propensity to consume (MPC) is 0.8, what is
resources are not fully employed, but personal income equal to?
human resources are fully employed. (A) $6,000 billion
(E) Specialization and trade would not benefit (B) $5,000 billion
the society. (C) $4,800 billion
2 When the U.S. Federal Reserve engages in (D) $3,200 billion
open market operations it is (E) $2,200 billion
(A) increasing or decreasing the discount rate
2015 2016 2016
(B) buying or selling government securities
Prices Output Prices
(C) increasing or decreasing reserve Pears $1.50 4 $2.50
requirements for member Apples $2 5 $2
financial institutions Oranges $8 3 $10
(D) buying or selling stocks 6
(E) engaging in check clearing operations for Given the production and price information
commercial banks listed in the table above, and assuming 2015
is the base year, calculate the Real Gross
3 A leftward shift in the short-run aggregate Domestic Product (RGDP) for 2016 and the
supply curve could be the result of GDP deflator for 2016.
(A) an increase in capital stock RGDP Deflator
(B) a central bank sale of government (A) $ 24 60
securities (B) $ 25 100
(C) tax credits for capital investments (C) $ 40 125
(D) a decrease in personal income taxes (D) $ 50 150
(E) an increase in input prices (E) $ 60 175

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7 In the equation of exchange, according to the 11 Assuming the country is experiencing a
quantity theory of money, the quantity of recessionary gap, which of the following
money and velocity of money are directly actions would the central bank most likely
related to engage in?
(A) the value of production (A) Sell bonds in open market operations and
(B) the nominal interest rate decrease personal income taxes
(C) the unemployment rate (B) Increase the discount rate and decrease
(D) the reserve requirement the reserve requirement
(E) the rate of capital inflow (C) Sell bonds in open market operations and
increase personal income taxes
8 Which of the following would most likely (D) Sell bonds in open market operations and
result in cost-push inflation? increase the reserve requirement
(A) A substanitial decrease in consumption (E) Buy bonds in open market operations
expenditures and decrease the discount rate
(B) A signifcant increase in union wages
(C) Contractionary fiscal policy 12 Which of the following will be the result of a
(D) Expansionary monetary policy decrease in input prices in the short run?
(E) An appreciation of the country’s Aggregate Aggregate
currency Demand Curve Supply Curve
(A) Shift to the left Shift to the left
9 If society experiences an increase in human (B) Shift to the right Shift to the left
capital but nominal wages remain the same, (C) Shift to the left No change
what will happen to real gross domestic (D) Shift to the right Shift to the right
product (RGDP) and real wages? (E) No change Shift to the right
RGDP Real Wages
(A) Increase Increase 13 Assume the economy of the nation of
(B) Increase Decrease Cliffland is operating short of full
(C) Indeterminate Increase employment output and economists agree that
(D) Decrease Decrease it would take $400 million dollars of
(E) Decrease Increase additional spending to bring the economy to
long run equilibrium. If the marginal
10 Scarcity is the condition in which propensity to consume is 0.75, what is the
(A) supplies of the four factors of production least amount of government spending that
are relatively unlimited could bring the nation back to long run
(B) capital stock does not depreciate equilibrium?
(C) structural unemployment means the labor (A) $50 million
force is not fully utilized (B) $80 million
(D) human wants are beyond society’s (C) $100 million
production (D) $200 million
(E) population and labor force are (E) $400 million
experiencing negative growth possibilities

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Interest Rate
14 Which of the following is true regarding the
consumer price index (CPI) i2
(A) The CPI measures the amount of imports
purchased by domestic consumers
(B) The CPI measures prices of all consumer i1
goods and services produced in the economy
(C) The CPI measures prices of selected raw Demand for
materials purchased by businesses Money
(D) The CPI measures prices of a specific
market basket of goods and services Q2 Q1 Quantity of Money
purchased by consumers
(E) The CPI measures changes in consumers’ 16 Which of the following would cause the shift
willingness to pay at different levels of illustrated in the money market graph above?
inflation (A) A decrease in the discount rate
(B) A decrease in the required reserve ratio
15 A rise in a nation’s real interest rate might be (C) A depreciating dollar causing an increase
fueled by which of the following events? in the supply of dollars in foreign
(A) An increase in taxes on consumer goods exchange markets
(B) A decrease in government spending (D) The Federal Reserve selling bonds on the
(C) A purchase of government bonds by the open market
country’s central bank (E) An increase in taxes on capital goods
(D) A perceived increase in the country’s
political and economic turmoil 17 Given a required reserve ratio of 0.10,
(E) An increase in the marginal propensity to suppose that Paula’s bank has $50,000 in
save on the part of the country’s citizens demand deposits and has loaned out all of its
excess reserves. If Paula withdraws $2,000
15 Skip this question. Thank you for supporting from the bank how much does her bank need
ACDC Econ and buying the Ultimate Review to increase its reserves to meet the reserve
Packet. Which of the following is the next requirement?
course of action if someone posted this online (A) $1,000
or gave it to you for free? (B) $1,800
(A) Explain to that person that preventing (C) $2,000
entrepreneurs form earning profit (D) $3,000
decreases their incentive to innovate (E) $5,000
(B) Remind them that no one wants to date
people that have no sense of right or 18 Which of the following is the best definition
wrong. of disposable income?
(C) Tell them that they are stealing from Mr. (A) Income minus autonomous consumption
Clifford (B) Nominal GDP minus net exports
(D) Ask them politely to do the right thing (C) Income minus tax liabilities
(E) All of the above (D) Income plus consumers spending
(E) Income minus savings

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19 Which of the following is an example of 23 Which of the following changes in the short
frictional unemployment? run aggregate supply curve and the aggregate
(A) A recent graduate, looking for their first demand curve would cause an increase in real
job. gross domestic product without a
(B) A full-time laborer involuntarily switches corresponding increase in the price level?
to part-time Short Run Aggregate
(C) A tradesperson is laid off as the economy Aggregate Supply Demand
moves into a recessionary gap (A) Decrease Increase
(D) A worker is replaced by computers at the (B) No Change Increase
office. (C) Increase No Change
(E) An older employee who takes voluntary (D) No Change Decrease
retirement (E) Decrease No Change

20 Which of the following characteristics best 24 If a country imposes a tariff on a product

defines the free market system? which they produce as well as import, which of
(A) Scarcity and limited resources the following will most likely occur?
(B) Private property and competition (A) Employment in the domestic production of
(C) Private production of public goods the product will increase
(D) Individuals that are motivated by self- (B) Employment in the foreign production of
interest the product will increase
(E) A privately funded financial sector (C) The domestic price of the product will
decrease
21 If a nation’s nominal gross domestic product (D) Domestic consumption of the product will
(NGDP) increased by 6%, while its real rate increase
of GDP growth (RGDP) was 2%, which of (E) Domestic production of the product will
the following must be true? decrease
(A) The GDP deflator increased by 4%
(B) The GDP deflator decreased by 4% 25 A country’s national debt is defined as
(C) The inflation rate was 8% (A) the amount of money owed by the
(D) The inflation rate was 3% government to foreign nations.
(E) The GDP deflator increased by 3% (B) the amount of money owed to holders of
government securities.
(C) the amount of money owed by a nation’s
22 Workers who have lost their jobs because of citizens to the national government.
technological improvements in the economy (D) the amount of currency in circulation that
are said to be is not backed by gold.
(A) cyclically unemployed. (E) the amount of money owed by that nation
(B) discouraged workers. to its trading partners.
(C) frictionally unemployed.
(D) structurally unemployed.
(E) underemployed.

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26 Which of the following would be most likely 30 Good X and Good Y are substitutes. An
to cause the long run output of an economy to increase in the price of Good Y will result in
decrease ? which of the following?
(A) Negative net capital stock investment (A) A decrease in the price of Good X
(B) An increase in the labor force participation (B) A decrease in the supply of Good X
rate (C) A decrease in the supply of Good Y
(C) The increase in nominal gross domestic (D) An increase in the demand for Good X
product is greater than the increase in real (E) An increase in both the demand and the
gross domestic product supply of Good X
(D) An increase in personal income taxes
(E) An increase in the unemployment rate 31 Which of the following could decrease to
cause the demand for money to fall?
27 Fiscal policy measures that work counter- (A) Long run aggregate supply
cyclically without overt government action (B) Short run aggregate supply
are known as (C) Interest rates
(A) non-discretionary fiscal policies (D) The money supply
(B) balanced budget multipliers (E) Price level
(C) discretionary fiscal policies
(D) open Market operations
LRAS SRAS
(E) self-correcting mechanisms for

Price Level
recessionary and inflationary gaps

28 Expansionary fiscal policy will have what

effect on the short-run Phillips curve?
(A) a decrease in both unemployment and
inflation
(B) an increase in both unemployment and
inflation AD
(C) an increase in unemployment but no
change in inflation YF RGDP
(D) a decrease in inflation, coupled with an 32 In the graph above, economic growth could
increase in unemployment be illustrated by a
(E) an increase in inflation, coupled with a (A) leftward shift of the aggregate demand
decrease in unemployment curve
(B) rightward shift of the aggregate demand
29 If James deposits $1,000 cash in his checking curve
account and the required reserve ratio is 0.10, (C) rightward shift of the short-run aggregate
what is the maximum resulting change in the supply curve
money supply from his deposit? (D) leftward shift of the long-run aggregate
(A) $900 supply curve
(B) $1,000 (E) rightward shift of the long-run aggregate
(C) $4,500 supply curve
(D) $9,000
(E) $10,000

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33 Crowding out is when government 37 If the Federal Reserve engages in open
borrowing limits private investment by market operations to buy government
(A) decreasing the real interest rate securities what will be the resulting change in
(B) increasing the real interest rate the money supply, interest rates and bond
(C) decreasing the supply of money prices?
(D) increasing the supply of money Money Interest Bond
(E) decreasing wages Suppy Rates Prices
(A) Increase Increase Increase
34 If a nation imports fewer goods and services (B) Increase Decrease Increase
than it exports, what must be true of that (C) Decrease Increase No Change
nation’s balance of payments accounts? (D) Decrease Increase Decrease
(A) The trade balance is in surplus (E) Decrease Decrease Decrease
(B) The financial account balance is in
38 If the country of Alpha is experiencing an
surplus
inflationary gap, which of the following
(C) The financial account balance is in monetary and fiscal policy combinations is
deficit most likely to move the nation toward long
(D) The current account balance is in run equilibrium?
surplus Monetary Policy Fiscal Policy
(E)The current account balance is in deficit (A) Buy securities on Decrease taxes
the open market
35 Full employment takes place when (B) Sell securities on Decrease spending
(A) the employment rate is equal to one- the open market
hundred percent. (C) Decrease the Increase taxes
(B) the economy is experiencing structural reserve requirement
and cyclical unemployment only. (D) Buy securities on Increase taxes
(C) the economy is experiencing structural the open market
unemployment only. (E) Decrease spending Increase Reserve
(D) the economy is experiencing structural Requirement
and frictional unemployment only.
(E) the unemployment rate is equal to zero 39 When Daniel purchased his house, he took
percent. out a 30 year, fixed-rate mortgage loan for
8%. At the time inflation was expected to be
36 Which of the following would cause a 4%. If the actual inflation rate turned out to
nation’s real output level at full employment be 5% who benefited from this unexpected
to decrease? change and what was the real interest rate?
(A) New technology that enhances labor Who benefited Real Interest Rate
productivity (A) The Bank 8%
(B) A sustained increase in resource costs (B) The Bank 4%
(C) An increase in net investment in capital (C) Neither 3%
stock (D) Daniel 4%
(D) An increase in the price level (E) Daniel 3%
(E) A decrease in the price level

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40 Avery can make 30 tacos in a day or 20 43 Which of the following is most likely to
burritos in a day, while Jessie can make 20 occur if the international value of the
tacos in a day or 10 burritos. Which of the Canadian dollar appreciates relative to the
following must be true? Euro?
(A) Jessie has an absolute advantage in making (A) Canadian exports to the European Union
tacos. will increase
(B) Jessie has an absolute advantage in making (B) Canadian imports from the European
burritos. Union will decrease
(C) Avery has a comparative advantage in (C) The Canadian balance of trade will move
making both tacos and burritos. toward a deficit
(D) Jessie has a comparative advantage in (D) Exports from the European Union to
making tacos. Canada will decrease
(E) Jessie has a comparative advantage in (E) Tourists from the European Union visit
making burritos. Canada in greater numbers

41 If David’s grandfather promises to give him a 44 Given a required reserve ratio of 20 percent
crisp, new $100 bill on his twelfth birthday and assuming banks hold no excess reserves,
one year from today, which of the following a central bank purchases $1000 of bonds in
describes the present value of that money open market operations. What is the
received one year from now? maximum change in each of the following?
(A) The present value will increase as Demand
interest rates increase. Deposits Loans Reserves
(B) The present value is worth more than (A) $5,000 $4,000 $4,000
$100 received today. (B) $5,000 $5,000 $5,000
(C) The present value is the same value as (C) $5,000 $4,000 $1,000
$100 received today. (D) $4,000 $1,000 $1,000
(D) The present value is worth less than (E) $4,000 $5,000 $1,000
$100 received today.
(E) Interest rate changes will have no effect 45 If a nation’s central bank buys government
on its present value. securities in the open market what will be the
resulting change in that nation’s interest rate,
42 Which of the following is illustrated by the the value of the country’s currency, and the
short-run Phillips curve? change in the nation’s exports and imports?
(A) Increases in the money supply result in Interest Value of
increases in the interest rate Rates the currency Exports Imports
(B) There is a trade-off between the (A) Increase Appreciates Increase Increase
unemployment rate and the inflation rate (B) Increase Depreciates Increase Decrease
(C) The natural rate of unemployment is (C) No Appreciates Decrease Increase
constant, and thus not connected with Change
fiscal or monetary policy shifts (D) Decrease Depreciates Increase Decrease
(D) Decreases in the unemployment rate are (E) Decrease Appreciates Decrease Increase
the result of decreases in interest rates
(E) Increases in the inflation rate are the
result of increases in interest rates

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46 Which of the following helps explain why the 49 If aggregate demand were to unexpectedly
aggregate demand curve is downward increase, what would be the resulting change
sloping? in the price level and unemployment rate?
(A) exports increase with a rise in domestic Price Unemployment
prices, mitigating a fall in domestic Level Rate
consumption (A) Decrease Decrease
(B) nominal wages decrease as the price (B) Decrease No change
(C) Decrease Increase
level rises as price level increases (D) Increase Decrease
(C) higher interest rates increase net capital (E) Increase Increase
outflow
(D) the ratio of consumption to price level is 50 Assuming no crowding out, if the federal
constant government engages in deficit spending, what
(E) real wealth, and thus consumption, is would be the resulting change in the
affected by changes in price level unemployment rate and price level?
Unemployment Price
47 In a perfectly competitive market, if both the Rate Level
supply of a good as well as the demand for the (A) Increase Increase
good decrease at the same time, what will be (B) Increase Decrease
the resulting change in the equilibrium price (C) No change No change
and equilibrium quantity of the good? (D) Decrease Decrease
Price Quantity (E) Decrease Increase
(A) Increase Increase
(B) Decrease Decrease 51 Assuming flexible prices, a recessionary gap
(C) Increase Indeterminate caused by a shift in the aggregate demand
(D) Decrease Increase curve will cause which of the following
(E) Indeterminate Decrease changes in price level and real gross domestic
product (RGDP) in the long run?
48 Real gross domestic product (RGDP) is Price Level RGDP
defined as (A) Increase Increase
(A) The value, adjusted for changes in price (B) Increase No change
level, of all final goods and services (C) Decrease Decrease
consumed within a nation’s borders in a (D) Decrease No change
given year. (E) No change Decrease
(B) The value, adjusted for changes in price
level, of all goods and services produced 52 Which of the following would be the result if
within a nation’s borders. the United States (US) dollar depreciated
(C) The value, of all final goods and services relative to other currencies?
produced by a nation’s businesses, US Net Exports _US Employment
foreign and domestic, in a given year. (A) Increase Increase
(D) The value, in current prices, of all final (B) Increase Decrease
goods and services produced within a (C) Decrease Increase
nation’s borders in a given year. (D) Decrease Decrease
(E) The value, adjusted for changes in price (E) Decrease No change
level, of all final goods and services
produced within a nation’s borders in a
given year.

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53 Which of the following would be an 56 Which of the following is true of a floating
appropriate fiscal policy to close a exchange rate system?
recessionary gap of $100 billion assuming an (A) Equilibrium exchange rates are
MPC of 0.80? determined by the free market
(A) Increase government expenditures by $20 (B) Equilibrium exchange rates are
billion. determined by a combination of the free
(B) Decrease government expenditures by market and government agencies
$100 billion. (C) Equilibrium exchange rates are
(C) Decrease personal income taxes by $20 determined by, or “pegged”, by the
billion. government
(D) Increase personal income taxes by $20 (D) Nominal exchange rates are determined
billion. by the government, but real exchange
(E) Purchase $20 billion in government rates are determined by the market
securities in the open market. (E) The demand curve is downward sloping,
as determined by the market, while the
54 The classical economists believe that the supply curve is vertical as determined by
economy is self-correcting to full individual governments
employment output because
(A) the money supply will steadily grow to 57 If a nation’s economy is experiencing a
keep pace with population growth and recessionary gap what will happen to the
full-employment output short run aggregate supply curve (SRAS) in
(B) government fiscal policy should act the long run if it is assumed that wages and
counter cyclically to private investment to prices are flexible?
balance aggregate demand and aggregate (A) SRAS will shift right as wages eventually
supply in equilibrium decrease, returning the economy to full
(C) private sector consumption and employment.
investment expenditures equal GDP at (B) SRAS will shift left while aggregate
full-employment demand shifts right, returning the
(D) wages and prices are flexible economy to full employment.
(E) wages and prices are “sticky” (C) SRAS will not shift, but LRAS will shift
left to create a new long run equilibrium.
55 All of the following are true of the loanable (D) SRAS will shift right as the federal
funds market EXCEPT? government increases spending to return
(A) Supply and demand for loanable funds the economy to long run equilibrium.
determines the real interest rate (E) SRAS will shift left as the federal
(B) Savers and lenders supply money to the government lowers corporate taxes to
loanable funds market return the economy to long run
(C) Government, firms and individuals make equilibrium.
up the demand in the loanable funds
market
(D) The supply of loanable funds is vertical
and is set by the Federal Reserve
(E) The loanable funds market is influenced
by monetary policy

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58 If the real interest rate in the United States 60 An increase in which of the following would
decreases relative to the rest of the world likely lead to a decrease in national income?
what will be the resulting changes in U.S. (A) Investment expenditures
capital flow, net exports and aggregate (B) Imports
demand? (C) Government spending
Capital Net Aggregate (D) Exports
Flow Exports Demand (E) Consumption expenditures
(A) Inflow Increase Increase
(B) Inflow Increase Decrease
(C) Outflow Increase Increase
(D) Outflow Increase Decrease
(E) Outflow Decrease Increase

59 Assume the inflation rate in Mexico is

significantly higher than its trading partners.
Which of the following will occur to the
demand, supply, and international value of
the Mexican Peso?
Demand Supply___ Value
(A) Increase Increase Depreciate
(B) Increase Decrease Appreciate
(C) Decrease Increase Appreciate
(D) Decrease Increase Depreciate
(E) Decrease Decrease Depreciate

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