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Chapter 36: Five Debates over Macroeconomic Policy - Principles of Economics Mankiw
Chapter 36: Five Debates over Macroeconomic Policy - Principles of Economics Mankiw
Chapter 36: Five Debates over Macroeconomic Policy

1. Stabilization policy is useful because
a. there is no reason for society to suffer through the booms and busts of the business cycle.
b. the economy would stabilize itself too quickly without government intervention.
c. there are significant lags due to the nature of the political process.
d. All of the above are correct.

2. The Federal Reserve will tend to tighten monetary policy when
a. interest rates are rising too rapidly.
b. it thinks the unemployment rate is too high.
c. the growth rate of real GDP is quite sluggish.
d. it thinks inflation is too high today, or will become too high in the future.

3. If the Federal Reserve loosened monetary policy today because it believed a recession was going to hit the economy in about one year, this is an indication that the Fed
a. is undertaking an inappropriate monetary policy.
b. recognizes the problem of lags.
c. recognizes the fact that money is neutral.
d. is conducting a procyclical monetary policy.

4. When economists say that there is a time lag in the effect of monetary policy, they mean that
a. it takes time to observe the effects of fiscal policy on the economy.
b. the Fed takes awhile to figure out what it wants to do.
c. the Congress takes awhile to figure out what it wants to do.
d. it takes time to observe the effects of monetary policy on the economy.

5. The outcome of monetary policy can never be certain because
a. unemployment is always changing.
b. the concept of a natural rate of unemployment is still not accepted by all policy actions.
c. the slope of the AS curve is never clear.
d. time lags disrupt policy planning.

6. Time inconsistency occurs when what currently seems best for today and tomorrow
a. is not best for tomorrow.
b. is not best for today.
c. does not appear to be best when tomorrow comes.
d. cannot be determined.

7. In general, economists who believe the Federal Reserve should stabilize aggregate demand favor
a. policy rules that specify how the Fed should respond to economic fluctuations.
b. a laissez-faire view of monetary policy.
c. discretionary monetary policy.
d. placing limits on the Federal Reserve’s open-market operations.

8. One reason some economists argue for a credible monetary policy rule is a belief that such a rule could be used to
a. reduce inflationary expectations, and lower actual inflation without raising the unemployment rate.
b. reduce inflationary expectations, and lower actual inflation without raising the unemployment rate very much.
c. reduce inflationary expectations, and lower actual inflation while the unemployment rate rises for only a short time period.
d. change the growth rate of real GDP without affecting the unemployment rate.

9. If the Federal Reserve followed a credible monetary policy rule, it would be better for the economy than discretionary monetary policy because the Fed could use a rule that creates low inflation; people would expect
a. low inflation, and the unemployment rate would be at its natural level.
b. low inflation, and the unemployment rate could be kept below the natural level.
c. even lower inflation, and the unemployment rate would be kept below the natural level.
d. higher inflation, and the unemployment rate would be kept below its natural level.

10. Proponents of credible policy rules for monetary policy argue that credible rules are better than discretionary policy because
a. only unanticipated policy actions affect real economic variables.
b. over a period of time discretionary actions of the Fed will become known, and then the Fed’s actions will no longer affect real economic variables.
c. credible rules reduce uncertainty in the economy.
d. All of the above are correct.

11. The federal government has run budget deficits every year since 1969. In recent years Congress has voted on a constitutional amendment that would require a balanced budget. If such an amendment were enacted it would
a. indicate that policy makers were taking a “business as usual” attitude.
b. probably not change expectations.
c. increase the credibility of a deficit-reduction plan.
d. probably raise interest rates in the economy.

12. If the Federal Reserve follows a policy of targeting the federal funds interest rate, then the money supply will increase when
a. the unemployment rate falls.
b. when the rate of interest falls.
c. inflation decreases.
d. the demand for bank reserves increases.

13. One reason the Fed tolerates ongoing inflation is because it
a. believes that the CPI understates the actual inflation rate.
b. believes that the CPI overstates the actual inflation rate.
c. accepts the idea that a zero inflation rate would make labor markets work more smoothly.
d. wants to focus more on price stability than on full employment.

14. Why doesn’t the Fed eliminate inflation from the economy entirely?
a. It believes that the measured inflation rate understates the true rate of inflation.
b. It recognizes that continuing inflation helps labor markets adjust more easily.
c. If it did so, no one would get a raise in salary.
d. All of the above are correct.

15. What is the major cost of slowing down ongoing inflation?
a. Output must rise above potential.
b. The Fed must sell bonds to the public at lower prices than those at which the bonds were purchased.
c. Output must fall below potential.
d. The Fed must spend money on purchasing bonds from the public.

16. Ongoing inflation means the Fed must respond to
a. an upward-shifting AS curve.
b. a downward-shifting AS curve.
c. changing interest rate targets.
d. a lower real interest rate.

17. The national debt
a. can be paid off without major economic effects.
b. need never be paid off.
c. is no more serious a problem than is a corporation’s debt.
d. should not exist during a period of economic prosperity.

18. The national debt
a. exists because of past government budget deficits.
b. is the difference between the government’s spending and revenue in a given year.
c. is the amount households owe on credit cards, mortgages and other loans.
d. is the same as the government’s budget deficit.

19. Government debt and interest payments on that debt
a. are problems if they grow faster than GDP.
b. are unrelated in the short run.
c. are unrelated in the long run, but not in the short run.
d. generally grow faster than government spending.

20. In the long run, large and continuing budget surpluses
a. mean higher taxes and a lower standard of living.
b. mean a larger money supply and higher interest rates.
c. are a problem because they crowd out private spending.
d. permit the government to lower taxes, thereby encouraging work, investment and saving.

21. The substitution effect of higher interest rates says that
a. smaller amounts of savings will generate the same amount of interest income.
b. higher rates of return increase the value of savings.
c. higher taxes will increase savings.
d. higher taxes will decrease savings.

22. The income effect of higher interest rates says that
a. smaller amounts of savings will generate the same amount of interest income.
b. higher rates of return increase the value of savings.
c. higher taxes will increase savings.
d. higher taxes will decrease savings.

23. U.S. government policy discourages savings by
a. taxing the income from capital.
b. reducing benefits for those who have accumulated wealth.
c. limiting interest payments that banks can make on savings accounts.
d. Both a and b are correct.

24. As compared to discretionary tax policy, a credible commitment to low taxes on capital would tend to
a. cause people to expect higher taxes in the future, reduce incentives to invest, and reduce tax revenues collected on capital.
b. allay people’s expectations of future tax increases, increase incentives to invest, and reduce tax revenues collected on capital.
c. allay people’s expectations of future tax increases, increase incentives to invest, and increase tax revenues collected on capital.
d. allay people’s expectations of future tax increases, increase incentives to invest, and could either increase or decrease tax revenues collected on capital.

25. According to supply-side economists, lowering corporate income taxes
a. results in higher wages without creating higher levels of labor productivity.
b. creates greater income equality.
c. checks the expansion of GDP and employment.
d. stimulates investment and spurs on economic growth. 

Pretty.Much Thursday, November 24, 2016
Chapter 35: The Short-Run Tradeoff between Inflation and Unemployment - Principles of Economics Mankiw
Chapter 35: The Short-Run Tradeoff between Inflation and Unemployment - Principles of Economics Mankiw
Chapter 35: The Short-Run Tradeoff between Inflation and Unemployment

1. Most macroeconomists agree that the fundamental issues facing an economy are
a. unemployment and inflation, and what should be done about them.
b. the economy’s long-run equilibrium position and how to get there.
c. the quantity of money and its velocity.
d. the long-run Phillips curve and the Laffer curve and whether they generate conflicting outcomes.

2. One explanation that economists offer to explain why a decline in the unemployment rate can raise the rate of inflation is that
a. firms will be put in a position of competing more intensely for scarce resources.
b. people will pay higher prices because competition among the suppliers—the firms—intensifies.
c. workers will focus more directly on protecting their jobs.
d. firms will refuse to shift higher labor costs along to consumers for fear of losing their markets.

3. The short-run Phillips Curve is drawn on the assumption that
a. technology does not affect output in the short run.
b. the skill level of the workforce does not affect output in the short run.
c. prices and wages are sticky in the short run.
d. All of the above are correct.

4. The Phillips curve traces a set of combinations of rates of
a. interest and unemployment.
b. real GDP and inflation.
c. real GDP and interest.
d. unemployment and inflation.

5. Suppose that the government in the economy of this diagram regards 9 percent unemployment as unacceptable. If the government insists on reducing the unemployment rate from 9 percent to 7 percent, regardless of the consequences, then
a. pressure will build in the economy to continuously reduce the rate of inflation.
b. the long-run Phillips curve becomes horizontal, freezing the rates of inflation and unemployment.
c. the inflation rate will increase but the unemployment rate will stay at 7 percent.
d. in the long run the rate of unemployment remains unchanged, but inflation will likely accelerate.



6. Suppose the federal government decreases tax rates dramatically in order to decrease the level of employment. We would expect to see aggregate demand shift to the
a. left and a move up the Phillips curve.
b. left and a move down the Phillips curve.
c. right and a move up the Phillips curve.
d. right and a move down the Phillips curve.

7. If the economy were left on its own without the interference of government or the Fed, it would move toward an equilibrium rate of growth that would produce, with only minor interruptions, the natural rate of unemployment without changes in the inflation rate. What economists would support this view?
a. Friedman and Phelps.
b. Phillips.
c. Samuelson and Solow.
d. Greenspan.

8. The tradeoffs between rates of employment and inflation during the 1970s and 1980s forced economists to reassess their earlier beliefs about the Phillips curve to conclude that
a. the Phillips curve was upward sloping, not downward sloping as first thought.
b. rather than there being one Phillips curve, there is a set of such curves.
c. the expected trade-offs did not occur, meaning that policy to lower unemployment rates would not cause inflation.
d. the aggregate supply curve actually sloped downward because price levels fell when real GDP rose.

9. When an economy is at full employment, this means
a. the unemployment rate is zero.
b. unemployment is at its natural rate.
c. frictional unemployment is zero.
d. job creation equals job destruction.

10. The long-run Phillips curve is vertical at
a. zero unemployment.
b. zero frictional unemployment.
c. the natural rate of unemployment.
d. the natural rate of inflation.

11. We would be most likely to experience a shift from one Phillips curve to another if the government attempts to
a. reduce the unemployment rate, and workers, fearing inflation, react by bargaining for higher wages.
b. reduce the unemployment rate, and consumers, fearing higher taxes, cut their spending.
c. reduce the unemployment rate and firms hire more employees without having to raise wage rates.
d. reduce the unemployment rate and the inflation rate simultaneously.

12. As prices adjust to a change in economic conditions, the
a. aggregate demand curve becomes horizontal.
b. aggregate demand curve becomes vertical.
c. Phillips curve and the aggregate supply curves become vertical.
d. Phillips curve and the aggregate supply curves become horizontal.

13. According to Friedman and Phelps, the unemployment rate is equal to
a. (the natural rate)  (the expected inflation rate).
b. (the natural rate) – (the expected inflation rate).
c. (the expected inflation rate) + (the actual inflation rate).
d. (the natural rate) – (the actual inflation rate – the expected inflation rate).

14. An increase in expected inflation will shift
a. both the short-run and the long-run Phillips curves to the right.
b. only the short-run Phillips curve to the right.
c. only the long-run Phillips curve to the right.
d. the short-run Phillips curve to the right and increase the slope of the long-run Phillips curve.

15. If people expect less inflation in the future, then the
a. long-run Phillips curve will become steeper.
b. long-run Phillips curve will become flatter.
c. short-run Phillips curve will become steeper.
d. short-run Phillips curve will shift down and to the left.

16. A movement along a short-run Phillips curve holds which of the following constants?
a. the level of GDP
b. actual inflation
c. expected inflation
d. employment

17. An increase in worker productivity brought about by the introduction of new technology into the workplace will
a. shift the long-run Phillips curve to the left.
b. shift the long-run Phillips curve to the right.
c. decrease aggregate demand, since workers will lose their jobs.
d. cause the aggregate demand curve to become horizontal.

18. Which of the following will reduce the price level and increase real output in the long run?
a. an increase in the money supply
b. an increase in wage rates
c. a decrease in the money supply
d. technical progress

19. The natural rate hypothesis argues that
a. inflation eventually returns to its natural rate, regardless of the rate of unemployment.
b. the inflation rate and the unemployment rate always return to their natural levels.
c. inflation will increase at a natural rate, regardless of monetary policy.
d. unemployment eventually returns to its natural rate, regardless of the rate of inflation.

20. Suppose that an economy is currently experiencing 10 percent unemployment and 15 percent inflation. If in the process of bringing inflation down by 2 percent real GDP falls by 4 percent, the sacrifice ratio is
a. 5 percent.
b. 2 percent.
c. 12 percent.
d. None of the above are correct.

21. To bring inflation down, an economy must sacrifice
a. real GDP.
b. exports.
c. employment for some people.
d. Both a and c are correct.

22. Which of the following would tend to shorten recessions associated with anti inflation policies of the Federal Reserve?
a. People adjust their expectations of inflation slowly.
b. People believe policy announcements made by Fed officials.
c. The short-run Phillips curve does not shift immediately.
d. All of the above are correct.

23. The largest recession in the United States since the Great Depression occurred
a. after the Vietnam War ended in 1975.
b. after President Carter imposed credit controls on the economy in 1980.
c. after Paul Volcker reduced the growth rate of the money supply in 1981.
d. when consumer confidence fell in 1990.

24. According to the theory of rational expectations,
a. workers’ experience tells them that government action to lower unemployment will not affect inflation.
b. consumers and investors generally behave so that rationally formed government attempts to stimulate aggregate demand have their desired effects.
c. policy goals can be achieved more easily in the short run than in the long run.
d. workers’ wage demands include anticipated inflation.

25. According to the theory of rational expectations,
a. the Phillips curve is upward sloping in the short run and downward sloping in the long run.
b. both for the short and long runs, the Phillips curve is horizontal.
c. both for the short and long runs, the Phillips curve is vertical.
d. there is no Phillips curve.


Pretty.Much
Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand - Principles of Economics Test Bank Mankiw
Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand - Principles of Economics Test Bank Mankiw
Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
1. The opportunity cost of holding money is the
a. dollar cost necessary to change other assets into money.
b. time cost of accessing funds.
c. value of the goods and services a person is able to obtain with the money.
d. interest a person could have earned by holding other forms of wealth instead.

2. Which of the following is the opportunity cost of money?
a. money being a means of payment
b. the trouble of having to get money out of the bank
c. the interest forgone by holding money
d. the ability to purchase things at a moment’s notice

3. When the interest rate falls,
a. the opportunity cost of holding money rises.
b. people shift out of holding interest-yielding assets and into holding more liquid forms of money.
c. the quantity of money people will hold decreases.
d. investment spending decreases.

4. The equilibrium interest rate occurs in the money market where the
a. quantity of money available is zero.
b. the maximum quantity of funds has been borrowed and loaned.
c. the money supply is equal to the money demand.
d. the quantity of money demanded is zero.

5. As the price level increases, the money demand curve will
a. shift to the left.
b. become steeper.
c. stay in the same position.
d. shift to the right.

6. The money supply curve is vertical because
a. real income does not influence the quantity of money supplied.
b. the price level does not influence the level of spending.
c. only the interest rate influences the quantity of money supplied.
d. the Federal Reserve sets the money supply.

7. The federal funds rate is the
a. federally mandated upper limit on credit card interest rates.
b. interest rate that banks charge to their most preferred clients.
c. interest rate that the Fed charges member banks for loans of reserves.
d. interest rate that banks charge for lending their excess reserves to other banks.

8. When the Fed increases the money supply, the interest rate
a. rises and spending increases.
b. rises and spending decreases.
c. falls and spending increases
d. falls and spending decreases.

9. In the short-run macro model, an open-market purchase of bonds by the Fed will
a. raise the interest rate, reduce spending, and increase output.
b. raise the interest rate, reduce spending, and decrease output.
c. lower the interest rate, reduce spending, and decrease output.
d. lower the interest rate, increase spending, and increase output.

10. Open market sales of bonds by the Federal Reserve reduce the money supply and
a. reduce aggregate expenditures.
b. increase real aggregate expenditures.
c. are helpful in monetizing the federal debt.
d. stimulate purchases of consumer durables.

11. Which of these diagrams describes an open market sale by the Fed?
Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand - Principles of Economics Test Bank Mankiw


a. a
b. b
c. c
d. d

12. __________ is the use of government expenditures and taxes to promote full employment, stable prices, and economic growth.
a. Monetary policy
b. Incomes policy
c. Stabilization policy
d. Fiscal policy

13. The marginal propensity to consume (MPC) is
a. the change in consumption divided by the change in disposable income.
b. total consumption divided by total disposable income.
c. the change in disposable income divided by the change in consumption.
d. total disposable income divided by total consumption.

14. Use this table to determine the MPC.
 Disposable   Consumption
 Income    Spending
 ($ billions)  ($ billions)
   0   $ 100
   $200    280
   $400    460
   $600    640
a. 0
b. .8
c. .9
d. 1.0

15. The multiplier effect
a. tells us that a change in government spending changes equilibrium GDP by more than the change in government spending.
b. works only for increases in investment.
c. is relevant only in situations where the MPC cannot be determined.
d. tells us whether a change in government policy has been effective.

16. If the marginal propensity to consume is .5, what is the value of the multiplier?
a. 1.0
b. 1.5
c. 2.0
d. .5

17. If government spending decreases by $500 billion and if MPC = .6,
a. equilibrium GDP will rise by $1,250 billion.
b. equilibrium GDP will fall by $500 billion.
c. equilibrium GDP will fall by $1,250 billion.
d. nothing will happen in the short run, but real output will rise by $500 billion in the long run.

18. The crowding-out effect occurs when increased government expenditures and the subsequent budget deficits cause
a. the money supply to increase, which curtails loans to consumers.
b. interest rates to increase, which reduces investment spending.
c. inflation, which erodes the purchasing power of the dollar.
d. the imports of goods and services to rise, and exports to decline.

19. Which of the following is not true for the crowding-out effect?
a. Federal budget deficits increase interest rates, which reduces investment spending.
b. Crowding out reduces the ability of fiscal policy to combat a recession.
c. If the government spends more on education, ceteris paribus, households may be forced to spend less on new homes.
d. Crowding out occurs especially when the economy is in a deep recession and people are not spending all the available money.

20. When George W. Bush was elected, he promised sweeping decreases in income tax rates for households. His idea with this plan was that the
a. tax cuts would lead to increased savings.
b. tax cuts would stimulate household spending, even though they might cause minimal increases in interest rates.
c. tax cuts would stimulate household spending and at the same time lower interest rates.
d. long-run aggregate supply curve would remain fixed while the aggregate demand curve and interest rates increased.

21. The Employment Act of 1946 provided that
a. the Federal Reserve should use monetary policy to stabilize the economy.
b. the Federal Deposit Insurance Corporation should insure bank deposits.
c. the federal government should use its spending and taxation powers to stabilize the economy.
d. state and local governments should regulate wages and employment in the electric and natural gas industries.

22. If the federal government announces a tax cut, which of the following is most likely in the short run?
a. a decrease in output, an increase in money demand, and an increase in the interest rate
b. an increase in output, a decrease in money demand, and a decrease in the interest rate
c. a decrease in output, a decrease in money demand, and a decrease in the interest rate
d. an increase in output, an increase in money demand, and an increase in the interest rate

23. Government spending on infrastructure
a. increases aggregate demand but not aggregate supply.
b. increases productivity of private business firms and hence aggregate supply.
c. cannot affect aggregate demand because the money does not go to households.
d. shifts the long-run aggregate supply curve to the left.

24. The automatic fiscal stabilizers include all of the following except
a. corporate income taxes.
b. unemployment insurance benefits.
c. the prime interest rate.
d. food stamps.

25. Unlike discretionary fiscal policy, automatic stabilizers consist of
a. deliberate changes in government spending to counteract recession and inflation.
b. deliberate changes in household taxes to counteract recession and inflation.
c. deliberate changes in corporation income taxes to counteract recession and inflation.
d. changes in government spending and tax revenues that occur automatically as the economy fluctuates.

Pretty.Much Monday, November 21, 2016
Chapter 33: Aggregate Demand and Aggregate Supply - Principles of Economics Test Bank Mankiw
Chapter 33: Aggregate Demand and Aggregate Supply - Principles of Economics Test Bank Mankiw
Chapter 33: Aggregate Demand and Aggregate Supply
1. A severe and prolonged recessionary phase of a business cycle is sometimes described as
a. an inverted peak.
b. a trough.
c. a recession.
d. a depression.

2. If you and your friends are still looking for a job eighteen months after graduation, even after lowering your wage expectations, you are probably in the business cycle phase of a
a. recession.
b. peak.
c. boom.
d. recovery

3. Ethel maintains that she can predict when the economy is going to move up or down a business cycle. In fact
a. most economists can predict the business cycle.
b. the business cycle is quite regular, with a new phase beginning every 24 months.
c. business cycles are irregular and unpredictable in the short run.
d. only the Federal Reserve can predict moves in the business cycle.

4. Recessions do not last forever because
a. workers get tired of being unemployed.
b. firms eventually have incentives to increase employment and produce more output.
c. government steps in and boosts spending back to long-run levels.
d. the Federal Reserve has perfect control over the money supply.

5. In the long run, the aggregate demand curve is
a. horizontal.
b. upward sloping.
c. downward sloping.
d. vertical.

6. When studying the short run, the assumption of money neutrality is
a. not relevant.
b. increasingly important.
c. still relevant but the classical dichotomy no longer holds.
d. Both b and c are correct.

7. If we are most interested in short-run changes in economic activity,
a. the classical model is an unreliable guide.
b. total spending can be ignored.
c. labor markets are irrelevant.
d. we should assume that neither expansions nor recessions can occur.

8. Anyone seeking to understand the causes of recessions must examine
a. the saving behaviors of different age groups.
b. investment patterns in the housing market.
c. disequilibrium in the manufacturing sector.
d. changes in the level of spending.

9. The wealth effect, interest rate effect, and foreign trade effect all explain why the aggregate
a. supply curve is horizontal.
b. supply curve is vertical.
c. supply curve is upward sloping.
d. demand curve is downward sloping.

10. According to the __________ effect, a lower price level decreases interest rates, which results in additional spending on investment goods and so increases the aggregate quantity of goods and services demanded.
a. money supply
b. interest rate
c. consumption
d. investment

11. Due to expectations of a future recession, companies do not think that they can sell all of their output and therefore purchase less equipment and machinery. As an immediate result, the aggregate
a. supply curve becomes vertical.
b. supply curve shifts right.
c. demand curve shifts right.
d. demand curve shifts left.

12. Movements along the aggregate supply curve are caused by changes in
a. technology.
b. government regulations.
c. wages and salaries.
d. the price level.

13. Which of the following will cause the aggregate supply curve to shift to the right?
a. increases in wages and salaries paid to employees
b. increases in the prices of oil and natural gas
c. increases in taxes for business
d. new work rules that increase the productivity of labor

14. Rising oil prices in the U.S. during the 1970s caused the economy’s aggregate
a. supply curve to shift to the right.
b. supply curve to shift to the left.
c. demand curve to become vertical.
d. demand curve to become horizontal.

15. To say that nominal prices are sticky means
a. the average price level seldom changes.
b. relative prices seldom change.
c. it takes at least one year for prices to change to a new equilibrium level.
d. it takes time for prices to adjust to equilibrium.

16. Which of the following is not a determinant of long-run aggregate supply?
a. the level of skills in the workforce
b. the price level
c. technology
d. the quantity of capital

17. The long-run effect of an increase in government spending is to raise
a. both real output and the price level.
b. real output and lower the price level.
c. real output and leave the price level unchanged.
d. the price level and leave real output unchanged.

18. If prices in an economy are sticky, then a decrease in the money supply
a. will cause a recession.
b. cannot be responsible for causing a recession.
c. will not have adverse effects on the economy.
d. will not affect prices.

19. Many economists believe that the severity of the Great Depression was due to
a. a flood of imported goods brought about by tariff reductions.
b. the failure of the Federal Reserve to prevent a large drop in the money supply.
c. the huge budget deficits of the federal government.
d. hyperinflation that occurred following World War I.

20. Which of the following will reduce the price level and raise real output?
a. an adjustment of prices to equilibrium
b. an increase in wage rates
c. the short-run aggregate supply curve becoming steeper
d. technical progress

21. Which of the following will reduce the price level and reduce real output in the short run?
a. an increase in the money supply
b. an increase in oil prices
c. a decrease in the money supply
d. technical progress

22. Which of the following will cause stagflation?
a. an increase in the money supply
b. an increase in oil prices
c. a decrease in the money supply
d. technical progress

23. Recessions in South Korea and Indonesia will cause
a. an upward movement along the U.S. AD curve.
b. a downward movement along the U.S. AD curve.
c. the U.S. AS curve to shift to the right.
d. the U.S. AD curve to shift to the left.

24. If there is speculation that a recession is around the corner, which means that our future incomes will most likely fall, then the effect of all this on the economy now will be that the
a. AS curve will shift to the left.
b. AD curve will shift to the right.
c. price level will rise and real output will rise.
d. price level will fall and real output will fall.

25. Any factor that increases resource availability causes a(n)
a. increase in AD.
b. decrease in AD.
c. increase in AS.

d. decrease in AS.

Pretty.Much
Chapter 32: A Macroeconomic Theory of the Open Economy - Principles of Economics Test Bank Mankiw
Chapter 32: A Macroeconomic Theory of the Open Economy - Principles of Economics Test Bank Mankiw
Chapter 32: A Macroeconomic Theory of the Open Economy

1. Households make their savings available to borrowers through
a. resource markets.
b. the loanable funds market.
c. the labor market.
d. taxes.

2. The supply of funds curve is upward sloping because a rise in the interest rate
a. decreases the opportunity cost of firms’ investment spending.
b. increases the opportunity cost of firms’ investment spending.
c. decreases the opportunity cost to households of consuming.
d. increases the opportunity cost to households of consuming.

3. Market clearing in the loanable funds market
a. guarantees that total spending will be just sufficient to purchase whatever output is produced.
b. means that the interest rate will never change.
c. guarantees that total spending will equal the quantity of loanable funds demanded.
d. requires that the government run a budget deficit.

4. Which of the following changes would cause a movement along the U.S. demand curve for a foreign currency?
a. an increase in U.S. real GDP
b. a decrease in U.S. real GDP
c. an increase in the U.S. interest rate
d. a change in the real exchange rate

5. As the U.S. interest rate falls relative to the British interest rate,
a. the U.S. demand curve for pounds will not change.
b. the U.S. demand curve for pounds will shift to the left.
c. the U.S. demand curve for pounds will shift to the right.
d. there will be a move down the existing U.S. demand curve for pounds.

6. The supply of foreign exchange is
a. determined by the real exchange rate.
b. independent of the real exchange rate.
c. determined by central bankers.
d. determined by the President.

7. Which of the following could increase the supply of dollars in the foreign exchange market?
a. lower inflation in foreign countries than in the United States
b. lower interest rates in foreign countries than in the United States
c. higher prices in the United States
d. a depreciation of other currencies

8. Which of the following could decrease the supply of dollars in the foreign exchange market?
a. a higher inflation rate in foreign countries
b. lower interest rates in foreign countries
c. lower prices in the United States
d. an appreciation of other currencies

9. Equilibrium in an open economy is characterized by
a. net exports = net capital outflow.
b. net exports + net capital outflow = savings.
c. domestic investment + net capital outflow = savings.
d. Both a and c are correct.

10. The link between the loanable funds market and the foreign exchange market is
a. the governments of the countries involved.
b. the International Monetary Fund.
c. net capital outflow.
d. purchasing power parity.

11. After reunification, Germany experienced a tremendous increase in the demand for loanable funds as many rebuilding projects were initiated. As a result, interest rates
a. rose, there was a decrease in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate fell.
b. rose, there was a decrease in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate rose.
c. fell, there was an increase in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate rose.
d. fell, there was an increase in net capital outflow, there was an increase in the supply of marks, and the real exchange rate fell.

12. Japan has historically had a high savings rate relative to other countries. This means that the
a. supply of loanable funds is larger, interest rates are lower, and net capital outflow is higher.
b. supply of loanable funds is smaller, interest rates are lower, and net capital outflow is higher.
c. demand for loanable funds is larger, interest rates are lower, and net capital outflow is higher.
d. government must subsidize production in order to encourage international trade.

13. Foreign investment in the U.S. causes the
a. balance on current account to become positive.
b. sum of the capital and current accounts to be positive.
c. balance of trade to become negative.
d. value of the dollar to increase.

14. The “twin deficits” refer to
a. the U.S. and Canadian trade deficits.
b. the U.S. trade deficit and the U.S. federal government budget deficit.
c. the current account and capital account deficits.
d. trade deficits that match one another when two countries trade.

15. If the United States government wants to eliminate a trade deficit, it could
a. reduce tariffs.
b. encourage imports.
c. reduce quotas on imports.
d. depreciate the dollar.

16. Which of the following would not be an appropriate response to a trade deficit for the United States?
a. increase tariffs
b. appreciate the dollar
c. subsidize exports
d. impose import quotas

17. Currently, the U.S. government is running a budget deficit. This means that the
a. supply of loanable funds has increased.
b. supply of loanable funds has decreased.
c. real interest rate has fallen.
d. real exchange rate has fallen.

18. Crowding out caused by government budget deficits will lead to
a. an increase in the real exchange rate.
b. a decrease in the real exchange rate.
c. no change in the real exchange rate.
d. a devaluation in a nation’s currency.

19. Surprisingly, government trade policies
a. can eliminate a trade imbalance.
b. often increase a trade deficit.
c. have no real affect on the trade balance.
d. can lower a deficit on current account but not on the capital account.

20. A tariff is a
a. tax on goods produced domestically.
b. tax on exported goods.
c. tax on imported goods.
d. limit placed on the quantity of goods that a country can import.

21. A import quota is a
a.  tax on goods produced domestically.
b. tax on exported goods.
c. tax on imported goods.
d. limit placed on the quantity of goods that a country can import.

22. Consider this diagram of the market for foreign exchange. If the U.S. government decides to increase import tariffs on imported steel, we could expect the



a. demand for dollars to shift from D1 to D2.
b. demand for dollars to shift from D2 to D1.
c. supply of dollars to increase.
d. supply of dollars to decrease.

23. In response to an import quota
a. exports increase by more than imports.
b. imports increase by more than exports.
c. imports and exports are unaffected, but the government collects revenues.
d. imports and exports are both reduced but net exports are unchanged.

24. A large and sudden movement of capital out of a country is called
a. a capital inflow.
b. capital flight.
c. a trade deficit.
d. a trade surplus.

25. The first step to analyzing capital flight is to expect a(n)
a. increase in net capital outflow for the country experiencing the flight.
b. decrease in net capital outflow for the country experiencing the flight.
c. decrease in the supply of domestic currency for the country experiencing the flight.
d. decrease in the demand for loanable funds for the country experiencing the flight.

26. Capital flight is often caused by
a. political stability.
b. shifts away from the industrial sector and towards the service sector.
c. political instability.
d. policies of the International Monetary Fund.

Pretty.Much
Chapter 31: Open-Economy Macroeconomics: Basic Concepts - Principles of Economics Test Bank Mankiw
Chapter 31: Open-Economy Macroeconomics: Basic Concepts - Principles of Economics Test Bank Mankiw
Chapter 31: Open-Economy Macroeconomics: Basic Concepts
1. A country’s balance of international trade is positive when
a. exports exceed imports.
b. exports plus investment exceed imports plus domestic saving.
c. imports exceed exports.
d. imports plus domestic saving exceed exports plus investment.

2. Which of the following would be recorded as an U.S. merchandise export?
a. An American tourist spends 10,000 francs on vacation in the south of France.
b. A machine shop in Ohio purchases a grinder made in Italy.
c. An American receives a $50 dividend check on stock she owns in a business in Germany.
d. France purchases a new jet fighter aircraft from the Boeing Company in the United States.

3. Which of the following is equivalent to the trade deficit?
a. imports/exports
b. net capital inflow
c. exports + imports
d. net exports – imports

4. If U.S. imports total $100 billion and U.S. exports total $150 billion, which of the following would be true?
a. U.S. net exports equal –$50 billion
b. The U.S. has a trade surplus of $50 billion.
c. The U.S. has a trade deficit of $100 billion.
d. The U.S. has a trade deficit of $50 billion.

5. What does a positive U.S. capital inflow signify?
a. Nothing.
b. That the government is running a budget deficit.
c. That more funds were invested in the United States by foreigners than the United States invested abroad.
d. That the United States is running a trade surplus.

6. International trade in financial assets
a. increases risk because little is known about firms in foreign lands.
b. increases risk because default risk is greater in foreign countries.
c. increases risk because of currency fluctuations.
d. reduces risk by allowing for increased diversification.

7. It must always be true that net capital outflow
a. is greater than net exports.
b. is less than net exports.
c. is equal to net exports.
d. equals 0.

8. If savings in Germany is $300 billion and investment in Germany is $550 billion, then
a. there must be net capital outflow of –$550 billion.
b. there must be net capital outflow of –$250 billion.
c. the German government must be running a $250 billion surplus.
d. the German financial market must be experiencing a net capital outflow.

9. If interest rates in Canada rise above those in the rest of the world, then
a. the demand for Canadian dollars decreases.
b. exports from Canada to other countries increases.
c. imports into Canada from other countries decreases.
d. it raises Canada’s exchange rate and this may result in a deficit on Canada’s current account.

10. Foreign direct investment differs from foreign portfolio investment in that
a. direct investments involve stocks and bonds.
b. direct investments can only be made by the International Monetary Fund.
c. direct investments involve physical capital; portfolio investments involve financial capital
d. a government must be involved in direct investment, but portfolio investment can involve private firms.

11. Which of the following would be classified as a direct foreign investment?
a. a purchase of 100 shares of British Petroleum stock
b. a loan of $1 million to a Brazilian utilities firm
c. A loan of $1 million from the World Bank to Surinam
d. building a new Pizza Hut in St. Petersburg, Russia

12. Net capital outflow measures
a. the flow of goods and services between countries.
b. the flow of assets between countries.
c. government budget surpluses and deficits relative to those experienced in other countries.
d. the amount of physical capital built in foreign countries.

13. U.S. trade deficits are a sign of
a. reduced national savings.
b. reduced production of manufactured goods.
c. an over reliance on the service economy.
d. high rates of unemployment in the U.S. economy.

14. The exchange rate is the
a. value of money.
b. quantity of dollars, yen, etc., that are traded on currency markets.
c. amount of foreign currency that is used to buy goods made in your country.
d. number of units of a foreign currency that can be bought with one unit of your own currency.

15. If you were told that the exchange rate was 1.5 U.S. dollars per 1 Canadian dollar (CDN), that would mean that Canadians would have to spend __________ to by a $12 watch in New York City.
a. $18 CDN
b. $15 CDN
c. $1.5 CDN
d. $12 CDN

16. Currencies depreciate and appreciate all the time. Who gains and who loses when the Mexican peso depreciates?
a. Americans holding Mexican pesos gain, U.S. tourists to Mexico lose.
b. U.S. exporters to Mexico gain, Americans holding pesos lose.
c. Mexican exporters gain, Mexican importers lose.
d. Mexican importers gain, Mexican exporters lose.

17. When Italy devalues its currency
a. the dollars per Italian lira will increase.
b. the drain of U.S. reserves on Italian lira will fall.
c. U.S. exports to Italy will increase.
d. the price of imported Italian olive oil in the United States will fall.

18. When fewer U.S. dollars are needed to buy a unit of Japanese yen, the dollar
a. is devalued.
b. is inflated.
c. appreciates.
d. depreciates.

19. If one country has a lower inflation rate than other countries, its
a. currency tends to appreciate.
b. currency tends to depreciate.
c. real interest rate will be higher than in other countries.
d. nominal interest rate will be higher than in other countries.

20. In the long run, exchange rates
a. are determined by business cycle fluctuations.
b. are determined by movements of Eurodollars.
c. will adjust until the price of a bundle of goods is the same in both countries.
d. will reflect economic fluctuations in both countries.

21. Which of the following is a statement of the purchasing power parity theory of exchange rate determination? The exchange rate will adjust in the
a. long run until the interest rate is roughly the same in both countries.
b. long run until real GDP is roughly the same in both countries.
c. long run until the average price of goods is roughly the same in both countries.
d. short run until the average price of goods is roughly the same in both countries.

22. Suppose the same basket of goods costs $100 in the U.S. and 50 pounds in Britain. According to PPP, if the prices do not change, what will be the exchange rate?
a. 2 dollars/pound
b. 4 dollars/pound
c. 5 dollars/pound
d. .5 dollars/pound

23. Which of the following is a reason why exchange rates may deviate from their purchasing power parity values for many years?
a. Some goods are not tradable.
b. In some cases, a foreign-produced good is not a perfect substitute for a domestically-produced version of the same thing.
c. In some markets, import quotas limit the ability of firms to agree on exchange prices.
d. Both a and b are correct.

24. If the U.S. price level is increasing by 3 percent annually and the Swiss price level is increasing by 5 percent annually, by what percent would the dollar price of francs need to change according to purchasing power parity?
a. depreciate by 5 percent
b. appreciate by 3 percent
c. appreciate by 5 percent
d. depreciate by 2 percent

25. Arbitrage refers to
a. simultaneously buying and selling a currency in order to profit from a difference in exchange rates.
b. simultaneously buying and selling a currency in order to change the exchange rate.
c. buying a currency when its price is high and selling it when its price is low.

d. exchanging the domestic currency for a foreign currency.

Pretty.Much
Chapter 30: Money Growth and Inflation - Principles of Economics Test Bank Mankiw
Chapter 30: Money Growth and Inflation - Principles of Economics Test Bank Mankiw
Chapter 30: Money Growth and Inflation
1. The price level that equates the quantity of money demanded with the quantity of money supplied is called the
a. equilibrium price level.
b. natural price level.
c. relative price level.
d. commodity price level.

2. Real economic variables measure
a. value in the prices of some certain base year.
b. value in the prices of the current year.
c. nominal values adjusted for the current interest rate.
d. nominal values adjusted for the current money supply.

3. According to the equation of exchange, money times velocity equals
a. nominal GDP.
b. real GDP.
c. inflation-adjusted total output in the economy.
d. the number of times each unit of money is spent on goods and services.

4. If real output in an economy is 1000 goods per year, the money supply is $300, and each dollar is spent 3 times per year, then the average price of goods is
a. $0.90.
b. $1.11.
c. $1.50.
d. $1.33.

5. Within the context of the equation of exchange, the higher the equilibrium price level is
a. the higher is the nominal money supply.
b. the lower is the nominal interest rate.
c. the higher is real GDP.
d. the lower is velocity.

6. If real GDP falls and the nominal interest rate rises, then the equilibrium price level
a. must fall.
b. must rise.
c. will fall if the effect of the decline in real GDP dominates.
d. will fall if the effect of the increase in the nominal interest rate dominates.

7. If the supply of money is greater than the amount of money people want to hold, then
a. spending will increase and the price level will fall.
b. spending will increase and the price level will rise.
c. spending will increase and the rate of interest will rise.
d. None of the above are correct. The amount of money supplied is never greater than the amount people want to hold.

8. According to classical economists
a. prices are rigid.
b. both velocity and real output are variable.
c. changes in the money supply cause changes in velocity.
d. the velocity of money is constant.

9. Since classical economists believe that both velocity and real output are constants, the equation of exchange becomes a theory in which
a. the quantity of money explains prices.
b. the quantity of money explains real GDP.
c. changes in the money supply cause changes in velocity.
d. prices are fixed.

10. According to the classical view, to prevent price level changes when real output is growing by 3 percent per year, the money supply must
a. decrease by 3 percent per year.
b. increase by 3 percent per year.
c. increase by more than 3 percent per year.
d. remain constant.

11. The irrelevance of monetary changes for real variables is called
a. the classical dichotomy.
b. the equation of exchange.
c. monetary neutrality.
d. hyperinflation.

12. Which of the following is a major source of inflation in the United States?
a. faster growth of the money supply than growth in GDP
b. monopoly power
c. low productivity
d. government regulation

13. If a government supplies more money than the quantity people want to hold
a. spending will decrease and the price level will fall.
b. spending will increase and the price level will rise.
c. spending will remain constant but the price level will rise.
d. there will be no change in the level of economic activity or prices; money is neutral.

14. Hyperinflation occurs because governments want to __________ spending but they ignore the fact that increasing the money supply will __________ .
a. decrease, require greater government spending
b. increase, also increase the price level
c. increase, put upward pressure on interest rates
d. decrease, put downward pressure on interest rates

15. The inflation tax is
a. a tax on windfall profits.
b. a special tax imposed on owners of shares of stock.
c. a special tax imposed on profits when inflation is over 10% per year.
d. the loss incurred when inflation reduces the purchasing power of assets.

16. The beneficiaries of the inflation tax are
a. those who borrow money.
b. all corporations.
c. all multinational corporations that can shift assets into alternative currencies.
d. exporters of goods and services.

17. If the nominal interest rate is 10%, the expected rate of inflation is 7%, and the growth rate of the money supply is 6%, then the real interest rate is
a. –4%.
b. –3%.
c. 3%.
d. 4%.

18. Studies of money demand indicate that the nominal demand for money
a. does not depend on interest rates.
b. does not depend on the price level.
c. is proportional to the price level.
d. is proportional to the nominal interest rate.

19. In 1985, the U.S. government indexed the federal personal income tax system. With indexing, households are pushed into a higher tax bracket only if their nominal income
a. rises as fast as the rate of inflation.
b. rises slower than the rate of inflation.
c. rises faster than the rate of inflation.
d. decreases by the amount of inflation.

20. Investors criticize the federal income tax system because they must pay taxes
a. on gains that merely reflect the effects of inflation.
b. only on gains that exceed the effects of inflation.
c. on losses as well as gains.
d. on losses but not on gains.

21. Unanticipated inflation helps
a. investors at the expense of savers.
b. proprietorships at the expense of partnerships.
c. borrowers at the expense of lenders.
d. taxpayers at the expense of government.

22. Some economists feel inflation is bad
a. because it reduces real GDP so much.
b. only if it is steady.
c. because it redistributes income arbitrarily.
d. only if it is anticipated.

23. Betty spends the entire week before Christmas shopping. However, inflation is so high in her community that she must make three trips to the bank each day so as not to lose too much purchasing power. These costs of inflation are called
a. menu costs.
b. shoeleather costs.
c. the inflation fallacy.
d. redistribution costs.

24. When news reporters blame inflation on monopoly sellers, or on greed, they
a. are correctly distinguishing between relative prices and the level of prices.
b. are confusing the level of prices with the rate of change of prices.
c. are identifying the major cause of inflation in the United States.
d. None of the above are correct.

25. Monopoly sellers
a. charge higher prices than more competitive firms and therefore cause inflation.
b. can achieve economies of scale not available to competitive firms and therefore charge lower prices, which causes deflation.
c. charge higher prices than more competitive firms, but do not cause inflation.

d. are much greedier than sellers in more competitive markets.

Pretty.Much