Hendricks Econ 102 Mcqs

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Hendricks ECON 102 MCQS
Introduction to Economics II (University of Ghana)
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ONE EXAM OR LOW GRADE WON’T TAKE AWAY YOUR DREAMS AND TALENTS. EXAMS ARE
IMPORTANT. BUT THEY ARE NOT EVERYTHING. GRADES ARE GOOD, BUT THEY DON’T DEFINE YOU.
DON’T LET ONE EXAM OR ONE GRADE DEFINE YOUR WHOLE FUTURE. THERE IS SO MUCH MORE
POTENTIAL RIGHT INSIDE OF YOU. DON’T LET OTHER PEOPLE’S METRICS OF SUCCESS BECOME YOURS.
TRY YOUR POSSIBLE BEST TO SOLVE ALL THESE QUESTIONS AND READ THE RECOMMENDED BOOKS
TO HELP YOU UNDERSTAND THE CONCEPTS BETTER. SOLVE THESE QUESTIONS REPEATEDLY AND
TRUST ME, YOU WOULD BE ABLE TO COME OUT SUCCESSFULLY AFTER THE PAPERS ARE MARKED.
Table of Contents
CHAPTER 23: MEASURING A NATION’S INCOME.......................................................................................... 4
True/False ................................................................................................................................................. 4
Multiple Choice ......................................................................................................................................... 5
CHAPTER 24: MEASURING THE COST OF LIVING ........................................................................................ 11
True/False ............................................................................................................................................... 11
Multiple Choice ....................................................................................................................................... 12
CHAPTER 25: PRODUCTION AND GROWTH ................................................................................................ 19
True/False ............................................................................................................................................... 19
Multiple Choice ....................................................................................................................................... 20
CHAPTER 26: SAVING, INVESTMENT AND THE FINANCIAL SYSTEM ........................................................... 25
True/False ............................................................................................................................................... 25
Multiple Choice ....................................................................................................................................... 26
CHAPTER 27: THE BASIC TOOLS OF FINANCE.............................................................................................. 30
True/False ............................................................................................................................................... 30
Multiple Choice ....................................................................................................................................... 31
CHAPTER 28: UNEMPLOYMENT AND ITS NATURAL RATE .......................................................................... 36
True/False ............................................................................................................................................... 36
Multiple Choice ....................................................................................................................................... 37
CHAPTER 29: THE MONETARY SYSTEM ...................................................................................................... 42
True/False ............................................................................................................................................... 42
Multiple Choice ....................................................................................................................................... 43
CHAPTER 30: MONEY GROWTH AND INFLATION ....................................................................................... 48
True/False ............................................................................................................................................... 48
Multiple Choice ....................................................................................................................................... 49
CHAPTER 31: OPEN-ECONOMY MACROECONOMIC: BASIC CONCEPTS ..................................................... 54
True/False ............................................................................................................................................... 54
Multiple Choice ....................................................................................................................................... 55
MACROECONOMICS TRUE& FALSE, MCQ’S AND ANSWERS COMPILED BY HENDRICKS GYIMAH FROM
CENGAGE LEARNING (PRINCIPLES OF ECONOMICS BY G. MANKIW). CONTACT/WHATSAPP NO:
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CHAPTER 32: A MACROECONOMIC THEORY OF THE OPEN ECONOMY ..................................................... 60
True/False ............................................................................................................................................... 60
Multiple Choice ....................................................................................................................................... 61
CHAPTER 33: AGGREGATE DEMAND AND AGGREGATE SUPPLY ................................................................ 66
True/False ............................................................................................................................................... 66
Multiple Choice ....................................................................................................................................... 67
CHAPTER 34: THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND ................ 72
True/False ............................................................................................................................................... 72
Multiple Choice ....................................................................................................................................... 74
CHAPTER 35: THE SHORT-RUN BETWEEN INFLATION AND UNEMPLOYMENT .......................................... 78
True/False ............................................................................................................................................... 78
Multiple Choice ....................................................................................................................................... 79
CHAPTER 36: COMMON AREAS AND EUROPEAN MONETARY UNION ....................................................... 88
True/False ............................................................................................................................................... 88
Multiple Choice ....................................................................................................................................... 89
CHAPTER 37: ............................................................................................................................................... 94
True/False ............................................................................................................................................... 94
Multiple Choice ....................................................................................................................................... 94
SOLUTIONS TO QUESTIONS FROM CHAPTER 23 TO 37 .............................................................................. 99
CHAPTER 23 ................................................................................................................................................ 99
CHAPTER 24 ................................................................................................................................................ 99
CHAPTER 25 .............................................................................................................................................. 100
CHAPTER 26 .............................................................................................................................................. 100
CHAPTER 27 .............................................................................................................................................. 101
CHAPTER 28 .............................................................................................................................................. 101
CHAPTER 29 .............................................................................................................................................. 102
CHAPTER 30 .............................................................................................................................................. 102
CHAPTER 31 .............................................................................................................................................. 103
CHAPTER 32 .............................................................................................................................................. 103
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CHAPTER 33 .............................................................................................................................................. 104
CHAPTER 34 .............................................................................................................................................. 104
CHAPTER 35 .............................................................................................................................................. 105
CHAPTER 36 .............................................................................................................................................. 105
CHAPTER 37 .............................................................................................................................................. 106
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CHAPTER 23: MEASURING A NATION’S INCOME
True/False
Indicate whether the sentence or statement is true or false.
1. For an economy as a whole, income equals expenditure because the income of the
seller must be equal to the expenditure of the buyer.
2. The production of an apple contributes more to GDP than the production of a

gold
ring because food is necessary for life itself.
3. If a timber yard sells €1,000 of timber to a carpenter and the carpenter uses the
timber to build a garage which he sells for €5,000, the contribution to GDP is
€6,000.
4. A country with a larger GDP per person generally has a greater standard of living
or quality of life than a country with a smaller GDP per person.
T 5. If nominal GDP in 2005 exceeds nominal GDP in 2004, real output must have
risen.
T 6. If UK GDP exceeds UK GNP, then foreigners produce more in the UK than UK

citizens produce in the rest of the world.
7. Wages are an example of a transfer payment because there is a transfer of

payment from the firm to the worker.
8. In the UK, investment is the largest component of GDP.
9. Nominal GDP employs current prices to value output while real GDP employs
constant base-year prices to value output.
10. A new car produced in 2004, but first sold in 2005, should be counted in 2005
GDP because that is when it was first sold as a final good.
11. When the city council of Southampton purchases a new school building, the
investment component of GDP increases.
12. A recession occurs when real GDP declines.
13. Depreciation is the value of the wear and tear on the economy's equipment and
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structures.
14. Cigarettes should be valued in GDP at €7.50 per pack even though €5.00 of that
price is tax because the buyers paid €7.50 per pack.
15. Net National Product always exceeds a nation's total income because of
depreciation and taxes.
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
16. An example of a transfer payment is

a. profit.
b. rent.
c. unemployment benefits.
d. government purchases.
e. wages.
17. The value of plant and equipment worn out in the process of manufacturing goods
and services is measured by
a. intermediate production.
b. Net National Product.
c. investment.
d. depreciation.
e. consumption.
18. Which of the following would be excluded from UK GDP for 2005? The sale of
a. a haircut.
b. the value of a lawyer’s services.
c. a 2005 Honda made in Swindon.
d. All of things mentioned in these answers should be counted in 2005 GDP.
e. a home built in 2004 and first sold in 2005.
19. Gross Domestic Product can be measured as the sum of

a. final goods and services, intermediate goods, transfer payments, and rent.
b. consumption, investment, government purchases, and net exports.
c. consumption, transfer payments, wages, and profits.
d. Net National Product, Gross National Product, and Disposable personal
income.
e. investment, wages, profits, and intermediate production.
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20. UK Gross Domestic Product (in contrast to Gross National Product) measures the
production and income of
a. British-owned firms no matter where they are located in the world.
b. none of these answers.
c. the domestic service sector only.
d. people and factories located within the borders of the UK.
e. the domestic manufacturing sector only.
21. Gross Domestic Product is the sum of the market value of the
a. intermediate goods.
b. final goods and services.
c. manufactured goods.
d. inferior goods and services.
e. normal goods and services.
22. If nominal GDP in 2005 exceeds nominal GDP in 2004, then the production of
output
a. must have fallen.
b. must have risen.
c. must have stayed the same.
d. may have risen, fallen, or stayed the same because there is not enough
information to determine what happened to real output.
23. If a cobbler buys leather for €100 and thread for €50 and uses them to produce
and sell €500 worth of shoes to consumers, the contribution to GDP is
a. €50.
b. €100.
c. €650.
d. €500.
e. €600.
24. GDP would include which of the following?

a. the value of taking a day off from work
b. consulting services
c. intermediate sales
d. illegal drug sales
e. housework
25. Real GDP is measured in ________ prices while nominal GDP is measured in
________ prices.
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a. foreign; domestic
b. current year; base year
c. domestic; foreign
d. base year; current year
e. intermediate; final
26. Figure 23-1
The following table contains information about an economy that

produces only pens and books. The base year is 2003.
Year Price of Quantity of Price of Quantity of
pens pens books books
2003 €3 100 €10 50
2004 3 120 12 70
2005 4 120 14 70
a. none of these answers

b. €800
c. €1,200
d. €1,460
e. €1,060
27. Figure 23-1

2003 €3 100 €10 50
2004 3 120 12 70
2005 4 120 14 70
Refer to Figure 23-1. What is the value of real GDP for 2004?
a. €800
b. €1,060
c. €1,460
d. €1,200
e. none of these answers
28. Figure 23-1
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2003 €3 100 €10 50
2004 3 120 12 70
2005 4 120 14 70
Refer to Figure 23-1. What is the value of the GDP deflator in 2004?
a. 119
b. 138
c. 116
d. 113
e. 100
29. Figure 23-1

2003 €3 100 €10 50
2004 3 120 12 70
2005 4 120 14 70
Refer to Figure 23-1. What is the percentage increase in prices from 2003 to
2004?
a. 16 percent
b. 22 percent
c. 13 percent
d. 0 percent
e. 38 percent
30. Figure 23-1

2003 €3 100 €10 50
2004 3 120 12 70
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2005 4 120 14 70
Refer to Figure 23-1. What is the approximate percentage increase in prices from
2004 to 2005?
a. 13 percent
b. 0 percent
c. 16 percent
d. 38 percent
e. 22 percent
31. Figure 23-1

2003 €3 100 €10 50
2004 3 120 12 70
2005 4 120 14 70
Refer to Figure 23-1. What is the percentage increase in real GDP from 2004 to
2005?
a. 27 percent
b. 7 percent
c. 32 percent
d. 0 percent
e. 22 percent
32. If UK GDP exceeds UK GNP, then

a. intermediate production exceeds final production.
b. foreigners are producing more in the UK than Britons are producing in
foreign countries.
c. real GNP exceeds nominal GNP.
d. real GDP exceeds nominal GDP.
e. Britons are producing more in foreign countries than foreigners are
producing in the UK.
33. UK GDP would exclude which of the following?

a. Lawyer services purchased by a home buyer.
b. The purchase of a new Nissan produced in Sunderland.
c. Copper purchased by tap manufacturer Bristan.
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d. A new art gallery purchased by the city of Newcastle.
e. Lawn care services purchased by a home owner.
34. How is your purchase of a €40,000 BMW automobile that was produced entirely
in Germany recorded in the UK GDP accounts?
a. Consumption increases by €40,000 and net exports decreases by €40,000.
b. Net exports increases by €40,000.
c. There is no impact because this transaction does not involve domestic
production.
d. Investment increases by €40,000 and net exports increases by €40,000.
e. Net exports decreases by €40,000.
35. If your grandparents buy a newly built retirement home, this transaction would
affect
a. investment.
b. net exports.
c. government purchases.
d. consumption.
e. none of these answers.
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CHAPTER 24: MEASURING THE COST OF LIVING
True/False
1. An increase in the price of imported cameras is captured by the CPI but not by
the GDP deflator.
2. An increase in the price of helicopters purchased by the UK armed forces is

captured by the CPI.
3. Because an increase in petrol prices causes consumers to ride their bikes more
and drive their cars less, the CPI tends to underestimate the cost of living.
4. An increase in the price of diamonds will have a greater impact on the CPI than
an equal percentage increase in the price of food because diamonds are so much
more expensive.
5. The "base year" in a price index is the benchmark year against which other years
are compared.
6. If the CPI rises at 5 percent per year, then every individual in the country needs
exactly a 5 percent increase in their income for their standard of living to remain
constant.
7. The producer price index (PPI) is constructed to measure the change in price of
total production.
8. If the Office of National Statistics fails to recognize that recently produced cars
can be driven for many more miles than older models, then the CPI tends to
overestimate the cost of living.
9. If your wage rises from €500 per week to €625 per week while the CPI rises from
112 to 121, you should feel an increase in your standard of living.
10. The largest category of goods and services in the CPI is food and non-alcoholic
beverages.
11. It is impossible for real interest rates to be negative.
12. If the nominal interest rate is 12 percent and the rate of inflation is 7 percent, then
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TRUST ME, YOU the
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real rate TO COME
of interest is 5OUT SUCCESSFULLY AFTER THE PAPERS ARE MARKED.
percent.
13. If lenders demand a real rate of return of 4 percent and they expect inflation to be
5 percent, then they should charge 9 percent interest when they extend loans.
14. If borrowers and lenders agree on a nominal interest rate and inflation turns out to
be greater than they had anticipated, lenders will gain at the expense of
borrowers.
15. If workers and firms agree on an increase in wages based on their expectations of
inflation and inflation turns out to be less than they expected, workers will gain at
the expense of firms.
Multiple Choice
16. Inflation can be measured by all of the following except the

a. All of these answers are used to measure inflation.
b. consumer price index.
c. producer price index.
d. GDP deflator.
e. finished goods price index.
17. The CPI will be most influenced by a 10 percent increase in the price of which of
the following consumption categories?
a. Clothing and footwear. See Figure 24.1 in the textbook.
b. Furniture, household equipment and maintenance. See Figure 24.1 in the
textbook.
c. Transport. See Figure 24.1 in the textbook.
d. Food and non-alcoholic beverages. See Figure 24.1 in the textbook.
e. All of these answers would produce the same impact. See Figure 24.1 in
the textbook.
18. In 1989, the CPI was 124.0. In 1990, it was 130.7. What was the rate of inflation
over this period?
a. 5.4 percent
b. 30.7 percent
c. You can't tell without knowing the base year.
d. 5.1 percent
e. 6.7 percent
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19. Which of the following would probably cause the CPI to rise more than the GDP
deflator in the UK?
a. An increase in the price of BMWs produced in Germany and sold in the
UK.
b. An increase in the price of Peugeots produced in the UK.
c. An increase in the price of helicopters purchased by the Royal Navy.
d. An increase in the price of domestically produced armoured vehicles sold
exclusively to India.
20.
The "basket" on which the CPI is based is composed of
a. consumer production.
b. products purchased by the typical consumer.
c. raw materials purchased by firms.
d. total current production.
e. none of these answers.
21. If there is an increase in the price of apples which causes consumers to purchase
fewer kilograms of apples and more kilograms of oranges, the CPI will suffer
from
a. none of these answers.
b. substitution bias.
c. base year bias.
d. bias due to unmeasured quality change.
e. bias due to the introduction of new goods.
22. Figure 24-1
The table shows the prices and the quantities consumed in Carnivore
Country. The base year is 2000. This means that 2000 is the year the
typical basket was determined so the quantities consumed in 2000
are the only quantities needed to calculate the CPI in each year.

beef beef pork pork
2000 €2.00 100 €1.00 100
2001 2.50 90 0.90 120
2002 2.75 105 1.00 130
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TRUST ME, YOU Refer
WOULD to BE ABLE24-1.
Figure TO COME
WhatOUT SUCCESSFULLY
is the value of theAFTER
basketTHE PAPERS
in the base ARE MARKED.
year?
a. €459.25
b. €418.75
c. €300
d. none of these answers
e. €333
23. Figure 24-1

beef beef pork pork
2000 €2.00 100 €1.00 100
2001 2.50 90 0.90 120
2002 2.75 105 1.00 130
Refer to Figure 24-1. What are the values of the CPI in 2000, 2001, and 2002,
respectively?
a. 83.5, 94.2, 100
b. 100, 113.3, 125
c. none of these answers
d. 100, 111, 139.6
e. 100, 109.2, 116
24. Figure 24-1

beef beef pork pork
2000 €2.00 100 €1.00 100
2001 2.50 90 0.90 120
2002 2.75 105 1.00 130
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Refer to Figure 24-1. What is the inflation rate for 2001?
a. 0 percent
b. 13.3 percent
c. 11 percent
d. 9.2 percent
25. Figure 24-1

beef beef pork pork
2000 €2.00 100 €1.00 100
2001 2.50 90 0.90 120
2002 2.75 105 1.00 130
Refer to Figure 24-1. What is the inflation rate for 2002?

a. 10.3 percent
b. none of these answers
c. 11 percent
d. 13.3 percent
e. 0 percent
26. Figure 24-1

beef beef pork pork
2000 €2.00 100 €1.00 100
2001 2.50 90 0.90 120
2002 2.75 105 1.00 130
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Refer to Figure 24-1. The table shows that the 2001 inflation rate is biased
upward because of
a. base year bias.
b. bias due to the introduction of new goods.
c. none of these answers.
d. bias due to unmeasured quality change.
e. substitution bias.
27. Figure 24-1

beef beef pork pork
2000 €2.00 100 €1.00 100
2001 2.50 90 0.90 120
2002 2.75 105 1.00 130
Refer to Figure 24-1. Suppose the base year is changed in the table from 2000 to
2002 (now use the 2002 consumption basket). What is the new value of the CPI
in 2001?
a. 90.6
b. 100.0
d. 114.7
e. 134.3
28. Suppose your income rises from €19,000 to €31,000 while the CPI rises from 122
to 169. Your standard of living has likely
a. fallen.
b. You can't tell without knowing the base year.
c. risen.
d. stayed the same.
29. If the nominal interest rate is 7 percent and the inflation rate is 3 percent, then the
real interest rate is
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TRUST ME, YOU a.
WOULD BE ABLE TO COME OUT SUCCESSFULLY AFTER THE PAPERS ARE MARKED.
4 percent.
b. 10 percent.
c. -4 percent.
d. 3 percent.
e. 21 percent.
30. Which of the following statements is correct?

b. The nominal interest rate is the inflation rate minus the real interest rate.
c. The real interest rate is the nominal interest rate minus the inflation rate.
d. The nominal interest rate is the real interest rate minus the inflation rate.
e. The real interest rate is the sum of the nominal interest rate and the
inflation rate.
31. If inflation is 8 percent and the real interest rate is 3 percent, then the nominal
interest rate must be
a. 3/8 percent.
b. 5 percent.
c. 11 percent.
d. 24 percent.
e. -5 percent.
32. Under which of the following conditions would you prefer to be the lender?
a. The nominal rate of interest is 15 percent and the inflation rate is 14
percent.
b. The nominal rate of interest is 20 percent and the inflation rate is 25
percent.
c. The nominal rate of interest is 12 percent and the inflation rate is 9
percent.
d. The nominal rate of interest is 5 percent and the inflation rate is 1 percent.
33. Under which of the following conditions would you prefer to be the borrower?
a. The nominal rate of interest is 12 percent and the inflation rate is 9
percent.
b. The nominal rate of interest is 20 percent and the inflation rate is 25
percent.
c. The nominal rate of interest is 5 percent and the inflation rate is 1 percent.
d. The nominal rate of interest is 15 percent and the inflation rate is 14
percent.
34. If borrowers and lenders agree on a nominal interest rate and inflation turns out to
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TRUST ME, YOU be
WOULD BE ABLE
less than theyTO
hadCOME OUT SUCCESSFULLY AFTER THE PAPERS ARE MARKED.
expected,
a. neither borrowers nor lenders will gain because the nominal interest rate
has been fixed by contract.
c. borrowers will gain at the expense of lenders.
d. lenders will gain at the expense of borrowers.
35. If workers and firms agree on an increase in wages based on their expectations of
inflation and inflation turns out to be more than they expected,
b. workers will gain at the expense of firms.
c. neither workers nor firms will gain because the increase in wages is fixed
in the labour agreement.
d. firms will gain at the expense of workers.
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CHAPTER 25: PRODUCTION AND GROWTH
True/False
1. The United States should grow faster than Japan because the United States has a
larger economy.
2. Evidence of rising prices for natural resources demonstrates that non-renewable

resources will become so scarce that economic growth will be limited.
3. The rate of economic growth is probably underestimated.
4. Human capital refers to human-made capital such as tools and machinery, as

opposed to natural capital such as rivers and timber.
5. If a production function exhibits constant returns to scale, then doubling all of the
inputs doubles output.
6. In very poor countries, paying parents to send their children to school may
increase the education of poor children and decrease the use of child labour.
7. An increase in capital should cause the growth rate of a relatively poor country to
increase more than that of a rich country.
8. An increase in the rate of saving and investment permanently increases a

country's rate of growth.
9. A country can only increase its level of investment by increasing its saving.
10. The only factor of production that is not "produced" is natural resources.
11. Investment in human capital and technology may be particularly productive

because of positive spillover effects.
12. If Germans invest in the UK economy by building a new Volkswagen factory, in

the future UK GDP will rise by more than UK GNP.
13. Most economists believe that inward-oriented policies that protect infant
industries improve the growth rates of developing nations.
14. Economic evidence supports the predictions of Thomas Malthus regarding the
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effects of population growth and the food supply on the standard of living.
15. The opportunity cost of additional growth is that someone must forgo current
consumption.
Multiple Choice
16. A reasonable measure of the standard of living in a country is

a. real GDP per person.
b. nominal GDP per person.
c. real GDP.
d. the growth rate of nominal GDP per person.
e. nominal GDP.
17. Many East Asian countries are growing very quickly because
a. they save and invest an unusually high percentage of their GDP.
b. they have always been wealthy and will continue to be wealthy, which is
known as the "snowball effect."
c. they are imperialists and have collected wealth from previous victories in
war.
d. they have enormous natural resources.
18. When a nation has very little GDP per person,

a. it is doomed to being relatively poor forever.
c. an increase in capital will likely have little impact on output.
d. it has the potential to grow relatively quickly due to the "catch-up-effect."
e. it must be a small nation.
19. Once a country is wealthy,

a. it no longer needs any human capital.
b. capital becomes more productive due to the "catch-up effect."
d. it may be harder for it to grow quickly because of the diminishing returns
to capital.
e. it is nearly impossible for it to become relatively poorer.
20. The opportunity cost of growth is

a. a reduction in current investment.
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b. a reduction in current consumption.
c. a reduction in taxes.
d. a reduction in current saving.
21. For a given level of technology, we should expect an increase in productivity

within a nation when there is an increase in each of the following except
a. labour.
b. physical capital/worker.
c. human capital/worker.
d. natural resources/worker.
22. Which of the following statements is true?

a. Countries all have the same growth rate and level of output because any
country can obtain the same factors of production.
b. Countries have great variance in both the level and growth rate of
GDP/person; thus, poor countries can become relatively rich over time.
c. Countries may have a different level of GDP/person but they all grow at
the same rate.
d. Countries may have a different growth rate but they all have the same
level of GDP/person.
23. If a production function exhibits constant returns to scale,

a. doubling all of the inputs more than doubles output due to the catch-up
effect.
b. doubling all of the inputs has absolutely no impact on output because
output is constant.
c. doubling all of the inputs less than doubles output due to diminishing
returns.
d. doubling all of the inputs doubles output.
24. Copper is an example of

a. a renewable natural resource.
b. human capital.
c. physical capital.
d. technology.
e. a non-renewable natural resource.
25. Which of the following statements regarding the impact of population growth on
productivity is true?
a. There is no evidence, yet, that rapid population growth stretches natural
resources to the point that it limits growth in productivity.
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b. all of these answers
c. Rapid population growth may dilute the capital stock, lowering
productivity.
d. Rapid population growth may promote technological progress, increasing
productivity.
26. Thomas Malthus argued that

b. an ever increasing population is constrained only by the food supply,
resulting in chronic famines.
c. technological progress will continuously generate improvements in
productivity and living standards.
d. labour is the only true factor of production.
e. private charities and government aid will improve the welfare of the poor.
27. Which of the following best describes the rate of growth in productivity in the
United States over the last fifty years?
a. Productivity growth has been steady over the last 50 years.
b. Productivity has been growing more slowly every decade since World
War II.
c. Productivity grew quickly in the 1950s and 1960s, more slowly from the
early 1970s through 1995, and then quickly again.
d. Productivity grew slowly from the 1950s through the 1970s, and then
began to accelerate, probably due to advances in computer technology.
e. Productivity has been growing more quickly every decade since World
War II.
28. Which of the following describes an increase in technological knowledge?

a. A farmer sends his child to agricultural college and the child returns to
work on the farm.
b. A farmer hires another day labourer.
c. A farmer buys another tractor.
d. A farmer discovers that it is better to plant in the spring rather than in the
fall.
29. Our standard of living is most closely related to

a. how hard we work.
b. our supply of capital, because everything of value is produced by
machinery.
c. our productivity, because our income is equal to what we produce.
d. our supply of natural resources, because they limit production.
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30. Which of the following is an example of foreign portfolio investment?

a. Toyota builds a new plant in the north of England.
b. EDF of France buys shares in Scottish & Southern Energy of the UK, and
Scottish & Southern Energy uses the proceeds to build a new hydro-
electric power station in Scotland.
c. Deutsche Bank of Germany buys some new software from a UK supplier.
d. JCB builds a new plant near Manchester.
e. None of these answers.
31. Which of the following government policies is least likely to increase growth in
Africa?
a. increase expenditures on public education
b. eliminate civil war
c. All of these answers would increase growth.
d. reduce restrictions on foreign capital investment
e. increase restrictions on the importing of American tractors and electronics
32. If Toyota builds a new plant in the north of England,

b. there has been an increase in foreign portfolio investment in the UK.
c. once the plant starts producing cars UK GDP will rise less than UK GNP.
d. once the plant starts producing cars UK GDP and GNP will both fall
because some income from this investment will accrue to foreigners.
e. once the plant starts producing cars UK GDP will rise more than UK
GNP.
33. If, in some European country, real GDP/person in 2004 is €18,073 and real
GDP/person in 2005 is €18,635, what is the growth rate of real output per person
over this period?
a. 3.1 percent
b. 3.0 percent
c. 18.6 percent
d. 18.0 percent
e. 5.62 percent
34. Which of the following expenditures to enhance productivity is most likely to

emit a positive externality?
a. Megabank buys a new computer.
b. Nathalie pays her university tuition fees.
c. Exxon leases a new oil field.
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d. General Motors buys a new drill press.
35. To increase growth, governments should do all of the following except

a. encourage foreigners to investment in your country.
b. encourage saving and investment.
c. nationalize major industries.
d. encourage research and development.
e. promote free trade.
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CHAPTER 26: SAVING, INVESTMENT AND THE FINANCIAL SYSTEM
True/False
1. When a business firm sells a bond, it has obtained equity finance.
2. People who buy shares in a firm have loaned money to the firm.
3. Investment funds reduce a shareholder's risk by purchasing a diversified portfolio.
4. UK government bonds pay less interest than corporate bonds issued by UK

companies because the government bonds carry less credit risk.
5. In a closed economy, saving is what remains after consumption expenditures and

government purchases.
6. Public saving is always positive.
7. In a closed economy, investment is always equal to saving regardless of where

the saving came from - public or private sources.
8. Investment is the purchase of capital equipment and structures.
9. If you save money this week and lend it to your flatmate to buy food for
consumption, your act of personal saving has increased national saving.
10. The quantity supplied of loanable funds is greater if real interest rates are higher.
11. If the real interest rate in the loanable funds market is temporarily held above the
equilibrium rate, desired borrowing will exceed desired lending and the real
interest rate will fall.
12. A reduction in the budget deficit should shift the supply of loanable funds to the
right, lower the real interest rate, and increase the quantity demanded of loanable
funds.
13. Public saving and the government's budget surplus are the same thing.
14. If the government wanted to increase the rate of growth, it should raise taxes on
interest and dividends to shift the supply of loanable funds to the right.
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15. An increase in the budget deficit that causes the government to increase its
borrowing shifts the demand for loanable funds to the right.
Multiple Choice
16. Which of the following is an example of equity finance?

a. Corporate bonds
b. Bank loan
c. All of these answers are equity finance.
d. Government bonds
e. Company shares
17. Credit risk refers to a bond's

a. probability of default.
b. price-earnings ratio.
c. dividend.
d. tax treatment.
e. term to maturity.
18. A financial intermediary is a middleperson between

a. buyers and sellers.
b. husbands and wives.
c. borrowers and lenders.
d. labour unions and firms.
19. National saving (or just saving) is equal to

b. investment + consumption expenditures.
c. private saving + public saving.
d. GDP - government purchases.
e. GDP + consumption expenditures + government purchases.
20. Which of the following statements is true?

a. Long-term bonds tend to pay less interest than short-term bonds.
b. Government bonds pay less interest than comparable corporate bonds.
c. Investment funds are riskier than single stock purchases because the
performance of so many different firms can affect the return of a mutual
fund.
d. A stock index is a directory used to locate information about selected
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stocks.
21. If government spending exceeds tax collections,

a. there is a budget deficit.
c. there is a budget surplus.
d. private saving is positive.
e. public saving is positive.
22. If GDP = €1,000, consumption = €600, taxes = €100, and government purchases
= €200, how much is saving and investment?
a. saving = €300, investment = €300
b. saving = €200, investment = €100
c. saving = €100, investment = €200
d. saving = €0, investment = €0
e. saving = €200, investment = €200
23. If the public consumes €100 billion less and the government purchases €100
billion more (other things unchanging), which of the following statement is true?
a. Saving is unchanged.
b. There is an increase in saving and the economy should grow more quickly.
c. There is a decrease in saving and the economy should grow more slowly.
d. There is not enough information to determine what will happen to saving.
24. Which of the following financial market securities would probably pay the
highest interest rate?
a. A bond issued by a start up company
b. A government bond issued by the government of France.
c. A bond issued by a blue chip company
d. An investment fund with a portfolio of corporate bonds issued by blue
chip companies.
25. Investment is
a. the purchase of goods and services.
b. the purchase of capital equipment and structures.
c. when we place our saving in the bank.
d. the purchase of stocks and bonds.
26. If UK citizens become more thrifty, we would expect

a. the supply of loanable funds in the UK loanable funds market to shift to
the right and the real interest rate to fall.
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b. the demand for loanable funds in the UK loanable funds market to shift to
the right and the real interest rate to rise.
c. the demand for loanable funds in the UK loanable funds market to shift to
the right and the real interest rate to fall.
d. the supply of loanable funds in the UK loanable funds market to shift to
the right and the real interest rate to rise.
27. Which of the following sets of government policies is the most growth oriented?
a. Lower taxes on the returns to saving, provide investment tax credits, and
lower the deficit.
b. Increase tax on the returns to saving, provide investment tax credits, and
increase the deficit.
c. Increase tax on the returns to saving, provide investment tax credits, and
lower the deficit
d. Lower taxes on the returns to saving, provide investment tax credits, and
increase the deficit.
28. An increase in the budget deficit that causes the government to increase its
borrowing
a. shifts the supply of loanable funds to the right.
b. shifts the demand for loanable funds to the left.
c. shifts the demand for loanable funds to the right.
d. shifts the supply of loanable funds to the left.
29. An increase in the budget deficit will

a. raise the real interest rate and decrease the quantity of loanable funds
demanded for investment.
b. lower the real interest rate and increase the quantity of loanable funds
c. raise the real interest rate and increase the quantity of loanable funds
d. lower the real interest rate and decrease the quantity of loanable funds
30. If the supply of loanable funds is very inelastic (steep), which policy would likely
increase saving and investment the most?
a. a reduction in the budget deficit
b. an increase in the budget deficit
c. an investment tax credit
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31. An increase in the budget deficit is
a. an increase in public saving.
b. a decrease in private saving.
d. a decrease in public saving.
e. an increase in private saving.
32. If an increase in the budget deficit reduces national saving and investment, we
have witnessed a demonstration of
a. intermediation.
b. equity finance.
c. crowding out.
d. the investment fund effect.
33. If UK citizens become less concerned with the future and save less at each real
interest rate,
a. real interest rates rise and investment falls.
b. real interest rates rise and investment rises.
c. real interest rates fall and investment rises.
d. real interest rates fall and investment falls.
34. If the government increases investment tax credits and reduces taxes on the return
to saving at the same time,
a. the real interest rate should fall.
b. the real interest rate should rise.
c. the impact on the real interest rate is indeterminate.
d. the real interest rate should not change.
35. An increase in the budget surplus

a. shifts the supply of loanable funds to the left and increases the real interest
rate.
b. shifts the supply of loanable funds to the right and reduces the real interest
rate.
c. shifts the demand for loanable funds to the right and increases the real
interest rate.
d. shifts the demand for loanable funds to the left and reduces the real
interest rate.
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CHAPTER 27: THE BASIC TOOLS OF FINANCE
True/False
1. If the prevailing interest rate is 10 per cent, a rational person should be indifferent
between receiving €1,000 today and €1,000 one year from today.
2. You are going to receive a €100,000 inheritance in ten years. If the prevailing
interest rate is 6 percent, the present value of your inheritance is €55,839.48.
3. The rule of 70 suggests that, on average, people's incomes double every 70 years.
4. If interest is compounded annually, €100 placed in a bank account earning 10

percent interest should generate €30 interest after three years.
5. According to the rule of 70, if your income grows at 7 percent per year, it will
double in ten years.
6. The present value of a future sum is the amount of money today that would be
needed, at prevailing interest rates, to produce that future sum.
7. If people are risk averse, the utility gained from winning €1,000 is equal to the
utility lost from losing a €1,000 bet.
8. If someone's utility function exhibits diminishing marginal utility of wealth, this

person is risk averse.
9. The insurance market demonstrates the problem of adverse selection when those
that are sicker than average seek health insurance.
10. People can reduce what is known as aggregate risk by diversifying their
portfolios.
11. Increasing the diversification of a portfolio from 1 share to 10 shares reduces the
portfolio's risk by the same amount as increasing the diversification from 10 to 20
shares.
12. As a person allocates more of his savings to shares and less to government bonds,
he will earn a higher rate of return but he must accept additional risk.
13. The efficient markets hypothesis suggests that since markets are efficient, it is
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easy to engage in fundamental analysis to purchase undervalued shares and then
earn greater than average market returns.
14. If the efficient markets hypothesis is true, share prices follow a random walk.
Therefore, buying a diversified portfolio, by purchasing an index fund or by
throwing darts at the share prices page in a newspaper, is probably the best that
you can do.
15. The value of a share is based on the present value of the future stream of dividend
payments and the final sales price.
Multiple Choice
16. The amount today that would be needed, at prevailing interest rates, to produce a
particular sum in the future is know as
a. future value.
b. fair value.
c. present value.
d. compound value.
e. beginning value.
17. If a depositor puts €100 in a bank account that earns 4 percent interest
compounded annually, how much will be in the account after five years?
a. €400.00
b. €104.00
c. €121.67
d. €123.98
e. €120.00
18. JCB (which makes agricultural and construction equipment) has the opportunity
to purchase a new factory today that will provide them with a £50 million return
four years from now. If prevailing interest rates are 6 percent, what is the
maximum that the project can cost for JCB to be willing to undertake the project?
a. £43,456,838
b. £53,406,002
c. £34,583,902
d. £39,604,682
e. £50,000,000
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19. An increase in the prevailing interest rate
a. increases the present value of future returns from investment, and
increases investment.
b. decreases the present value of future returns from investment, and
decreases investment.
c. decreases the present value of future returns from investment, and
increases investment.
d. increases the present value of future returns from investment, and
decreases investment.
20. If two countries start with the same real GDP/person, and one country grows at 2
percent while the other grows at 4 percent,
a. one country will always have 2 percent more real GDP/person than the
other.
b. the standard of living in the country growing at 4 percent will start to
accelerate away from the slower growing country due to compound
growth.
c. the standard of living in the two countries will converge.
d. next year the country growing at 4 percent will have twice the
GDP/person as the country growing at 2 percent.
21. Using the rule of 70, if your income grows at 10 percent per year, your income
will double in approximately
a. 70 years.
b. 7 years.
c. 10 years.
d. There is not enough information to answer this question.
e. 700 years.
22. Using the rule of 70, if your parents place €10,000 in a deposit for you on the day
you are born, approximately how much will be in the account when you retire at
70 years old if the deposit earns 3 percent per year?
a. €20,000
b. €300
c. €70,000
d. €80,000
e. €3,000
23. If people are risk averse, then

a. none of these answers are true.
b. all of these answers are true.
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c. they dislike bad things more than the like comparable good things.
d. the utility they would lose from losing a €50 bet would exceed the utility
they would gain from winning a €50 bet.
e. their utility functions exhibit the property of diminishing marginal utility
of wealth.
24. Which of the following does not help reduce the risk that people face?
a. increasing the rate of return within their portfolio
b. diversifying their portfolio
c. All of these answers help reduce risk.
d. buying insurance
25. Which of the following is an example of moral hazard?

a. After Guiseppe buys fire insurance, he begins to smoke cigarettes in bed.
b. None of these answers demonstrate moral hazard.
c. Martin has been feeling poorly lately so he seeks health insurance.
d. Both of Suzanne’s parents lost their teeth due to gum disease, so Suzanne
buys dental insurance.
e. All of these answers demonstrate moral hazard.
26. Idiosyncratic risk is the

a. uncertainty associated with the entire economy.
b. uncertainty associated with specific companies.
c. risk associated with adverse selection.
d. risk associated with moral hazard.
27. Diversification of a portfolio can

a. reduce aggregate risk.
b. eliminate all risk.
c. increase the standard deviation of the portfolio's return.
d. reduce idiosyncratic risk.
28. Compared to a portfolio composed entirely of shares, a portfolio that is 50

percent government bonds and 50 percent shares will have a
a. lower return and a lower level of risk.
b. lower return and a higher level of risk.
c. higher return and a lower level of risk.
d. higher return and a higher level of risk.
29. The study of a company's accounting statements and future prospects to

determine its value is known as
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a. information analysis.
b. risk management.
c. fundamental analysis.
d. diversification.
30. If the efficient markets hypothesis is true, then

a. shares tend to be overvalued.
b. the stock market is informationally efficient so share prices should follow
a random walk.
c. all of these answers
d. fundamental analysis is a valuable tool for increasing one's returns from
investing in shares.
e. an index fund is a poor investment.
31. Which of the following reduces risk in a portfolio the greatest?

a. Increasing the number of shares from 10 to 20
b. All of these answers provide the same amount of risk reduction.
c. Increasing the number of shares in the portfolio from 1 to 10
d. Increasing the number of shares from 20 to 30
32. Which of the following should cause the price of a share of stock to rise?
a. None of these answers
b. An increase in expected dividends
c. A reduction in aggregate risk
d. A reduction in the interest rate
e. All of these answers
33. Speculative bubbles may occur in the shares market

a. during periods of extreme pessimism because so many stocks become
undervalued.
b. only when people are irrational.
c. when stocks are fairly valued.
d. because rational people may buy an overvalued share if they think they
can sell it to someone for even more at a later date.
34. Share prices will follow a random walk if

a. shares are overvalued.
b. people behave irrationally when choosing shares.
c. markets reflect all available information in a rational way.
d. shares are undervalued.
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35. It is difficult for an actively managed investment fund to out perform an index
fund because
a. stock markets tend to be inefficient.
b. all of these answers
c. index funds are able to buy undervalued stocks.
d. actively managed funds trade more often and charge fees for their alleged
expertise.
e. index funds generally do better fundamental analysis.
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CHAPTER 28: UNEMPLOYMENT AND ITS NATURAL RATE
True/False
1. The natural rate of unemployment is the amount of unemployment that won't go

away on its own, even in the long run.
2. If the unemployment rate falls, we can be certain that more workers have jobs.
3. In the UK over the twenty years from mid-1980s, the labour-force participation
rate has been rising for women and has been falling for men.
4. The unemployment rate is about the same for the various demographic groups:
men, women, people from non-white ethnic backgrounds, people from white
ethnic backgrounds, young people, old people.
5. A minimum wage is likely to have a greater impact on the market for skilled
workers than on the market for unskilled workers.
6. The presence of a union tends to raise the wage for insiders and lower the wage
for outsiders.
7. A union is a labour cartel.
8. Unions may increase efficiency in some circumstances because they decrease the
cost of bargaining between labour and management.
9. An efficiency wage is like a minimum wage in that firms are required by

legislation to pay it.
10. Paying efficiency wages tends to increase worker turnover because workers can
get continually higher wages if they change employer often.
11. Firms may voluntarily pay wages above the level that balances the supply and
demand for workers because the higher wage improves the average quality of
workers that apply for employment.
12. If wages were always at the competitive equilibrium, there would be absolutely
no unemployment.
13. Due to the existence of discouraged workers, the official unemployment rate may
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overstate true unemployment.
14. The presence of unemployment insurance tends to decrease the unemployment

rate because recipients of unemployment benefits are not counted in the labour
force.
15. Whenever the wage rises above the competitive equilibrium, regardless of the
source, the result is additional unemployment.
Multiple Choice
16. The amount of unemployment that the economy normally experiences is known
as
a. the natural rate of unemployment.
b. cyclical unemployment.
c. efficiency wage unemployment.
d. frictional unemployment.
17. According to the Office of National Statistics, a husband who chooses to stay
home and take care of the household is
a. employed.
b. not in the labour force.
c. a discouraged worker.
d. unemployed.
18.
Refer to Figure 28-1. The labour force is

a. 134.0 million.
c. 92.3 million.
d. 139.7 million.
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e. 98.0 million.
19.
Refer to Figure 28-1. The unemployment rate is

a. 3.2 percent.
b. 5.7 percent.
c. 5.8 percent.
d. Not enough information is available to answer.
e. 6.2 percent.
20.
Refer to Figure 28-1. The labour force participation rate is

a. 47.1 percent.
b. 65.9 percent.
c. 50.2 percent.
d. none of these answers.
e. 70.2 percent.
21. A miner who has been unable to find work for so long that he has stopped
looking for work is considered to be
a. not in the labour force.
b. not in the adult population.
c. unemployed.
d. employed.
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22. Which of the following statements is true of the UK?
a. Women tend to have broadly similar unemployment rates as men.
b. All of these answers are true.
c. The labour force participation rate of men is rising.
d. People from non-white ethnic backgrounds have a lower unemployment
rate than people from white ethnic backgrounds.
e. Most spells of unemployment are long term but most unemployment
observed at any given time is short term.
23. A minimum wage law tends to

a. help all teenagers because they receive a higher wage than they would
otherwise.
b. have no impact on unemployment as long as it is set above the competitive
equilibrium wage.
c. create more unemployment in high-skill job markets than in low-skill job
markets.
d. create more unemployment in low-skill job markets than in high-skill job
markets.
24. Which one of the following types of unemployment results from the wage being
held above the competitive equilibrium wage?
a. Structural unemployment
b. Cyclical unemployment
c. Frictional unemployment
d. None of these answers
e. Sectoral unemployment
25. If, for any reason, the wage is held above the competitive equilibrium wage,
a. the quantity of labour supplied will exceed the quantity of labour
demanded and there will be unemployment.
b. unions will likely strike and the wage will fall to equilibrium.
c. the quantity of labour demanded will exceed the quantity of labour
supplied and there will be a labour shortage.
d. the quality of workers in the applicant pool will tend to fall.
26. A reservation wage is the

a. maximum wage the firm is willing to pay.
b. tip necessary to get a waiter to reserve a table.
c. minimum wage the worker is willing to accept.
d. competitive equilibrium wage.
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27. Which of the following government policies would fail to lower the
unemployment rate?
a. Establishing worker training programs
b. Establishing right-to-work laws
c. Reducing unemployment benefits
d. Establishing employment agencies
e. Raising the minimum wage
28. Sectoral shifts tend to raise which type of unemployment?

a. Structural unemployment
b. Unemployment due to efficiency wages
c. Unemployment due to unions
d. Frictional unemployment
29. Which of the following is an example of a reason why firms might pay efficiency
wages?
a. At equilibrium wages, workers sleep when the boss is not looking because
workers are not deeply concerned about being fired.
b. At equilibrium wages, workers often quit to find better jobs.
c. At equilibrium wages, only minimally qualified workers apply for the job.
d. At equilibrium wages, workers cannot afford a healthy diet so they fall
asleep at work due to a lack of energy.
e. All of these answers
30. Some frictional unemployment is inevitable because

a. of minimum wage laws.
b. there are changes in the demand for labour among different firms.
c. of unions.
d. all of these answers
e. efficiency wages may hold the wage above the equilibrium wage.
31. Unions might increase efficiency in the case where they

a. raise the wage for insiders above the competitive equilibrium.
b. lower the wage of local outsiders.
c. offset the market power of a large firm that is the dominant employer in a
region.
d. threaten a strike but don't actually follow through so there are no lost
hours of work.
32. Which of the following statements about efficiency wage theory is true?
a. Paying above the competitive equilibrium wage tends to cause workers to
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shirk their responsibilities.
b. Firms do not have a choice about whether they pay efficiency wages or
not because these wages are determined by law.
c. Paying the lowest possible wage is always the most efficient (profitable).
d. Paying above the competitive equilibrium wage may improve worker
health, lower worker turnover, improve worker quality, and increase
worker effort.
33. Unions tend to increase the disparity in pay between insiders and outsiders by
a. increasing the wage in the unionized sector, which may create a decrease
in the supply of workers in the non-unionized sector.
b. increasing the demand for workers in the unionized sector.
c. decreasing the demand for workers in the unionized sector.
d. increasing the wage in the unionized sector, which may create an increase
in the supply of workers in the non-unionized sector.
34. Which of the following types of unemployment will exist even if the wage is at
the competitive equilibrium?
a. unemployment due to unions
b. unemployment due to efficiency wages
c. frictional unemployment
d. unemployment due to minimum-wage laws
35. If unemployment insurance were so generous that it paid laid off workers 95 per
cent of their regular salary,
a. frictional unemployment would fall.
b. the official unemployment rate would probably understate true
unemployment.
c. the official unemployment rate would probably overstate true
unemployment.
d. there would be no impact on the official unemployment rate.
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CHAPTER 29: THE MONETARY SYSTEM
True/False
1. Money and wealth are the same thing.
2. Fiat money is money that is used in Italy.
3. Commodity money has value independent of its use as money.
4. A depository institution is one that accepts deposits, and so provides people with
a safe place to keep their money, but does not make loans.
5. When you are willing to go to sleep tonight with £100 in your wallet and you
have complete confidence that you can spend it tomorrow and receive the same
amount of goods as you would have received had you spent it today, money has
demonstrated its function as a medium of exchange.
6. Money has three functions: It acts as a medium of exchange, a unit of account,

and a hedge against inflation.
7. The Bank of England is the central bank of the United Kingdom and its Monetary
Policy Committee comprises members appointed by the Bank and by the
Chancellor of the Exchequer (the UK finance minister).
8. If there is 100 per cent reserve banking, the money supply is unaffected by the
proportion of its money that the public chooses to hold as currency rather than as
bank deposits.
9. A repurchase agreement is an agreement between the central bank and a

commercial bank whereby a bond or other non-monetary asset is sold by one to
the other with an agreement to reverse the transaction a short time later.
10. The central bank cannot control the amount of money that the economy’s
commercial banks lend because the banks may choose what proportion of
deposits to hold as reserves.
11. If the central bank wishes to contract the money supply, it could do any of the
following: sell government bonds, raise the reserve requirement, and raise the
refinancing rate.
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12. When the central bank in an economy raises the refinancing rate it encourages
commercial banks to reduce their lending, thereby tending to reduce the money
supply.
Multiple Choice
13. Which of the following is not a function of money?

a. hedge against inflation
b. medium of exchange
c. unit of account
d. store of value
14. An example of fiat money is

a. paper euros.
b. gold.
c. silver coins.
d. cigarettes.
15. Commodity money

a. has no intrinsic value.
b. has intrinsic value.
c. is used exclusively in the economies of western Europe and north
America.
d. is used as reserves to back fiat money.
16. Which of the following statements about money is not true?

a. A debit card is not really money because it is only a means of transferring
money between accounts.
b. All the wealth that people hold, in whatever form, should be considered as
money.
c. Wealth held in the current account you hold with your bank is almost as
convenient for buying things as wealth held in your wallet, so the wealth
in current accounts should be included in measures of money.
d. In a complex economy it is not easy to draw a clear dividing line between
assets that should be considered as money and those that should not.
17. Which of the following statements is not true?

a. The purchase of government bonds from the public increases the money
supply.
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b. The US Federal Reserve is run by its Board of Governors, which
comprises seven people who are appointed by the US President.
c. When the central bank sells government bonds to the public, the money
supply decreases.
d. Monetary policy in the UK is set by the Chancellor of the Exchequer in
consultation with the Bank of England.
e. Monetary policy in the euro area is set by the Governing Council of the
European Central Bank.
18. Banca Solida has, in the past, always operated with a reserve ratio of 25 per cent.
It has now been taken over by Gung-Ho Bank which operates with a reserve ratio
of 12½ per cent. Assuming that Banca Solida adopts the business practices of its
new owner, what will be the effect on money supply in the country in which
Banca Solida operates?
a. Money supply will increase because Banca Solida will increase its loans.
b. The effect on money supply cannot be determined from the information
given.
c. Money supply will decrease because the loans will have to be repaid.
d. Money supply will be unchanged because the central bank has made no
policy changes.
19. If the banks in an economy operate with a reserve ratio of 20 per cent then the
money multiplier is:
a. 4
b. 20
c. 25
d. 5
e. 20
20. Suppose Gerard moves his €1,000 demand deposit from Bank A to Bank B. If
both banks operate with a reserve ratio of 10 per cent, what is the potential
change in money supply as a result of Gerard’s action?
a. €10,000
b. €1,000
c. €9,000
d. €0
21. Reserve requirements that may be imposed on an economy’s banks by its central
bank specify that banks’ reserves must be a minimum percentage of their
a. assets.
b. deposits.
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c. loans.
d. government bonds.
22. Which of the following policy actions by a central bank is likely to increase the
money supply?
a. Increasing the refinancing rate.
b. All of these will increase the money supply.
c. Buying government bonds in open market operations.
d. Increasing reserve requirements.
23. The refinancing rate is

a. the interest rate at which commercial banks lend to and borrow from each
other.
b. the interest rate the European Central Bank pays on reserves.
c. the interest rate the public pays when borrowing from banks.
d. the interest rate the European Central Bank charges on loans to banks.
e. the interest rate banks pay on the public's deposits.
24. Suppose the Bank of England purchases a £1,000 government bond from you. If
you deposit the entire £1,000 in your bank, what is the total potential change in
the money supply as a result of the Bank of England’s action if the your bank’s
reserve ratio is 20 per cent?
a. £4,000
b. £5,000
c. £1,000
d. £0
25. Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits
€1,000 of currency in a bank,
a. the money supply increases by more than €1,000.
b. the money supply increases by less than €1,000.
c. the money supply decreases by less than €1,000.
d. the money supply decreases by more than €1,000.
e. the money supply is unaffected.
26. Given the following T-account, what is the largest new loan this bank can
prudently make if it wishes to maintain a reserve ratio of 10 per cent?
Banca Solida
Assets Liabilities
Reserves €150 Deposits €1000
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Loans €850
b. €50
c. €0
d. €150
e. €1,000
27. The three main tools of monetary policy are

a. fiat, commodity, and deposit money.
b. open-market operations, reserve requirements, and the refinancing rate.
c. the money supply, government purchases, and taxation.
d. government expenditures, taxation, and reserve requirements.
e. coin, currency, and demand deposits.
28. Suppose the central bank purchases a government bond from a person who
deposits the entire amount received from the sale in her bank, the money supply
will
a. rise by an amount that depends on the bank’s reserve ratio.
b. rise by less than the amount of the deposit.
c. fall by exactly the amount of the deposit as long as the bank does not
change its reserve ratio.
d. fall by exactly the amount of the deposit as long as the bank does not
change its reserve ratio.
e. be unchanged.
29. If there is a general shortage of liquidity in the money market then

a. the banks will increase their lending.
b. the short-term interest rate at which the economy’s commercial banks lend
to and borrow from each other will fall and the central bank may be
expected to reduce the supply of liquidity to the banks.
c. the short-term interest rate at which the economy’s commercial banks lend
to and borrow from each other will rise and the long-term interest rate may
be expected to rise as a result.
d. the long-term interest rate in the economy will rise and the central bank
will raise its interest rate in response.
e. the short-term interest rate at which the economy’s commercial banks lend
to and borrow from each other will rise and the central bank may be
expected to increase the supply of liquidity to the banks.
30. Which one of the following is not true?

a. The difference between the price at which a commercial bank sells an
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asset to the central bank and the price it agrees to buy it back can be
expressed as an annualized percentage of the selling price, and this is
called the refinancing rate.
b. Commercial banks may borrow from and lend to each other and the
interest rate at which they do this is called the refinancing rate.
c. In the UK the refinancing rate is known as the repo rate and in the USA it
is referred to as the discount rate.
d. If the central bank has bought some assets from a commercial bank with
an agreement that the commercial bank will buy them back at a later date,
then this would be called a repo.
e. If the central bank raises its refinancing rate then the commercial banks
will try to reduce their lending and so reduce the need to borrow from the
central bank.
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CHAPTER 30: MONEY GROWTH AND INFLATION
True/False
1. An increase in the price level is the same as a decrease in the value of money.
2. The quantity theory of money suggests that an increase in the money supply
increases real output proportionately.
3. If the price level were to double, the quantity of money demanded would double
because people would need twice as much money to cover the same transactions.
4. In the long run, an increase in the money supply tends to have an effect on real
variables but no effect on nominal variables.
5. If the money supply is €500, real output is 2,500 units, and the average price of a
unit of real output is €2, the velocity of money is 10.
6. The Fisher effect suggests that, in the long run, if the rate of inflation rises from 3
per cent to 7 per cent, the nominal interest rate should increase by 4 percentage
points and the real interest rate should remain unchanged.
7. An inflation tax is paid by those that hold money because inflation reduces the
value of their money holdings.
8. Monetary neutrality means that a change in the money supply doesn't cause a
change in anything at all.
9. Inflation erodes the value of people's wages and reduces their standard of living.
10. Inflation reduces the relative price of goods whose prices have been temporarily
held constant to avoid the costs associated with changing prices.
11. The shoe leather costs of inflation should be approximately the same for a
medical doctor and for an unemployed worker.
12. Inflation tends to stimulate saving because it raises the after tax real return to
saving.
13. Governments that spend more money than they can raise from taxing or
borrowing tend to print too much money which causes inflation.
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14. If inflation turns out to be higher than people expected, wealth is redistributed to
lenders from borrowers.
15. If the nominal interest rate is 7 per cent and the inflation rate is 5 per cent, the real
interest rate is 12 per cent.
Multiple Choice
16. In the long run, inflation is caused by

a. governments that raise taxes so high that it increases the cost of doing
business and, hence, raises prices.
b. banks that have market power and refuse to lend money.
d. governments that print too much money.
e. increases in the price of inputs, such as labour and oil.
17. When prices rise at an extraordinarily fast rate, it is called

a. disinflation.
b. deflation.
c. hyperinflation.
d. inflation.
e. hypoinflation.
18. If the price level doubles,

a. the quantity demanded of money falls by half.
b. the value of money has been cut by half.
c. nominal income is unaffected.
e. the money supply has been cut by half.
19. In the long run, the demand for money is most dependent upon
a. the level of prices.
b. the interest rate.
c. the availability of banking outlets.
d. the availability of credit cards.
20. The quantity theory of money concludes that an increase in the money supply
causes
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a. a proportional increase in prices.
b. a proportional increase in real output.
c. a proportional decrease in velocity.
d. a proportional increase in velocity.
e. a proportional decrease in prices.
21. An example of a real variable is

a. the wage rate in euros.
b. None of these answers are real variables.
c. the price of corn.
d. the nominal interest rate.
e. the ratio of the value of wages to the price of soda.
22. The quantity equation states that

a. money 3 real output = velocity 3 price level.
b. money 3 velocity = price level 3 real output.
d. money 3 price level = velocity 3 real output.
23. If money is neutral,

a. an increase in the money supply does nothing.
b. a change in the money supply only affects real variables such as real
output.
c. a change in the money supply reduces velocity proportionately; therefore
there is no effect on either prices or real output.
d. a change in the money supply only affects nominal variables such as
prices and wages.
e. the money supply cannot be changed because it is tied to a commodity
such as gold.
24. If the money supply grows 5 per cent, and real output grows 2 per cent, prices
should rise by
a. 5 per cent.
b. more than 5 per cent.
c. less than 5 per cent.
25. The velocity of money is

a. highly unstable.
b. impossible to measure.
c. the rate at which money loses its value.
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d. the rate at which inflation rises.
e. the rate at which money changes hands.
26. Countries that employ an inflation tax do so because

a. the government doesn't understand the causes and consequences of
inflation.
b. government expenditures are high and the government has inadequate tax
collections and difficulty borrowing.
c. an inflation tax is the most progressive (paid by the rich) of all taxes.
d. an inflation tax is the most equitable of all taxes.
e. the government has a balanced budget.
27. An inflation tax

a. is usually employed by governments with balanced budgets.
c. is an explicit tax paid quarterly by businesses based on the amount of
increase in the prices of their products.
d. is a tax borne only by people who hold interest bearing savings accounts.
e. is a tax on people who hold money.
28. Suppose the nominal interest rate is 7 per cent while the money supply is growing
at a rate of 5 per cent per year. If the government increases the growth rate of the
money supply from 5 per cent to 9 per cent, the Fisher effect suggests that, in the
long run, the nominal interest rate should become
a. 9 per cent.
b. 11 per cent.
c. 4 per cent.
d. 16 per cent.
e. 12 per cent.
29. If the nominal interest rate is 6 per cent and the inflation rate is 3 per cent, the real
interest rate is
b. 3 per cent.
c. 6 per cent.
d. 18 per cent.
e. 9 per cent.
30. If actual inflation turns out to be greater than people had expected, then
a. no redistribution occurred.
b. wealth was redistributed to lenders from borrowers.
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c. the real interest rate is unaffected.
d. wealth was redistributed to borrowers from lenders.
31. Which of the following costs of inflation does not occur when inflation is
constant and predictable?
a. Costs due to inflation induced tax distortions.
b. Arbitrary redistributions of wealth.
c. Shoeleather costs.
d. Menu costs.
e. Costs due to confusion and inconvenience.
32. Suppose that, because of inflation, a business in Russia must calculate, print, and
mail a new price list to its customers each month. This is an example of
a. shoeleather costs.
b. costs due to confusion and inconvenience.
c. arbitrary redistributions of wealth.
d. costs due to inflation induced tax distortions.
e. menu costs.
33. Suppose that, because of inflation, people in Brazil economize on currency and
go to the bank each day to withdraw their daily currency needs. This is an
example of
a. costs due to inflation induced relative price variability which misallocates
resources.
b. menu costs.
c. shoeleather costs.
d. costs due to inflation induced tax distortions.
e. costs due to confusion and inconvenience.
34. If the real interest rate is 4 per cent, the inflation rate is 6 per cent, and the tax rate
is 20 per cent, what is the after tax real interest rate?
a. 5 per cent
b. 2 per cent
c. 1 per cent
d. 3 per cent
e. 4 per cent
35. Which of the following statements is true about a situation where real incomes
are rising at 3 per cent per year.
a. None of these answers is true.
b. If money is neutral, an increase in the money supply will not alter the rate
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of growth of real income.
c. All of these answers are true.
d. If inflation were 0 per cent, people should receive raises of about 3 per
cent.
e. If inflation were 5 per cent, people should receive raises of about 8 per
cent per year.
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CHAPTER 31: OPEN-ECONOMY MACROECONOMIC: BASIC CONCEPTS
True/False
1. Net exports are defined as imports minus exports.
2. UK net capital outflow falls when Whole Foods Inc of the USA buys retail
premises in Kensington, London.
3. For any country, net exports are always equal to net capital outflow because
every international transaction involves an exchange of an equal value of some
combination of goods and assets.
4. For a given amount of UK national saving, an increase in UK net capital outflow

decreases UK domestic investment.
5. Valuable technologically advanced goods are less likely to be traded

internationally because shipping costs absorb too much of the potential profit.
6. A country that exports more than it imports is said to have a trade deficit.
7. If the yen/dollar exchange rate rises, the dollar has appreciated.
8. If a case of mineral water costs €8 in the Eurozone and 720 yen in Japan, then
according to the purchasing power parity theory of exchange rates, the yen/euro
exchange rate should be 5,760 yen/euro.
9. If purchasing power parity holds, the real exchange rate is always equal to 1.
10. If the UK's money supply grows faster than Switzerland’s, the value of the pound
should rise relative to the value of the Swiss franc.
11. If the nominal exchange rate is 2 UK pounds per US dollar, and if the price of a
Big Mac is $2 in the USA and 6 pounds in the UK, then the real exchange rate is
2/3 British Big Mac per American Big Mac.
12. In order to increase domestic investment, a country must either increase its saving
or decrease its net foreign investment
13. Arbitrage is the process of taking advantage of differences in prices of the same
good by buying where the good is cheap and selling where it is expensive.
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14. Arbitrage tends to cause prices for the same good to diverge from one another.
15. If a company based in the UK prefers a strong pound (a pound with a high
foreign exchange value), then the company probably exports more than it imports
Multiple Choice
16. An economy that interacts with other economies is known as

a. an export economy.
b. a friendly economy.
c. an open economy.
d. a balanced trade economy.
e. an import economy.
17. Each of the following is a reason why international trade has expanded in recent
decades except which one?
a. Technological improvements have meant that countries have become
more similar in terms of the goods they can produce.
b. Many new high technology goods have been introduced for which the cost
of transport relative to the value of the product is low.
c. There have been improvements in technology that have improved
telecommunications between countries.
d. Policy makers have promoted policies to increase international trade, such
as the General Agreement on Tariffs and Trade, and subsequently
established the World Trade Organization.
e. Larger cargo ships and aeroplanes have reduced the cost of transporting
goods.
18. Which of the following statements is true about a country with a trade deficit?
a. Net exports are negative.
b. Net capital outflow must be positive.
c. Exports exceed imports.
d. Net exports are positive.
19. Which of the following would directly increase UK net capital outflow?
a. Rolls Royce sells an aircraft engine to Boeing of the USA.
b. The Japanese financial company Nomura buys shares in Vodafone.
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c. BP builds a new oilrig in Venezuela.
d. Honda builds a new plant in Swindon, England.
20. Which of the following is an example of foreign direct investment?

a. General Motors buys steel from South Korea.
b. General Motors of the USA buys shares in Saab of Sweden.
c. McDonald's builds a restaurant in Moscow.
d. UK publisher Bloomsbury sells the rights to make a film of a Harry Potter
book to an American film studio.
21. If Japan exports more than it imports,

a. Japan's net exports are negative.
b. Japan is running a trade deficit.
c. Japan's net capital outflow must be positive.
d. Japan's net capital outflow must be negative.
22. If the USA saves $1,000 billion and US net capital outflow is - $200 billion, US
domestic investment is
a. $800 billion.
b. $1,200 billion.
c. -$200 billion.
d. $1,000 billion.
e. $200 billion.
23. If the exchange rate changes from 3 Brazilian reals per dollar to 4 reals per euro,
b. the euro has appreciated.
c. the euro has depreciated.
d. the euro could have appreciated or depreciated depending what happened
to relative prices in Brazil and the Eurozone countries.
24. Suppose the real exchange rate between Russia and the UK is defined in terms of
bottles of Russian vodka per bottle of UK vodka. Which of the following will
increase the real exchange rate (that is, increase the number of bottles of Russian
vodka per bottle of UK vodka)?
a. an increase in the price in pounds of UK vodka
b. None of the changes described in these answers will increase the real
exchange rate.
c. an increase in the number of roubles for which the pound can be
exchanged
d. All of the changes described in these answers will increase the real
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exchange rate.
e. a decrease in the price in roubles of Russian vodka
25. The most accurate measure of the international value of the UK pound is
a. an exchange rate index that accounts for many exchange rates.
b. the yen/pound exchange rate.
c. the pound/dollar exchange rate.
d. the euro/pound exchange rate.
e. the Swiss franc/pound exchange rate.
26. If the nominal exchange rate between UK pounds and US dollars is 0.5 pound per
dollar, how many dollars can you get for a pound?
a. 1.5 dollars
b. 0.5 of a dollar
c. 1 dollar
d. 2 dollars
27. Suppose the nominal exchange rate between the Japanese yen and the UK pound
is 100 yen per pound. Further, suppose that a kilogram of rice costs £2 in the UK
and 250 yen in Japan. What is the real exchange rate between Japan and the UK?
a. 2.5 kilograms of Japanese rice per kilogram of UK rice
b. 0.5 kilograms of Japanese rice per kilogram of UK rice
d. 1.25 kilograms of Japanese rice per kilogram of UK rice
e. 0.8 kilograms of Japanese rice per kilogram of UK rice
28. Which of the following people or firms would be pleased by a depreciation of the
pound?
a. All the people and firms mentioned in these answers.
b. A French exporter of wine to the UK.
c. An American tourist visiting London.
d. A UK importer of French wine.
e. A UK company that wishes to expand abroad by building a factory in
Poland.
29. Suppose a cup of coffee is 1.5 euros in Germany and £0.50 in the UK. If
purchasing power parity holds, what is the nominal exchange rate between euros
and pounds?
a. 3 euros per pound
b. 1.5 euros per pound
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c. 0.75 euro per pound
d. 1/3 euro per pound
30. Which of the following products would likely be the least accurate if used to
calculate purchasing power parity?
a. Diamonds
b. Gold
c. Cars
d. Wheat
e. Dental services
31. Suppose the money supply in Mexico grows more quickly than the money supply
in the USA. We would expect that
a. The Mexican peso should appreciate relative to the US dollar.
b. the Mexican peso should depreciate relative to the US dollar.
d. the Mexican peso should maintain a constant exchange rate with the US
dollar because of purchasing power parity.
32. When people take advantage of differences in prices for the same good by buying
it where it is cheap and selling it where it is expensive, it is known as
a. net exports.
b. purchasing power parity.
c. net capital outflow.
d. currency appreciation.
e. arbitrage.
33. Suppose a resident of the USA buys a Jaguar car from the UK, and the UK
exporter uses the receipts to buy shares in Boeing. Which of the following
statements is true from the perspective of the UK?
a. Net exports fall, and net capital outflow rises.
b. Net exports rise, and net capital outflow rises.
d. Net exports rise, and net capital outflow falls.
e. Net exports fall, and net capital outflow falls.
34. Which of the following statements is not true about the relationship between
national saving, investment, and net capital outflow?
a. An increase in saving associated with an equal increase in net capital
outflow leaves domestic investment unchanged.
b. For a given amount of saving, an increase in net capital outflow must
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decrease domestic investment.
c. For a given amount of saving, a decrease in net capital outflow must
decrease domestic investment.
d. Saving is the sum of investment and net capital outflow.
35. Suppose the inflation rate over the last 20 years has been 10 per cent in the UK, 7
per cent in Japan, and 3 per cent in the USA. If purchasing power parity holds,
which of the following statements is true? Over this period,
a. the value of the dollar should have fallen compared to the value of the
pound and the yen.
c. the yen should have fallen in value compared to the pound and risen
compared to the dollar.
d. the value of the pound should have risen compared to the value of the yen
and the dollar.
e. the yen should have risen in value compared to the pound and fallen
compared to the dollar.
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CHAPTER 32: A MACROECONOMIC THEORY OF THE OPEN ECONOMY
True/False
1. Net capital outflow is the purchase of domestic assets by foreigners minus the
purchase of foreign assets by domestic residents.
2. A country's net capital outflow (NCO) is always equal to its net exports (NX).
3. All other things being equal, an increase in a country's real interest rate reduces
net capital outflow.
4. An increase in UK net capital outflow increases the supply of pounds in the

market for foreign currency exchange and decreases the real exchange rate of the
pound.
5. If labour unions convince UK consumers to "buy British," it will improve (move

toward surplus) the UK trade balance.
6. If a country's net capital outflow (NCO) is positive, it is an addition to its demand

for loanable funds.
7. An increase in the government's budget deficit shifts the supply of loanable funds
to the right.
8. An increase in the UK government's budget deficit tends to cause the real

exchange rate of the pound to depreciate.
9. The term "twin deficits" refers to a country's trade deficit and its government
budget deficit.
10. If the EU raises its tariff on imported sugar, it will reduce imports and improve
the trade balance of EU members.
11. If the EU raises its tariff on imported sugar, domestic sugar growers will benefit,
but the euro will appreciate and domestic producers of export goods will be
harmed.
12. An increase in the government budget deficit reduces net exports.
13. A country experiencing capital flight will experience a reduction in its net capital
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outflow and its net exports.
14. If UK residents increase their saving, the pound will appreciate in the market for
foreign currency exchange.
15. A rise in Denmark’s net exports (NX) will increase the demand for the Danish
krone in the market for foreign currency exchange and the krone will appreciate
in value.
Multiple Choice
16. Which of the following statements regarding the loanable funds market is not
true?
a. A decrease in a country's net capital outflow shifts the demand for
loanable funds to the left.
b. An increase in domestic investment shifts the demand for loanable funds
to the right.
c. An increase in a country's net capital outflow shifts the supply of loanable
funds to the left.
d. An increase in a country's net capital outflow raises its real interest rate.
17. An increase in the government budget deficit

a. has no impact on the real interest rate and fails to crowd out investment
because foreigners buy assets in the deficit country.
b. decreases the real interest rate and crowds out investment.
d. increases the real interest rate and crowds out investment.
18. Which of the following statement regarding the loanable funds market is true?
a. A decrease in the government budget deficit increases the real interest
rate.
b. An increase in the government budget deficit shifts the supply of loanable
funds to the right.
c. An increase in private saving shifts the supply of loanable funds to the
left.
d. An increase in the government budget deficit shifts the supply of loanable
funds to the left.
19. Assuming all other things unchanged, a higher UK real interest rate
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a. decreases UK net capital outflow because UK residents and foreigners
prefer to invest in the UK
c. decreases UK net capital outflow because UK residents and foreigners
prefer to invest abroad.
d. increases UK net capital outflow because UK residents and foreigners
prefer to invest in the UK.
20. An increase in Europe's taste for UK produced Hondas would cause the pound to
a. depreciate and would increase UK net exports.
b. appreciate and would increase UK net exports.
c. depreciate and would decrease UK net exports.
d. appreciate and would decrease UK net exports.
e. appreciate, but the total value of UK net export stays the same.
21. An increase in the UK government budget deficit

a. increases UK net exports and decreases UK net capital outflow.
b. decreases UK net exports and UK net capital outflow the same amount.
c. increases UK net exports and UK net capital outflow the same amount.
d. decreases UK net exports and increases UK net capital outflow.
22. The phrase "twin deficits" refers to

a. a country's trade deficit and its government budget deficit.
b. the fact that if a country has a trade deficit, its trading partners must also
have trade deficits.
c. the equality of a country's saving deficit and its investment deficit.
d. a country's trade deficit and its net capital outflow deficit.
23. Which of the following statements regarding the market for foreign currency
exchange is true?
a. An increase in UK net exports decreases the supply of pounds and the
pound depreciates.
b. An increase in UK net exports increases the demand for pounds and the
pound appreciates.
c. An increase in UK net exports increases the supply of pounds and the
pound depreciates.
d. An increase in UK net exports decreases the demand for pounds and the
pound appreciates.
24. Which of the following statements regarding the market for foreign currency
exchange is true?
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a. An increase in UK net capital outflow increases the supply of pounds and
the pound depreciates.
b. An increase in UK net capital outflow increases the demand for pounds
and the pound appreciates.
c. An increase in UK net capital outflow increases the demand for pounds
and the pound depreciates.
d. An increase in UK net capital outflow increases the supply of pounds and
the pound appreciates.
25. If the EU imposes a quota on the importing of clothing produced in China, so

reducing UK imports of clothing, which of the following is true regarding the
market for foreign currency exchange?
a. The demand for pounds decreases and the pound depreciates.
b. The supply of pounds increases and the pound depreciates.
c. The supply of pounds decreases and the pound appreciates.
d. The demand for pounds increases and the pound appreciates.
26. If the EU imposes a quota on the importing of clothing produced in China, so

reducing UK imports of clothing, which of the following is true regarding UK net
exports?
a. Net exports will rise.
c. Net exports will fall.
d. Net exports will remain unchanged.
27. Suppose, due to political instability, Russians suddenly choose to invest in UK

assets as opposed to Russian assets. Which of the following statements is true
regarding UK net foreign investment?
a. UK net foreign investment is unchanged because only UK residents can
alter UK net foreign investment.
b. UK net foreign investment rises.
c. UK net foreign investment falls.
28. Suppose, due to political instability, Russians suddenly choose to purchase UK

assets as opposed to Russian assets. Which of the following statements is true
regarding the value of the pound and UK net exports?
a. The pound appreciates, and UK net exports rise.
b. The pound appreciates, and UK net exports fall.
c. The pound depreciates, and UK net exports rise.
d. The pound depreciates, and UK net exports fall.
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29. An increase in UK private saving

a. increases UK net exports and UK net capital outflow the same amount.
b. increases UK net exports and decreases UK net capital outflow.
c. decreases UK net exports and UK net capital outflow the same amount.
d. decreases UK net exports and increases UK net capital outflow.
30. Which of the following statements about trade policy is true?

a. A country's trade policy has no impact on the size of its trade balance.
c. A restrictive import quota decreases a country's net exports.
d. A restrictive import quota increases a country's net exports.
31. Which of the following groups would not benefit from an EU import quota on
Japanese cars?
a. EU consumers who buy electronics from Japan.
b. EU farmers who export grain.
c. Employees of EU car manufacturers.
d. Shareholders of German carmaker BMW.
32. An example of a trade policy is

a. a tariff on sugar.
b. All are examples of trade policy.
c. capital flight because it increases a country's net exports.
d. an increase in the government budget deficit because it reduces a country's
net exports.
33. An export subsidy should have the opposite effect of

a. a government budget deficit.
b. capital flight.
c. an increase in private saving.
d. a tariff.
34. Which of the following groups would be most harmed by a UK government

budget deficit?
a. Foreigners who wish to buy assets in the UK.
b. BAe Systems wishing to sell aircraft to Saudi Arabia.
c. UK residents wishing to buy foreign produced cars.
d. Lenders of loanable funds.
35. Capital flight

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a. decreases a country's net exports and increases its long-run growth path.
b. increases a country's net exports and increases its long-run growth path.
c. increases a country's net exports and decreases its long-run growth path.
d. decreases a country's net exports and decreases its long-run growth path.
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CHAPTER 33: AGGREGATE DEMAND AND AGGREGATE SUPPLY
True/False
1. Over the last 50 years, UK real GDP has grown at about 5 percent per year.
2. Investment is a particularly volatile component of spending across the business

cycle.
3. An increase in price expectations shifts the long-run aggregate supply curve to

the left.
4. If the classical dichotomy and monetary neutrality hold in the long run, then the
long-run aggregate supply curve should be vertical.
5. Economists refer to fluctuations in output as the "business cycle" because

movements in output are regular and predictable.
6. One reason aggregate demand slopes downward is the wealth effect: a decrease in
the price level increases the value of money holdings and consumer spending
rises.
7. If a country’s central bank increases the money supply, the aggregate demand
curve shifts to the left.
8. The misperceptions theory explains why the long-run aggregate supply curve is
downward sloping.
9. A rise in price expectations that causes wages to rise causes the short-run
aggregate supply curve to shift left.
10. If the economy is in a recession, the economy will adjust to long-run equilibrium
on its own as wages and price expectations rise.
11. In the short run, if the government cuts back spending to balance its budget, it
will probably cause a recession.
12. The short-run effect of an increase in aggregate demand is an increase in output

and an increase in the price level.
13. A rise in the price of oil tends to cause stagflation.

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14. In the long run, an increase in government spending tends to increase output and
prices.
15. If policy makers choose to try to move the economy out of a recession, they
should use their policy tools to decrease aggregate demand.
Multiple Choice
16. Which of the following statements about economic fluctuations is true?

a. None of these answers
b. A depression is a mild recession.
c. A variety of spending, income, and output measures can be used to
measure economic fluctuations because most macroeconomic quantities
tend to fluctuate together.
d. A recession is when output rises above the natural rate of output.
e. Economic fluctuations have been termed the "business cycle" because the
movements in output are regular and predictable.
17. According to the interest rate effect, aggregate demand slopes downward
(negatively) because
a. lower prices increase money holdings, decrease lending, interest rates rise,
and investment spending falls.
b. lower prices increase the value of money holdings and consumer spending
increases.
c. lower prices decrease the value of money holdings and consumer spending
decreases.
d. lower prices reduce money holdings, increase lending, interest rates fall,
and investment spending increases.
18. Which of the following would not cause a shift in the long-run aggregate supply
curve?
a. All of these answers shift the long-run aggregate supply curve.
b. An increase in the available capital
c. An increase in the available labour
d. An increase in the available technology
e. An increase in price expectations
19. Which of the following is not a reason why the aggregate demand curve slopes
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downward?
a. The exchange-rate effect
b. The wealth effect.
c. The classical dichotomy/monetary neutrality effects.
d. The interest-rate effect
e. All of these answers are reasons why the aggregate-demand curve slopes
downward.
20. In the model of aggregate demand and aggregate supply, the initial impact of an
increase in consumer optimism is to
a. shift the short-run aggregate supply curve to the left.
b. shift the aggregate demand curve to the right.
c. shift the short-run aggregate supply curve to the right.
d. shift the aggregate demand curve to the left.
e. shift the long-run aggregate supply curve to the left.
21. Which of the following statements is true regarding the long-run aggregate supply
curve? The long-run aggregate supply curve
a. is vertical because an equal change in all prices and wages leaves output
unaffected.
b. is positively sloped because price expectations and wages tend to be fixed
in the long run.
c. shifts right when the government raises the minimum wage.
d. shifts left when the natural rate of unemployment falls.
22. According to the wealth effect, aggregate demand slopes downward (negatively)
because
a. lower prices increase the value of money holdings and consumer spending
increases.
b. lower prices decrease the value of money holdings and consumer spending
decreases.
c. lower prices reduce money holdings, increase lending, interest rates fall,
and investment spending increases.
d. lower prices increase money holdings, decrease lending, interest rates rise,
and investment spending falls.
23. The natural rate of output is the amount of real GDP produced
a. when the economy is at the natural rate of unemployment.
b. when the economy is at the natural rate of investment.
c. when the economy is at the natural rate of aggregate demand.
d. when there is no unemployment.
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24. Suppose the price level falls but because of fixed nominal wage contracts, the real
wage rises and firms cut back on production. This is a demonstration of the
a. sticky-wage theory of the short-run aggregate supply curve.
b. classical dichotomy theory of the short-run aggregate supply curve.
c. misperceptions theory of the short-run aggregate supply curve.
d. sticky-price theory of the short-run aggregate supply curve.
25. Suppose the price level falls but suppliers only notice that the price of their
particular product has fallen. Thinking there has been a fall in the relative price of
their product, they cut back on production. This is a demonstration of the
a. misperceptions theory of the short-run aggregate supply curve.
b. classical dichotomy theory of the short-run aggregate supply curve.
c. sticky-price theory of the short-run aggregate supply curve.
d. sticky-wage theory of the short-run aggregate supply curve.
26. Suppose the economy is initially in long-run equilibrium. Then suppose there is a
increase in military spending due to rising international tensions. According to
the model of aggregate demand and aggregate supply, what happens to prices and
output in the short run?
a. Prices fall; output rises.
b. Prices fall; output falls.
c. Prices rise; output falls.
d. Prices rise; output rises.
increase in military spending due to rising international tensions. According to
the model of aggregate demand and aggregate supply, what happens to prices and
output in the long run?
a. Output falls; prices are unchanged from the initial value.
b. Prices fall; output is unchanged from its initial value.
c. Output and the price level are unchanged from their initial values.
d. Prices rise; output is unchanged from its initial value.
e. Output rises; prices are unchanged from the initial value.
drought that destroys much of the wheat crop. According to the model of
aggregate demand and aggregate supply, what happens to prices and output in the
short run?
a. Prices rise; output falls.
b. Prices fall; output rises.
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c. Prices rise; output rises.
d. Prices fall; output falls.
drought that destroys much of the wheat crop. If policymakers allow the economy
to adjust to long-run equilibrium on its own, according to the model of aggregate
demand and aggregate supply, what happens to prices and output in the long run?
a. Output rises; prices are unchanged from the initial value.
b. Output and the price level are unchanged from their initial values.
c. Output falls; prices are unchanged from the initial value.
d. Prices fall; output is unchanged from its initial value.
e. Prices rise; output is unchanged from its initial value.
30. Stagflation occurs when the economy experiences

a. rising prices and rising output.
b. rising prices and falling output.
c. falling prices and falling output.
d. falling prices and rising output.
31. Which of the following events shifts the short-run aggregate supply curve to the
right?
a. a decrease in the money supply
b. a drop in oil prices
c. an increase in government spending on military equipment
e. an increase in price expectations
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32.
Refer to Exhibit 4. Suppose the economy is operating in a recession such as point

B in Exhibit 4. If policymakers wished to move output to its long-run natural rate,
they should attempt to
a. shift aggregate demand to the left.
b. shift short-run aggregate supply to the left.
c. shift aggregate demand to the right.
d. shift short-run aggregate supply to the right.
33.
Refer to Exhibit 4. Suppose the economy is operating in a recession such as point

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B in Exhibit 4. If policymakers allow the economy to adjust to the long-run
natural rate on its own,
a. people will reduce their price expectations and the short-run aggregate
supply will shift right.
b. people will raise their price expectations and aggregate demand will shift
left.
c. people will raise their price expectations and the short-run aggregate
supply will shift left.
d. people will reduce their price expectations and aggregate demand will
shift right.
34. According to the model of aggregate supply and aggregate demand, in the long
run, an increase in the money supply should cause
a. prices to rise and output to rise.
b. prices to fall and output to remain unchanged.
c. prices to fall and output to fall.
d. prices to rise and output to remain unchanged.
35. Policy makers are said to "accommodate" an adverse supply shock if they
a. fail to respond to the adverse supply shock and allow the economy to
adjust on its own.
b. respond to the adverse supply shock by decreasing aggregate demand,
which lowers prices.
c. respond to the adverse supply shock by decreasing short-run aggregate
supply.
d. respond to the adverse supply shock by increasing aggregate demand,
which further raises prices.
CHAPTER 34: THE INFLUENCE OF MONETARY AND FISCAL POLICY ON

AGGREGATE DEMAND
True/False
1. An increase in the interest rate increases the quantity demanded of money

because it increases the rate of return on money.
2. When money demand is drawn on a graph with the interest rate on the vertical
axis and the quantity of money on the horizontal axis, an increase in the price
level shifts money demand to the right.
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3. Keynes's theory of liquidity preference suggests that the interest rate is

determined by the supply and demand for money.
4. The interest-rate effect suggests that the aggregate demand curve slopes
downward because an increase in the price level shifts money demand to the
right, increases the interest rate, and reduces investment.
5. An increase in the money supply shifts the money supply curve to the right,
increases the interest rate, decreases investment, and shifts the aggregate demand
curve to the left.
6. Because of the multiplier effect, an increase in government spending of £40

billion will shift the aggregate demand curve to the right by more than £40 billion
(assuming there is no crowding out).
7. If the MPC (marginal propensity to consume) is 0.80, then the value of the
multiplier is 8.
8. Crowding out occurs when an increase in government spending increases

incomes, shifts money demand to the right, raises the interest rate, and reduces
private investment.
9. Suppose the government increases its expenditure by £10 billion. If the crowding-
out effect exceeds the multiplier effect, then the aggregate demand curve shifts to
the right by more than £10 billion.
10. Suppose investors and consumers become pessimistic about the future and cut
back on expenditures. If fiscal policymakers engage in activist stabilization
policy, the policy response should be to decrease government spending and
increase taxes.
11. Many economists prefer automatic stabilizers because they affect the economy
with a shorter lag than activist stabilization policies.
12. In the short run, the interest rate is determined by the loanable funds market,
while in the long run, the interest rate is determined by money demand and
money supply.
13. Unemployment benefits are an example of an automatic stabilizer because when

incomes fall, unemployment benefits rise.
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Multiple Choice
14. Keynes's liquidity preference theory of the interest rate suggests that the interest
rate is determined by
a. aggregate supply and aggregate demand.
b. the supply and demand for loanable funds.
c. the supply and demand for money.
d. the supply and demand for labour.
15. When money demand is expressed in a graph with the interest rate on the vertical
axis and the quantity of money on the horizontal axis, an increase in the interest
rate
b. decreases the quantity demanded of money.
c. increases the quantity demanded of money.
d. decreases the demand for money.
e. increases the demand for money.
16. When the supply and demand for money are expressed in a graph with the
interest rate on the vertical axis and the quantity of money on the horizontal axis,
an increase in the price level
a. shifts money demand to the right and increases the interest rate.
c. shifts money demand to the right and decreases the interest rate.
d. shifts money demand to the left and increases the interest rate.
e. shifts money demand to the left and decreases the interest rate.
17. For the Eurozone countries, the most important source of the downward slope of
the aggregate demand curve is probably
a. the wealth effect.
c. the exchange-rate effect.
d. the fiscal effect.
e. the interest-rate effect.
18. In the market for real output, the initial effect of an increase in the money supply
is to
a. shift the aggregate supply curve to the right.
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b. shift the aggregate supply curve to the right.
c. shift the aggregate demand curve to the left.
d. shift the aggregate demand curve to the right.
19. The initial effect of an increase in the money supply is to

a. increase the interest rate.
b. increase the price level.
c. decrease the price level.
d. decrease the interest rate.
20. The long-run effect of an increase in the money supply is to

a. increase the interest rate.
b. decrease the price level.
c. increase the price level.
d. decrease the interest rate.
21. Suppose a wave of investor and consumer pessimism in the USA causes a
reduction in spending. If the US Federal Reserve (which has a broader remit than
the Bank of England which is charged only with controlling inflation) chooses to
engage in activist stabilization policy, it should
a. increase government spending and decrease taxes.
b. decrease the money supply.
c. decrease government spending and increase taxes.
d. decrease interest rates.
22. The initial impact of an increase in government spending is to shift

a. aggregate demand to the right.
b. aggregate demand to the left.
c. aggregate supply to the right.
d. aggregate supply to the left.
23. If the marginal propensity to consume MPC is 0.75, the value of the multiplier is
a. 4.
b. 7.5.
d. 5.
e. 0.75.
24. An increase in the marginal propensity to consume (MPC)

a. raises the value of the multiplier.
b. has no impact on the value of the multiplier.
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c. rarely occurs because the MPC is set by congressional legislation.
d. lowers the value of the multiplier.
25. Suppose a wave of investor and consumer optimism has increased spending so
that the current level of output exceeds the long-run natural rate. If policy makers
choose to engage in activist stabilization policy, they should
a. decrease government spending, which the shifts the aggregate demand
curve to the left.
b. decrease taxes, which shifts the aggregate demand curve to the right.
c. decrease taxes, which shifts the aggregate demand curve to the left.
d. decrease government spending, which shifts the aggregate demand curve
to the right.
26. When an increase in government purchases raises incomes, shifts money demand
to the right, raises the interest rate, and lowers investment, we have seen a
demonstration of
a. supply-side economics.
c. the crowding-out effect.
d. the multiplier effect.
27. Which of the following statements regarding taxes is correct?

a. Most economists believe that, in the short run, the greatest impact of a
change in taxes is on aggregate supply, not aggregate demand.
b. An increase in taxes shifts the aggregate demand curve to the right.
c. A decrease in taxes shifts the aggregate supply curve to the left.
d. A permanent change in taxes has a greater effect on aggregate demand
than a temporary change in taxes.
28. Suppose the government increases its purchases by £16 billion. If the multiplier
effect exceeds the crowding-out effect, then
a. the aggregate supply curve shifts to the right by more than £16 billion.
b. the aggregate demand curve shifts to the left by more than £16 billion.
c. the aggregate demand curve shifts to the right by more than £16 billion.
d. the aggregate supply curve shifts to the left by more than £16 billion.
29. When an increase in government purchases increases the income of some people,
and those people spend some of that increase in income on additional consumer
goods, we have seen a demonstration of
a. the multiplier effect.
b. supply-side economics.
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d. the crowding-out effect.
30. Which of the following is an automatic stabilizer?

a. Spending on public schools
b. Military spending
c. All of these answers are automatic stabilizers.
d. Spending on the space shuttle
e. Unemployment benefits
31. Which of the following statements about stabilization policy is not true?
a. The UK government has given control of interest rates, a key tool of
activist stabilization policy, to the Bank of England.
b. Many economists prefer automatic stabilizers because they affect the
economy with a shorter lag than activist stabilization policy.
c. None of these answers is true.
d. Long lags enhance the ability of policy makers to fine-tune the economy.
e. When policy markers implement activist stabilization policies, there is a
significant risk that their policies may actually have a destabilizing effect.
32. Which of the following best describes how an increase in the money supply shifts
the aggregate demand curve?
a. The money supply shifts right, prices fall, spending increases, and the
aggregate demand curve shifts right.
b. The money supply shifts right, the interest rate rises, investment decreases,
and the aggregate demand curve shifts left.
c. The money supply shifts right, the interest rate falls, investment increases,
and the aggregate demand curve shifts right.
d. The money supply shifts right, prices rise, spending falls, and the
aggregate demand curve shifts left.
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CHAPTER 35: THE SHORT-RUN BETWEEN INFLATION AND UNEMPLOYMENT
True/False
1. The Phillips curve illustrates the positive relationship between inflation and
unemployment.
2. If inflation is 4 per cent and unemployment is 6 per cent, the misery index is 2 per
cent.
3. In the short run, an increase in aggregate demand increases prices and output, and
decreases unemployment.
4. When unemployment is below the natural rate the labour market is unusually
tight, putting pressure on wages and prices to rise.
5. An increase in price expectations shifts the Phillips curve upward and makes the
inflation unemployment trade-off less favourable.
6. An increase in the money supply increases inflation and permanently decreases

unemployment.
7. In the long run, the unemployment rate is independent of inflation and the
Phillips curve is vertical at the natural rate of unemployment.
8. When actual inflation exceeds expected inflation, unemployment exceeds the

natural rate.
9. The natural rate hypothesis suggests that, in the long run, unemployment returns
to its natural rate, regardless of inflation.
10. An adverse supply shock, such as an increase in the price of imported oil, shifts
the Phillips curve upward and makes the inflation unemployment trade-off less
favourable.
11. A decrease in unemployment benefits reduces the natural rate of unemployment

and shifts the long-run Phillips curve to the right.
12. An increase in aggregate demand temporarily reduces unemployment, but after

people raise their expectations of inflation, unemployment returns to the natural
rate.
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13. A sudden monetary contraction moves the economy up a short-run Phillips curve,
reducing unemployment and increasing inflation.
14. If people have rational expectations, an announced monetary contraction by the

central bank that is credible could reduce inflation with little or no increase in
unemployment.
15. If the sacrifice ratio is four, a reduction of inflation from 9 per cent to 5 per cent
requires a reduction in output of 8 per cent.
Multiple Choice
16. The misery index, which some commentators suggest measures the health of the
economy, is
a. the sum of the growth rate of output and the inflation rate.
b. the sum of the natural rate of unemployment and the actual rate of
unemployment.
c. the sum of the inflation rate and the central bank’s refinancing rate.
d. the sum of the unemployment rate and the inflation rate.
17. The original Phillips curve illustrates

a. the trade-off between inflation and unemployment.
b. the trade-off between output and unemployment.
c. the positive relationship between output and unemployment.
d. the positive relationship between inflation and unemployment.
18. The Phillips curve is an extension of the model of aggregate supply and aggregate
demand because, in the short run, an increase in aggregate demand increases
prices and
a. decreases unemployment.
b. decreases growth.
c. increases unemployment.
d. decreases inflation.
19. Along a short-run Phillips curve,

a. a higher rate of inflation is associated with a lower unemployment rate.
b. a higher rate of growth in output is associated with a lower unemployment
rate.
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c. a higher rate of inflation is associated with a higher unemployment rate.
d. a higher rate of growth in output is associated with a higher
unemployment rate.
20. If, in the long run, people adjust their price expectations so that all prices and
incomes move proportionately to an increase in the price level, then the long-run
Phillips curve
a. is vertical.
b. is negatively sloped.
c. has a slope that is determined by how fast people adjust their price
expectations.
d. is positively sloped.
21. According to the Phillips curve, in the short run, if policy makers choose an
expansionary policy to lower the rate of unemployment,
a. the economy will experience an increase in inflation.
b. the economy will experience a decrease in inflation.
c. inflation will be unaffected if price expectations are unchanging.
22. An increase in expected inflation

a. shifts the short-run Phillips curve downward and the unemployment
inflation trade-off is less favourable.
b. shifts the short-run Phillips curve upward and the unemployment inflation
trade-off is more favourable.
c. shifts the short-run Phillips curve downward and the unemployment
inflation trade-off is more favourable.
d. shifts the short-run Phillips curve upward and the unemployment inflation
trade-off is less favourable.
23. Which of the following would shift the long-run Phillips curve to the right?
a. An increase in the minimum wage
b. An increase in expected inflation
c. An increase in the price of foreign oil
d. An increase in aggregate demand
24. When actual inflation exceeds expected inflation,

a. unemployment is equal to the natural rate of unemployment.
b. people will reduce their expectations of inflation in the future.
c. unemployment is greater than the natural rate of unemployment.
d. unemployment is less than the natural rate of unemployment.
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25. A decrease the price of foreign oil

a. shifts the short-run Phillips curve downward, and makes the
unemployment inflation trade-off less favourable.
b. shifts the short-run Phillips curve upward, and makes the unemployment
inflation trade-off less favourable.
c. shifts the short-run Phillips curve upward, and makes the unemployment
inflation trade-off more favourable.
d. shifts the short-run Phillips curve downward, and makes the
unemployment inflation trade-off more favourable.
26. The natural rate hypothesis argues that

a. in the long run, the unemployment rate returns to the natural rate,
regardless of inflation.
b. unemployment is always below the natural rate.
c. unemployment is always above the natural rate.
d. unemployment is always equal to the natural rate.
27.
Refer to Exhibit 6. If people in the economy expect inflation to be 3 per cent and
inflation is 3 per cent, the economy is operating at point
a. B.
b. I.
c. A.
d. E.
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e. H.
28.
Refer to Exhibit 6. If people in the economy expect inflation to be 6 per cent but
inflation turns out to be 3 per cent, the economy is operating at point
a. H.
b. C.
c. D.
d. A.
e. F.
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29.
Refer to Exhibit 6. Suppose the economy is in long-run equilibrium at point E. A

sudden increase in government spending should move the economy in the
direction of point
a. D.
b. G.
c. E.
d. B.
e. A.
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30.
Refer to Exhibit 6. Suppose the economy is operating at point D. As people revise

their price expectations,
a. the short-run Phillips curve will shift in the direction of the short-run
Phillips curve associated with an expectation of 3 per cent inflation.
b. the short-run Phillips curve will shift in the direction of the short-run
c. the short-run Phillips curve will shift in the direction of the short-run
d. the long-run Phillips curve will shift to the left.
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31.
Refer to Exhibit 6. Suppose the economy is operating in long-run equilibrium at

point E. An unexpected monetary contraction will move the economy in the
direction of point
a. H.
b. F.
c. E.
d. C.
e. A.
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32.
Refer to Exhibit 6. Suppose the economy is operating in long-run equilibrium at

point E. In the long run, a monetary contraction will move the economy in the
direction of point
a. F.
b. A.
c. H.
d. I.
e. B.
33. If people have rational expectations, a monetary policy contraction that is

announced and is credible could
a. reduce inflation with little or no increase in unemployment.
b. increase inflation but it would decrease unemployment by an unusually
large amount.
c. increase inflation with little or no decrease in unemployment.
d. reduce inflation but it would increase unemployment by an unusually
large amount.
34. If the sacrifice ratio is five, a reduction in inflation from 7 per cent to 3 per cent
would require
a. a reduction in output of 20 per cent.
b. a reduction in output of 5 per cent.
c. a reduction in output of 15 per cent.
d. a reduction in output of 35 per cent.
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35. If a country’s policy makers were to continuously use expansionary monetary

policy in an attempt to hold unemployment below the natural rate, the long-run
result would be
a. an increase in the level of output.
b. a decrease in the unemployment rate.
c. an increase in the rate of inflation.
d. all of these answers.
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CHAPTER 36: COMMON AREAS AND EUROPEAN MONETARY UNION
True/False
1. The single European currency – the euro – came into existence on 1 January
2002.
2. In the context of the Single European Market project, the single European
Currency was seen as a final step towards completing the single market.
3. Because international capital flows are so huge, currency pegs such as the
Exchange Rate Mechanism are always vulnerable to speculative attacks.
4. The people who would lose their jobs working on currency transactions if the UK
to join the European EMU represent a significant cost of adopting the euro.
5. The major cost to the UK of joining the euro would be the loss of the freedom for
the country to set its own monetary policy and the loss of the possibility of
needed adjustments in the UK economy being achieved through changes in the
foreign exchange value of the UK currency.
6. In 2004 Germany had a lower degree of trade integration with the other EU
countries than did the UK
7. Since the European EMU was established the degree of capital market integration
among EMU member countries has increased substantially at both the level of the
wholesale financial markets and the level of the retail financial markets.
8. The free rider problem that arises in a currency union is that a member
government that borrows heavily may not be obliged to pay as high a rate of
interest on its borrowing as it would if it were not a member of the currency
union, while the other governments of the currency union find the financial
markets require them to pay higher interest on their borrowing because of the
high borrowing of one of their neighbours.
9. Eurozone countries in breach of the excessive deficit criterion could be subject to

a fine of up to 1% of their GDP under the Stability and Growth Pact.
10. Some of the criteria for deciding whether a group of economies constitute an
optimum currency area are probably endogenous.
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Multiple Choice
11. Before Economic and Monetary Union (EMU) most EU member countries
participated in something called
a. the European Common Currency Area.
b. the Exchange Rate Model.
c. the European Monetary Union.
d. the Exchange Rate Mechanism.
e. the European Union Mechanism.
12. Which of the following was not a goal of the EU in passing the 1986 Single
European Act to complete the Single European Market (SEM)?
a. The approximation of relevant laws, regulations and administrative
provisions between member states.
b. A common, EU-wide competition policy, administered by the European
Commission.
c. A common, EU-wide agricultural policy.
d. The free movement of goods, services, labour and capital between EU
member states.
e. A system of common external tariffs implemented against countries that
are not members of the EU.
13. Which one of the following is rightly considered a cost of a single currency?
a. The loss of the freedom for countries joining the single currency to set
their own fiscal policies.
b. The loss of the freedom for countries joining the single currency to set
their own monetary policies.
c. Higher unemployment.
d. The loss of jobs involved in currency transactions.
e. Higher inflation.
14. Which one of these benefits of a single currency is not correctly explained?
a. Using a single currency reduces price discrimination because companies
will be obliged by law to charge the same prices for their goods in the
different countries of the currency union.
b. None of the benefits of a single currency described in these answers is
incorrectly explained.
c. Using a single currency reduces transaction costs involved in trade
between members of a common currency area and the resources that are
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no longer employed in working on currency transactions can be used more
productively to produce other goods and services.
d. Using a single currency eliminates exchange rate variability for companies
trading with other members of the common currency area and so
companies may engage in more of this trade, and they can also eliminate
the cost of entering into forward foreign exchange contracts with banks.
15. If two countries, A and B, have separate currencies and there is a shift in
consumer preferences away from the goods of country A and towards those of
country B, then
a. there will be an increase in inflation in country A.
b. the foreign exchange value of country A’s currency is likely to rise, thus
making country A’s goods relatively more expensive and worsening the
reduction in aggregate demand in country A.
c. the foreign exchange value of country A’s currency is likely to fall, thus
making country A’s goods relatively cheaper and offsetting the reduction
in aggregate demand in country A.
d. there will be a fall in aggregate demand in country B.
16. If two countries, A and B, are members of a currency union and there is a shift in
consumer preferences away from the goods of country A and towards those of
country B, then which one of the following would help to offset the effect of the
resulting changes in aggregate demand in A and B on inflation and
unemployment in the two countries?
a. A high degree of labour mobility between the two countries.
b. An increase in government spending in country A.
c. A depreciation in the foreign exchange value of the common currency.
d. A low degree of capital mobility between the two countries.
e. A cut in taxes in both countries.
17. Which of the following could not be described as an asymmetric macroeconomic

shock?
a. None of these answers. All of them are asymmetric macroeconomic
shocks.
b. A sudden and substantial fall in the worldwide demand for French wine.
c. An epidemic of an animal disease in a country that significantly reduces
the country’s agricultural output.
d. A hurricane that disrupts economic activity in the USA.
e. A sudden and substantial rise in prices on the world oil market.
18. A high degree of real wage flexibility will tend to reduce the costs to a country of
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joining a currency union because
a. all of the reasons given in these answers are correct.
b. real wages fall rapidly in a recession and the economy moves quickly back
to long-run equilibrium, so limiting the duration of the recession even
when exchange rate adjustment is not possible.
c. workers will move from a country in which aggregate demand falls to
other countries of the currency union, and so unemployment remains
lower than it otherwise would.
d. real wages fall and so offset the inflationary effect of switching from the
old currency to the new common currency.
19. Which one of the following is not a characteristic that reduces the cost of a single
currency?
a. A high degree of labour mobility among the countries of the common
currency area.
b. A high degree of capital mobility among the countries of the common
currency area.
c. None of the characteristics described in these answers – they are all
characteristics that reduce the cost of a single currency.
d. Synchronized economic cycles in the countries of the common currency
area.
e. A high degree of trade integration among the countries of the common
currency area.
20. How does the eurozone compare with the USA as a possible optimal currency
area (OCA)?
a. The eurozone has a higher degree of labour mobility than the USA and
labour law is much less restrictive in the eurozone than in the USA. On
these measures, the eurozone is more likely to be an OCA than is the
USA.
b. The eurozone has a lower degree of labour mobility than the USA and
labour law is much more restrictive in the eurozone than in the USA. On
these measures, the eurozone is less likely to be an OCA than is the USA.
c. The eurozone has a higher degree of labour mobility than the USA but
labour law is much more restrictive in the eurozone than in the USA. On
these measures, it is hard to judge whether the eurozone is more or less
likely to be an OCA than is the USA.
d. The eurozone has a lower degree of labour mobility than the USA but
labour law is much less restrictive in the eurozone than in the USA. On
these measures, it is hard to judge whether the eurozone is more or less
likely to be an OCA than is the USA.
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21. What is fiscal federalism?

a. A fiscal system for a group of countries in which fiscal policy is set in a
treaty signed by all the countries.
b. A fiscal system for a group of countries in which government budget
deficits are strictly limited.
c. A fiscal system for a group of countries involving a common fiscal budget
and a system of taxes and fiscal transfers across countries.
d. A fiscal system in which fiscal policy is jointly determined by local and
national politicians.
e. A fiscal system for a group of countries in which fiscal policy is set by the
central bank.
22. Which of the following is a problem for fiscal policy in a currency union?
a. The central bank controls interest rates on long-term bonds issued by the
governments of the member countries of the currency union.
b. Governments of the member countries of the currency union may run
large budget deficits and so crowd out private investment.
c. Governments of the member countries of the currency union may run
large budget deficits and so impose costs on other countries by pushing up
interest rates on the bonds these countries’ governments issue.
d. It is difficult to raise enough tax revenue to pay for the operation of the
currency union.
e. Governments of the member countries of the currency union may run
large budget deficits and so force taxes to be increased across all countries
of the currency union.
23. To try to overcome the free rider problem, the members of EMU signed
a. the stability and growth pact.
b. the European solidarity pact.
c. the exchange rate mechanism pact.
d. the responsibility and growth pact.
e. the fiscal stability pact.
24. Which of the following is a problem for monetary policy in a currency union?
a. Money supply is more difficult to control in a currency union.
b. The inflation-unemployment trade-off is more unstable in a currency
union.
c. All of these answers describe problems for monetary policy in a currency
union.
d. The interest rate may be higher than is appropriate for economic
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conditions in some countries while it’s lower than is appropriate in some
others – monetary policy must be <one size fits all=.
e. Monetary policy will affect the economy with a longer time lag in a large
currency union than in a single country.
25. Which one of the following is not an argument in support of the UK joining the
EMU?
a. None of these arguments – they are all arguments in support of the UK
joining the EMU.
b. The characteristics of the UK housing market make UK consumers’
expenditure very sensitive to changes in interest rates.
c. The UK risks exclusion from the Euroland capital market with damaging
consequences for the City of London.
d. The UK needs to be a member of the EMU in order to continue to attract
such a large share of foreign direct investment in EU countries.
e. The UK would benefit from increased trade with the eurozone countries,
boosting GDP.
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CHAPTER 37:
True/False
1. Monetary policy affects the economy with a lag but fiscal policy has no lag.
2. Discretionary monetary policy suffers from time inconsistency because policy

makers have an incentive to engage in a policy that differs from their policy
announcements.
3. The political business cycle refers to a situation where corporate executives also
hold political office.
4. Opponents of a monetary policy rule argue that a rule would make it more
difficult for the central bank to respond to an unusual crisis.
5. Government budget deficits tend to redistribute wealth from the current

generation to future generations.
6. Replacing the income tax with a consumption tax may increase saving, but it will
tend to benefit the rich more than the poor.
7. A reduction in taxes on interest income will increase saving if the substitution

effect from the increase in after-tax interest outweighs the income effect.
8. The European Central Bank pursues an inflation targeting policy so that monetary
policy in the euro area is set in a fashion that is similar to the way the Bank of
England sets monetary policy.
9. While monetary policy may have no effect on output and employment in the long
run, a one size fits all monetary policy in the euro area that did not suit economic
conditions in the UK could cause substantial short-run fluctuations in output and
employment.
10. The UK economy grew faster than the euro area economy in the first few years
after the euro’s launch.
Multiple Choice
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11. Suppose that the consumers and firms in an economy are pessimistic about the
future and reducing their expenditure. Which of the following is an activist
stabilization policy that "leans against the wind?"
a. Policy makers should increase taxes.
c. Policy makers should decrease the money supply.
d. Policy makers should decrease government spending.
e. Policy makers should decrease interest rates.
12. Economists who argue that policy makers should not try to stabilize the economy
make all of the following arguments except which one?
a. Since stabilization policy affects the economy with a lag, well-intended
policy could be destabilizing.
b. Stabilization policy has no effect on the economy in the short run or the
long run.
c. Since forecasting shocks to the economy is difficult, well-intended policy
could be destabilizing.
d. The first rule of policy making should be "do no harm."
13. Fluctuations in the economy caused by policy maker's manipulation of the

economy for the purpose of affecting electoral outcomes is known as the
a. time inconsistency of policy.
b. income effect.
c. discretionary effect.
d. substitution effect.
e. political business cycle.
14. The discrepancy between policy announcements and policy actions is known as
the
a. time inconsistency of policy.
b. income effect.
c. substitution effect.
d. political business cycle.
e. discretionary effect.
15. Economists who argue that monetary policy should be made by a rule make all of
the following arguments except which one?
a. A policy rule is more flexible than discretionary policy.
b. A policy rule limits the abuse of power of policy makers.
c. A policy rule limits the incompetence of policy makers.
d. A policy rule eliminates the time inconsistency problem.
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16. Which of the following is an example of a discretionary policy action that further
destabilizes the economy?
a. Investors become excessively optimistic, and the central bank responds
with a reduction in the money supply.
b. Investors become pessimistic, and the central bank responds with a
reduction in interest rates.
c. Consumers become pessimistic, and fiscal policy makers respond with a
reduction in taxes.
d. Consumers become pessimistic, and fiscal policy makers respond with a
reduction in government spending.
17. A government budget deficit tends to

b. redistribute wealth from future generations to the current generation.
c. redistribute wealth from the current generation to future generations.
d. have no redistributive effects.
18. Which of the following is not true with regard to government budget deficits?
a. Budget deficits reduce capital investment, future productivity and,
therefore, future incomes.
b. Budget deficits place the burden of current spending on future taxpayers.
c. Budget deficits should be scrutinized because they are the only way to
transfer wealth across generations of taxpayers.
d. Budget deficits reduce national saving.
19. Economists who argue that the government need not balance its budget make all
of the following arguments except which one?
a. Budget deficits increase future growth because they transfer wealth from
the present generation to future generations.
b. As long as the budget deficit is used to finance investment spending rather
than current government spending then a budget deficit is quite
acceptable.
c. Budget deficits will not become an increasing burden as long as they do
not grow more quickly than a nation's nominal income.
d. Cutting the budget deficit means the tax burden on future generations can
be lower; but if the deficit reduction is achieved by reducing spending on
public services such as education then it may mean that younger
generations have lower productivity, and so lower incomes, than would
otherwise have been the case.
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20. Which of the following changes to tax laws would encourage more saving but
also increase the tax burden on low-income people?
a. Remove the double taxation on capital income from stocks
b. Replace the income tax with a consumption tax
c. Reduce inheritance taxes
d. Reduce taxes on the return to saving
e. All of the changes described in these answers
21. A reduction in taxes that increases the after-tax return to saving will increase the
quantity of saving in the economy if the
a. substitution effect from the increase in after-tax return to saving exceeds
the income effect.
b. policy is time inconsistent.
c. income effect from the increase in after-tax return to saving equals the
substitution effect.
d. income effect from the increase in after-tax return to saving exceeds the
substitution effect.
22. Tax reform that encourages saving tends to

a. shift the tax burden toward low-income people away from high-income
people.
b. reduce the rate of growth of output.
c. reduce the deficit.
d. shift the tax burden toward high-income people away from low-income
people.
23. If discretionary monetary policy is time inconsistent,

a. the long-run Phillips curve shifts to the left.
b. the short-run Phillips curve shifts downward.
c. the short-run Phillips curve shifts upward.
d. the long-run Phillips curve shifts to the right.
24. Which one of the following is not one of the UK government’s five tests that
must be passed before a strong case can be made for the UK joining the European
Economic and Monetary Union (EMU)?
a. Are business cycles and economic structures compatible so that the UK
could live permanently with euro interest rates?
b. Would joining the euro promote higher growth, stability and a lasting
increase in jobs?
c. If problems emerge, is there sufficient flexibility to deal with them?
d. Would joining the euro encourage investment?
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e. Is the UK’s trade with other countries outside of the euro area declining?
25. Which one of the following is not true?

a. The UK Treasury concluded in 1997 that the City of London would do
better if the UK were to adopt the euro than it would if the UK were to
remain outside the eurozone.
b. If EMU leads to greater financial market integration then, if there were an
asymmetric macroeconomic shock that pushed one country into recession,
its firms and consumers could borrow from other euro area residents
through the financial system to tide them over until the economy recovers.
c. About a third of UK trade takes place with other European countries.
d. Outside of the EMU, if the UK’s productivity rises more slowly than it
does in the Eurozone, then UK competitiveness can be maintained by
depreciation of the pound’s foreign exchange value against the euro; but if
the UK were in the eurozone, then wage rates would have to fall relative
to wage rates in other eurozone countries.
e. The UK has benefited from a great deal of foreign direct investment, but if
the UK remains outside of the euro area then overseas firms, such as
Nissan and Honda, may decide it is better to locate their production
facilities in the Eurozone and so avoid the transaction costs and
uncertainty that having to deal with the pound-euro exchange rate brings.
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SOLUTIONS TO QUESTIONS FROM CHAPTER 23 TO 37
CHAPTER 23
1. TRUE 9. TRUE 17. D 25. D 33. C

2. FALSE 10. FALSE 18. E 26. C 34. A
3. FALSE 11. FALSE 19. B 27. B 35. A
4. TRUE 12. TRUE 20. D 28. D
5. FALSE 13. TRUE 21. B 29. C
6. TRUE 14. TRUE 22. D 30. E
7. FALSE 15. FALSE 23. D 31. D
8. FALSE 16. C 24. B 32. B
CHAPTER 24
1. TRUE 9. TRUE 17. C 25. A 33. B

2. FALSE 10. FALSE 18. A 26. E 34. D
3. FALSE 11. FALSE 19. A 27. A 35. D
4. FALSE 12. TRUE 20. B 28. C
5. TRUE 13. TRUE 21. B 29. A
6. FALSE 14. FALSE 22. C 30. C
7. FALSE 15. TRUE 23. B 31. C
8. TRUE 16. E 24. B 32. D
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CHAPTER 25
1. FALSE 9. FALSE 17. A 25. B 33. A

2. FALSE 10. FALSE 18. D 26. B 34. B
3. TRUE 11. TRUE 19. D 27. C 35. C
4. FALSE 12. TRUE 20. B 28. D
5. TRUE 13. FALSE 21. A 29. C
6. TRUE 14. FALSE 22. B 30. B
7. TRUE 15. TRUE 23. D 31. E
8. FALSE 16. A 24. E 32. E
CHAPTER 26
1. FALSE 9. FALSE 17. A 25. B 33. A

2. FALSE 10. TRUE 18. C 26. A 34. C
3. TRUE 11. FALSE 19. C 27. A 35. B
4. TRUE 12. TRUE 20. B 28. D
5. TRUE 13. TRUE 21. A 29. A
6. FALSE 14. FALSE 22. E 30. A
7. TRUE 15. FALSE 23. A 31. D
8. TRUE 16. E 24. A 32. C
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CHAPTER 27
1. FALSE 9. TRUE 17. C 25. A 33. D

2. TRUE 10. FALSE 18. D 26. B 34. C
3. FALSE 11. FALSE 19. B 27. D 35. D
4. FALSE 12. TRUE 20. B 28. A
5. TRUE 13. FALSE 21. B 29. C
6. TRUE 14. TRUE 22. D 30. B
7. FALSE 15. TRUE 23. B 31. C
8. TRUE 16. C 24. A 32. E
CHAPTER 28
1. TRUE 9. FALSE 17. B 25. A 33. D

2. FALSE 10. FALSE 18. E 26. C 34. C
3. TRUE 11. TRUE 19. C 27. E 35. C
4. FALSE 12. FALSE 20. E 28. D
5. FALSE 13. FALSE 21. A 29. E
6. TRUE 14. FALSE 22. A 30. B
7. TRUE 15. TRUE 23. D 31. C
8. TRUE 16. A 24. A 32. D
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CHAPTER 29
1. FALSE 9. TRUE 17. D 25. E

2. FALSE 10. TRUE 18. A 26. B
3. TRUE 11. TRUE 19. D 27. B
4. TRUE 12. TRUE 20. D 28. A
5. FALSE 13. A 21. B 29. E
6. FALSE 14. A 22. C 30. B
7. TRUE 15. B 23. D
8. TRUE 16. B 24. B
CHAPTER 30
1. TRUE 9. FALSE 17. C 25. E 33. C

2. FALSE 10. TRUE 18. B 26. B 34. B
3. TRUE 11. FALSE 19. A 27. E 35. C
4. FALSE 12. FALSE 20. A 28. B
5. TRUE 13. TRUE 21. E 29. B
6. TRUE 14. FALSE 22. B 30. D
7. TRUE 15. FALSE 23. D 31. B
8. FALSE 16. D 24. C 32. E
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CHAPTER 31
1. FALSE 9. TRUE 17. A 25. A 33. B

2. FALSE 10. FALSE 18. A 26. D 34. C
3. TRUE 11. TRUE 19. C 27. E 35. E
4. TRUE 12. TRUE 20. C 28. C
5. FALSE 13. TRUE 21. C 29. A
6. FALSE 14. FALSE 22. B 30. E
7. TRUE 15. FALSE 23. B 31. B
8. FALSE 16. C 24. D 32. E
CHAPTER 32
1. FALSE 9. TRUE 17. D 25. D 33. D

2. TRUE 10. FALSE 18. D 26. D 34. B
3. TRUE 11. TRUE 19. A 27. C 35. C
4. TRUE 12. TRUE 20. E 28. B
5. FALSE 13. FALSE 21. B 29. A
6. TRUE 14. FALSE 22. A 30. A
7. FALSE 15. TRUE 23. B 31. B
8. FALSE 16. C 24. A 32. A
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CHAPTER 33
1. FALSE 9. TRUE 17. D 25. A 33. A

2. TRUE 10. FALSE 18. E 26. D 34. D
3. FALSE 11. TRUE 19. C 27. D 35. D
4. TRUE 12. TRUE 20. B 28. A
5. FALSE 13. TRUE 21. A 29. B
6. TRUE 14. FALSE 22. A 30. B
7. FALSE 15. FALSE 23. A 31. B
8. FALSE 16. C 24. A 32. C
CHAPTER 34
1. FALSE 9. FALSE 17. E 25. A

2. TRUE 10.FALSE 18. D 26. C
3. TRUE 11. TRUE 19. D 27. D
4. TRUE 12. FALSE 20. C 28. C
5. FALSE 13. TRUE 21. D 29. A
6. TRUE 14. C 22. A 30. E
7. FALSE 15. B 23. A 31. D
8. TRUE 16. A 24. A 32. C
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CHAPTER 35
1. FALSE 9. TRUE 17. A 25. D 33. A

2. FALSE 10. TRUE 18. A 26. A 34. A
3. TRUE 11. FALSE 19. A 27. E 35. C
4. TRUE 12. TRUE 20. A 28. E
5. TRUE 13. FALSE 21. A 29. A
6. FALSE 14. TRUE 22. D 30. B
7. TRUE 15. FALSE 23. A 31. B
8. FALSE 16. D 24. D 32. C
CHAPTER 36
1. FALSE 9. FALSE 17. E 25. B

2. TRUE 10. TRUE 18. B
3. TRUE 11. D 19. E
4. FALSE 12. C 20. B
5. TRUE 13. B 21. C
6. FALSE 14. A 22. C
7. FALSE 15. C 23. A
8. TRUE 16. A 24. D
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CHAPTER 37
1. FALSE 9. TRUE 17. B 25. C

2. TRUE 10. TRUE 18. C
3. FALSE 11. E 19. A
4. TRUE 12. B 20. E
5. FALSE 13. E 21. A
6. TRUE 14. A 22. A
7. TRUE 15. A 23. C
8. TRUE 16. D 24. E
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Hendricks Econ 102 Mcqs

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Hendricks ECON 102 MCQS

Introduction to Economics II (University of Ghana)

Studocu is not sponsored or endorsed by any college or university

2. The production of an apple contributes more to GDP than the production of a

T 6. If UK GDP exceeds UK GNP, then foreigners produce more in the UK than UK

7. Wages are an example of a transfer payment because there is a transfer of

8. In the UK, investment is the largest component of GDP.

12. A recession occurs when real GDP declines.

16. An example of a transfer payment is

19. Gross Domestic Product can be measured as the sum of

24. GDP would include which of the following?

26. Figure 23-1

The following table contains information about an economy that

a. none of these answers

27. Figure 23-1

The following table contains information about an economy that

28. Figure 23-1

29. Figure 23-1

The following table contains information about an economy that

30. Figure 23-1

The following table contains information about an economy that

31. Figure 23-1

The following table contains information about an economy that

32. If UK GDP exceeds UK GNP, then

33. UK GDP would exclude which of the following?

2. An increase in the price of helicopters purchased by the UK armed forces is

11. It is impossible for real interest rates to be negative.

16. Inflation can be measured by all of the following except the

22. Figure 24-1

Year Price of Quantity of Price of Quantity of

23. Figure 24-1

Year Price of Quantity of Price of Quantity of

24. Figure 24-1

Year Price of Quantity of Price of Quantity of

25. Figure 24-1

Year Price of Quantity of Price of Quantity of

Refer to Figure 24-1. What is the inflation rate for 2002?

26. Figure 24-1

Year Price of Quantity of Price of Quantity of

27. Figure 24-1

Year Price of Quantity of Price of Quantity of

30. Which of the following statements is correct?

2. Evidence of rising prices for natural resources demonstrates that non-renewable

3. The rate of economic growth is probably underestimated.

4. Human capital refers to human-made capital such as tools and machinery, as

8. An increase in the rate of saving and investment permanently increases a

11. Investment in human capital and technology may be particularly productive

12. If Germans invest in the UK economy by building a new Volkswagen factory, in

16. A reasonable measure of the standard of living in a country is

18. When a nation has very little GDP per person,

19. Once a country is wealthy,

20. The opportunity cost of growth is

21. For a given level of technology, we should expect an increase in productivity

22. Which of the following statements is true?

23. If a production function exhibits constant returns to scale,

24. Copper is an example of

26. Thomas Malthus argued that

28. Which of the following describes an increase in technological knowledge?

29. Our standard of living is most closely related to

30. Which of the following is an example of foreign portfolio investment?

32. If Toyota builds a new plant in the north of England,

34. Which of the following expenditures to enhance productivity is most likely to

35. To increase growth, governments should do all of the following except