BADM 606 Economics for Decision-makers
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1. An increase in product price will cause:
a. the demand curve to shift to the left.
b. the supply curve to shift to the right.
c. quantity demanded to increase.
d. quantity supplied to decrease.
e. quantity demanded to decrease.
2. An 'increase in demand' means that:
a. the demand curve has shifted to the left.
b. price has declined and consumers therefore want to
purchase more of the product.
c. the demand curve has shifted to the right.
d. given supply, the price of the product can be
expected to decline.
3. If real GDP increases and the price index has increased:
a. money GDP must have fallen.
b. money GDP must have increased.
c. money GDP may have either increased or decreased.
d. the percentage increase in money GDP must have been
less than the percentage increase in the price
level.
4. The value of American imports are:
a. added to GDP because they reflect spending by
Americans.
b. subtracted from GDP because they do not entail
spending by Americans.
c. subtracted from GDP because they do not entail
productive activity in the United States.
d. added to GDP because they do not entail productive
activity in the United States.
5. The United States' economy is generally considered to be at
'full employment' when:
a. 100 percent of the labor force is employed.
b. about 6 percent of the labor force is unemployed.
c. 90 percent of the labor force is employed.
d. 90 percent of the total population is employed.
e. 10 to 20 percent of the labor force is unemployed.
6. The official unemployment rate is:
a. the percentage of the total population which is not
working.
b. the percentage of the civilian labor force which is
unemployed.
c. the ratio of unemployed to employed workers.
d. those people over 16 years of age who are not
currently seeking employment.
7. The consumer price index was 298 in 1983 and 311 in 1984.
Therefore, the rate of inflation in 1984 was about:
a. 13 percent.
b. 2.8 percent.
c. 4.4 percent.
d. 6 percent.
8. Which of the following will NOT cause the consumption
schedule to shift?
a. a growing expectation that consumer durables will be
in short supply
b. the expectation of a recession
c. a change in consumer incomes
d. a sharp increase in the amount of liquid assets held
by households
e. an expected change in the price level
9. The investment‑demand curve suggests:
a. a direct relationship between the rate of interest
and the level of investment spending.
b. that an increase in business taxes will tend to
stimulate investment spending.
c. an inverse relationship between the real rate of
interest and the level of investment spending.
d. that the amount invested will not be affected by
changes in the real interest rate.
10. In Keynesian economics the size of the MPC is assumed to be:
a. less than zero.
b. greater than one.
c. greater than zero, but less than one.
d. none of the above.
11. Generally speaking, the increase in income which results
from an increase in investment spending would be greater
the:
a. larger the marginal propensity to consume.
b. larger the marginal propensity to save.
c. smaller the average propensity to consume.
d. larger the marginal propensity to save.
12. Assume the current equilibrium level of income is $200
billion as compared to the full‑employment income level of
$240 billion and that consumption is the only component of
aggregate expenditures that depends upon the level of GDP.
If the MPC is 5/8, what change in aggregate
expenditures is needed to achieve full employment?
a. an increase of $15 billion
b. an increase of $40 billion
c. an increase of $10 billion
d. an increase of $25 billion
e. a decrease of $12 billion
13. If the government increases its spending during recession in
order to assist the economy in recovery, the funds for such
expenditures must come from some source. According to Keynesian
theory, which of the following sources would tend to be the most
expansionary?
a. additional taxes upon corporate profits
b. borrowing from the public
c. creating new money
d. additional taxes upon personal incomes
14. If the government increases its spending during recession in
order to assist the economy in recovery, the funds for such
expenditures must come from some source. According to monetarist
theory, which of the following sources would tend to be the most
expansionary?
a. additional taxes upon corporate profits
b. borrowing from the public
c. creating new money
d. additional taxes upon personal incomes
15. Supply‑side economists argue that the primary effect of tax
cuts is to:
a. shift the aggregate supply curve leftward.
b. shift the aggregate demand curve leftward.
c. shift the aggregate supply curve rightward.
d. lower real GDP and increase the price level.
16. The 'crowding‑out effect' suggests that:
a. consumer and investment spending always vary
inversely.
b. it is very difficult to have excessive aggregate
spending in our economy.
c. increases in government spending financed through
borrowing will increase the interest rate and
thereby reduce investment.
d. tax increases are paid primarily out of saving and
17. According to rational expectations theory:
a. workers cannot anticipate the inflationary effects
of expansionary public policies.
b. workers can perfectly predict inflation with the
result that the Phillips Curve is vertical.
c. workers only adapt their wage demands to inflation
after a considerable time lag.
d. the Phillips Curve is quite flat so that a large
reduction in employment can be achieved with little
inflation.
18. The major component of the money supply (M1) is:
a. coins.
b. paper money in circulation.
c. checkable deposits.
d. gold certificates.
19. If the money GNP is $600 billion and, on the average, each
dollar is spent three times per year, then the amount of
money demanded for transactions purposes:
a. will be $1800 billion.
b. will be $600 billion.
c. will be $200 billion.
d. cannot be determined from the information given.
20. In the U.S. economy the money supply is controlled by the:
a. Congress.
b. Senate Committee on Banking and Finance.
c. Federal Reserve System.
d. U.S. Treasury.
e. President.
21. The money supply is 'backed':
a. dollar‑for‑dollar with gold bullion.
b. dollar‑for‑dollar with gold and silver.
c. by government bonds.
d. by the government's ability to control the supply of
money and therefore to keep its value relatively
stable.
22. Checkable deposits are classified as money because:
a. they earn interest income for the depositor.
b. they are ultimately the obligations of the
Treasury.
c. banks hold currency equal to the value of their
outstanding deposits.
d. they can be readily used in the making of purchases
and payment of debts.
23. The opportunity cost of holding money:
a. varies inversely with the level of economic
activity.
b. varies directly with the interest rate.
c. varies inversely with the interest rate.
d. is zero because money is not an economic resource.
24. When a bank loan is repaid the supply of money:
a. may either increase or decrease.
b. is increased.
c. is decreased.
d. is constant, but its composition will have
changed.
25. A tight money policy may be offset by:
a. an increase in the rate of velocity of money.
b. a decline in the velocity of money.
c. a budget surplus.
d. a deterioration in the profit expectations of
businessmen.
26. A contraction of the money supply tends to:
a. lower both the interest rate and aggregate expenditures.
b. lower the interest rate, but increase aggregate
expenditures.
c. increase the interest rate and aggregate expenditures.
d. increase the interest rate, but decrease aggregate
expenditures.
27. Assuming the reserve requirement is 20 percent and commer‑
cial banks have no excess reserves initially, the commercial
banking system could increase the money supply by a maximum
of $1,000,000 if the Federal Reserve Banks would:
a. buy $250,000 of securities from commercial banks.
b. sell $1,000,000 of securities to commercial banks.
c. buy $1,000,000 of securities from commercial banks.
d. buy $200,000 of securities from commercial banks.
e. sell $200,000 of securities to commercial banks.
28. Which of the following best describes the Keynesian cause‑
effect chain of an easy money policy?
a. An increase in the money supply will lower the interest
rate, increase investment spending, and increase GDP.
b. An increase in the money supply will raise the interest
rate, decrease investment spending, and decrease GDP.
c. A decrease in the money supply will raise the interest
rate, decrease investment spending, and decrease GDP.
d. A decrease in the money supply will lower the interest
rate, increase investment spending, and increase GDP.
29. The Federal Reserve System regulates the money supply
primarily by:
a. restricting the issuance of Federal Reserve Notes
because paper money is the largest portion of the
money supply.
b. altering the reserves of commercial banks, largely
through sales and purchases of government bonds.
c. altering the reserve requirements of commercial banks
and thereby the ability of banks to make loans.
d. controlling the production of coins at the United
States mint.
30. Which of the following is NOT a tool of monetary policy?
a. changes in the discount rate.
b. changes in tax rates.
c. changes in reserve requirements.
d. open market operations.
e. changes in margin requirements.
31. Monetarists advocate that the:
a. money supply should be increased during inflation
and reduced during recession.
b. money supply should be reduced during inflation and
increased during recession.
c. money supply should be increased by a constant
rate year after year.
d. functional finance approach to fiscal policy be
adopted.
32. Keynesians take the position that:
a. monetary policy is more important than fiscal policy.
b. monetary policy and fiscal policy are equally
important.
c. fiscal policy is more important than monetary policy.
d. monetary policy is more important than fiscal policy
during recession, but the opposite holds true during
inflation.
33. According to the monetarists, the transmission mechanism for
changes in the money supply is such that a change in the
money supply changes:
a. the nominal GDP.
b. the interest rate which in turn changes the nominal
GDP.
c. investment spending which in turn changes the
nominal GDP.
d. the velocity of money which in turn changes the
nominal GDP.