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ECON 2123: Macroeconomics    Practice Questions  Instructor: Fei DING 

Practice Questions for the Mid‐term Exam (Ch1‐5)

Macroeconomics, ECON 2123
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1. An individual is said to be a discouraged worker if he or she

A) is working, but prefers not to work.
B) is working part time, but would prefer a full time job.
C) is working in jobs she/he is not suited for.
D) wants to work, and is actively searching for a job.
E) wants to work, but has given up searching for a job.
Answer: E

2. Which of the following tends to occur when the unemployment rate increases?
A) a reduction in the labor force participation rate
B) a reduction in the number of discouraged workers
C) an increase in the number of employed workers
D) all of the above
E) none of the above
Answer: A

3. Which of the following calculations will yield the correct measure of real GDP?
A) divide nominal GDP by the consumer price index
B) divide the GDP deflator by the consumer price index
C) multiply nominal GDP by the consumer price index
D) multiply nominal GDP by the GDP deflator
E) none of the above
Answer: E

4. Suppose we switch the base year from 2000 to 2008. This change in the base year will cause
A) nominal GDP in every year to increase.
B) nominal GDP in every year to decrease.
C) both nominal and real GDP in every year to decrease.
D) real GDP in every year to decrease.
E) none of the above
Answer: E

5. The Okun's law shows the relationship between

A) inflation and unemployment rate.

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ECON 2123: Macroeconomics    Practice Questions  Instructor: Fei DING 

B) output growth and unemployment.

C) inflation and output growth.
D) output growth and money supply.
Answer: B

6. The Phillips curve describes the relationship between

A) output growth and unemployment.
B) inflation and output growth.
C) output growth and money supply.
D) inflation and unemployment.
Answer: D

7. Based on the notation presented in Chapter 2, which of the following expressions represents
nominal GDP?
A) Yt
B) PtYt
C) Yt/Pt
D) $Yt/Pt
Answer: B

8. Deflation generally occurs when which of the following occurs?

A) the consumer price index is greater than the GDP deflator
B) the consumer price index decreases
C) the rate of inflation falls, for example, from 4% to 2%
D) nominal GDP does not change
Answer: B

9. During the late 1990s, Japan experienced reductions in the GDP deflator. Given this information, we
know with certainty that
A) real GDP fell during these periods.
B) real GDP did not change during these periods.
C) the overall price level in Japan decreased during these periods.
D) both real GDP and the overall price level decreased during these periods.
Answer: C

10. Hedonic pricing is

A) the way that luxury goods are priced in a market economy.
B) the tendency for the inflation rate to rise by greater and greater amounts.

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ECON 2123: Macroeconomics    Practice Questions  Instructor: Fei DING 

C) the tendency for nominal GDP to rise when the price level rises.
D) the process of translating nominal GDP into real GDP.
E) the process of pricing individual characteristics of a good or service.
Answer: E

11. Which of the following is an exogenous variable in our model of the goods market in Chapter 3?
A) consumption (C)
B) saving (S)
C) disposable income (YD)
D) government spending (G)
E) none of the above
Answer: D

12. The marginal propensity to consume represents

A) the level of consumption that occurs if disposable income is zero.
B) the ratio of total consumption to disposable income.
C) total income minus total taxes.
D) the change in output caused by a one-unit change in autonomous demand.
E) the change in consumption caused by a one-unit change in disposable income.
Answer: E

13. Suppose the consumption equation is represented by the following: C = 250 + .75YD. Given this
information, the marginal propensity to save is
A) .25.
B) .7.
C) 1.
D) 4.
E) none of the above
Answer: A

14. Which of the following would tend to make the multiplier larger?
A) an increase in the marginal propensity to consume
B) an increase in the marginal propensity to save
C) a reduction in taxes
D) a reduction in government spending
E) none of the above
Answer: A

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ECON 2123: Macroeconomics    Practice Questions  Instructor: Fei DING 

15. Which of the following events will cause an increase in equilibrium output?
A) an increase in the marginal propensity to save
B) an increase in taxes
C) a reduction in the marginal propensity to consume
D) all of the above
E) none of the above
Answer: E

16. Which of the following equals demand in an open economy?

A) C + I + G + X
B) C + I + G + X - IM
C) C + I + G + IM - X
D) C + I + G
Answer: B

17. Suppose an open economy is in equilibrium. Given this information, we know with certainty that
A) G = T.
B) X = IM.
C) S = I.
D) Y = Z.
Answer: D

18. Suppose the consumption equation is represented by the following: C = 250 + .75YD, then private
savings is
A) -250+0.25YD.
B) -250+0.75YD.
C) -1000+0.25YD.
D) -1000+0.75YD.
Answer: A

19. If C = 2000 + .9YD, what decrease in taxes must occur for equilibrium output to increase by 1000?
A) 111
B) 100
C) 1000
D) 500
Answer: A

20. Inventory investment refers to

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ECON 2123: Macroeconomics    Practice Questions  Instructor: Fei DING 

A) the difference between production and sales in a given year.

B) fixed investment.
C) nonresidential investment.
D) the purchase by firms of new machines.
Answer: A

21. Based on our understanding of the model presented in Chapter 3, we know that an increase in c1
(where C = c0 + c1YD) will cause
A) the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a
smaller effect on output.
B) the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a larger
effect on output.
C) the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a smaller
effect on output.
D) the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a larger
effect on output.
Answer: B

22. An increase in the marginal propensity to save from .1 to .2 will cause

A) an increase in the multiplier and a given change in autonomous consumption (c0) to have a smaller
effect on output.
B) an increase in the multiplier and a given change in autonomous consumption (c0) to have a larger
effect on output.
C) a reduction in the multiplier and a given change in autonomous consumption (c0) to have a smaller
effect on output.
D) a reduction in the multiplier and a given change in autonomous consumption (c0) to have a larger
effect on output.
Answer: C

23. An increase in the desire to save by households will cause

A) a reduction in output.
B) a reduction in investment.
C) an increase in output.
D) no change in investment and no change in output.
Answer: A

24. Based on our understanding of the model presented in Chapter 3, we know with certainty that an
equal and simultaneous reduction in G and T will cause

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ECON 2123: Macroeconomics    Practice Questions  Instructor: Fei DING 

A) an increase in output.
B) no change in output.
C) a reduction in output.
D) an increase in investment.
Answer: C

25. Suppose business confidence decreases causing a reduction in investment. Based on our
understanding of the model presented in Chapter 3, we know with certainty that a reduction in
investment will cause
A) an increase in the multiplier.
B) a reduction in the multiplier.
C) a reduction in the marginal propensity to save.
D) none of the above.
Answer: D

26. Which of the following is a component of money?

A) bonds
B) saving
C) income
D) stocks
E) none of the above
Answer: E

27. Which of the following will cause an increase in the amount of money that one wishes to hold?
A) an increase in the interest rate
B) a reduction in the interest rate
C) a reduction in income
D) none of the above
Answer: B

28. The money demand curve will shift to the right when which of the following occurs?
A) an increase in income
B) a reduction in the interest rate
C) an increase in the money supply
D) all of the above
E) none of the above
Answer: A

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ECON 2123: Macroeconomics    Practice Questions  Instructor: Fei DING 

29. Which of the following is a liability for the central bank?

A) currency
B) bonds
C) savings accounts
D) loans
E) checkable deposits
Answer: A

30. Suppose a one-year discount bond offers to pay $1000 in one year and currently sells for $950.
Given this information, we know that the interest rate on the bond is
A) 5.3%.
B) 9.5%.
C) 10%.
D) 90%.
E) 110%.
Answer: A

31. We would expect which of the following to occur when the central bank pursues expansionary
monetary policy?
A) an increase in bond prices and an increase in the interest rate (i)
B) a reduction in bond prices and an increase in i
C) an increase in bond prices and a reduction in i
D) a reduction in bond prices and a reduction in i
E) none of the above
Answer: C

32. The IS curve represents

A) the single level of output where the goods market is in equilibrium.
B) the single level of output where financial markets are in equilibrium.
C) the combinations of output and the interest rate where the money market is in equilibrium.
D) the combinations of output and the interest rate where the goods market is in equilibrium.
E) none of the above
Answer: D

33. The IS curve will shift to the right when which of the following occurs?
A) an increase in the money supply
B) an increase in government spending
C) a reduction in the interest rate

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ECON 2123: Macroeconomics    Practice Questions  Instructor: Fei DING 

D) all of the above

E) none of the above
Answer: B

34. For each interest rate, the LM curve illustrates the level of output where
A) the goods market is in equilibrium.
B) inventory investment equals zero.
C) money supply equals money demand.
D) all of the above
E) none of the above
Answer: C

35. The LM curve shifts down when which of the following occurs?
A) an increase in taxes
B) an increase in output
C) an open market sale of bonds by the central bank
D) an increase in consumer confidence
E) none of the above
Answer: E

36. Which of the following statements is consistent with a given (i.e., fixed) LM curve?
A) a reduction in the interest rate causes investment spending to increase
B) a reduction in the interest rate causes money demand to decrease
C) a reduction in the interest rate causes an increase in the money supply
D) an increase in output causes an increase in demand for goods
E) an increase in output causes an increase in money demand
Answer: E

37. Suppose the economy is currently operating on both the LM curve and the IS curve. Which of the
following is true for this economy?
A) Production equals demand.
B) The quantity supplied of bonds equals the quantity demanded of bonds.
C) The money supply equals money demand.
D) Financial markets are in equilibrium.
E) all of the above
Answer: E

38. During 2008 in the United States, consumer confidence fell significantly. Which of the following

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ECON 2123: Macroeconomics    Practice Questions  Instructor: Fei DING 

will occur as a result of this reduction in consumer confidence?

A) the LM curve will shift up.
B) the LM curve will shift down.
C) the IS curve will shift rightward.
D) the IS curve will shift leftward.
E) the IS curve will shift rightward, and the LM curve will shift up.
Answer: D

39. Suppose policy makers decide to reduce taxes. This fiscal policy action will cause which of the
following to occur?
A) the LM curve shifts and the economy moves along the IS curve.
B) the IS curve shifts and the economy moves along the LM curve.
C) both the IS and LM curves shift.
D) neither the IS nor the LM curve shifts.
E) output will change causing a change in money demand and a shift of the LM curve.
Answer: B

40. In late 2007 and early 2008, the U.S. Federal Reserve pursued expansionary monetary policy.
Which of the following will occur as a result of this monetary policy action?
A) the LM curve shifts down.
B) the LM curve shifts up.
C) the IS curve shifts rightward as the interest rate falls.
D) the IS curve shifts leftward as the interest rate increases.
E) none of the above
Answer: A

41. Suppose investment spending is very sensitive to the interest rate. Given this information, we
know that
A) the IS curve should be relatively flat.
B) the IS curve should be relatively steep.
C) the LM curve should be relatively flat.
D) the LM curve should be relatively steep.
E) neither the IS nor the LM curve will be affected.
Answer: A

42. An increase in the money supply will cause an increase in which of the following variables?
A) output
B) investment

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ECON 2123: Macroeconomics    Practice Questions  Instructor: Fei DING 

C) consumption
D) all of the above
E) none of the above
Answer: D

43. For this question, assume that investment spending depends only on the interest rate and no longer
depends on output. Given this information, a reduction in the money supply
A) will cause investment to decrease.
B) will cause investment to increase.
C) may cause investment to increase or to decrease.
D) will have no effect on output.
E) will cause a reduction in output and have no effect on the interest rate.
Answer: A

44. Suppose there is a Fed purchase of bonds and simultaneous tax cut. We know with certainty that
this combination of policies must cause
A) an increase in the interest rate (i).
B) a reduction in i.
C) an increase in output (Y).
D) a reduction in Y.
Answer: C

45. A fiscal contraction will tend to cause which of the following to occur?
A) a reduction in the interest rate and a reduction in investment
B) a reduction in the interest rate and an upward shift in the LM curve
C) a reduction in the interest rate and an ambiguous effect on investment
D) no change in output if the Fed simultaneously pursues contractionary monetary policy
Answer: C

46. An increase in the reserve deposit ratio will most likely have which of the following effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
Answer: C

47. An increase in the aggregate price level, P, will most likely have which of the following effects?
A) a rightward shift in the IS curve

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ECON 2123: Macroeconomics    Practice Questions  Instructor: Fei DING 

B) a leftward shift in the IS curve

C) an upward shift in the LM curve
D) a downward shift in the LM curve
Answer: C

48. If government spending and taxes decrease by the same amount,

A) the IS curve does not shift.
B) the IS curve shift leftward.
C) the IS curve shifts rightward.
D) the LM curve shifts downward.
Answer: B

49. The IS curve will NOT shift when which of the following occurs?
A) a reduction in government spending.
B) a reduction in the interest rate.
C) a reduction in consumer confidence.
D) all of the above
E) none of the above
Answer: B

50. Assume that investment does NOT depend on the interest rate. A reduction in the money supply
will cause which of the following for this economy?
A) no change in the interest rate
B) no change in output
C) a reduction in investment
D) an increase in investment
Answer: B

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