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Basic Concepts 1. ( * 78%) Which of the following is true according to the circular flow model ?

2000 AP Macro Exam [with some 1995 & 1990 questions] [ * represents what percent of 23,000 students chose the correct answer] [Includes 59 questions from 2000 Macro exam, 35 from 1995 exam, and 6 from 1990 exam]. Basic Concepts

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Basic Concepts 1. ( * 78%) Which of the following is true according to the circular flow model ?

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  1. 2000 AP Macro Exam [with some 1995 & 1990 questions][*represents what percent of 23,000 students chose the correct answer][Includes 59 questions from 2000 Macro exam, 35 from 1995 exam, and 6 from 1990 exam] Basic Concepts 1. (*78%) Which of the following is true according to the circular flow model? a. Firms are suppliers in both the product and factor markets. b. Firms are demanders in the product markets and suppliers in the factor markets. c. Households are demanders in both the product and factor markets. d. Households are demanders in the product markets & suppliers in the factor markets. e. The government is a demander in the product market only. 2. (*78%) On the basis of the diagram showing an economy’s PPC for two goods, which of the following statements must be true? I. The opportunity cost of moving from point P to point R is 10 units of Y. II. The opportunity cost of moving from point R to point P is 8 units of X. III. The opportunity cost of moving from point Q to point R is 0 units. a. I only b. III only c. I and II only d. II and III only e. I, II, & III Global Trade 3. (*74%) An increase in Japan’s demand for U.S. goods would cause the dollar to a. depreciate because of inflation b. depreciate because the U.S. would be selling more dollars to Japan c. depreciate because the U.S. money supply would increase as exports rise d. appreciate because Japan would be buying more U.S. dollars e. appreciate because Japan would be selling more U.S. dollars

  2. 4. (*65%) As nations specialize in production and trade in international markets, they can expect which of the followingdomestic improvements? I. Allocation of domestic resources II. Standard of living III. Self-sufficiency a. I only b. II only c. III only d. I and II only e. I, II, and III 5. (*51%) Which of the following would be most likely to occur if the U.S. placed high tariffs on imported goods? a. Workers in the U.S. would have more jobs in the long run. b. Income in the U.S. would be redistributed from the rich to the poor. c. The U.S. standard of living would increase. d. The United States economy would become less efficient. 6. (*58%)Mary Jane is a lawyer who can earn $150 per hour in her law practice. She is also an excellent carpenterwho can build cabinets three times as fast as the best carpenter, whose hourly wage is $20 per hour. Which of the following is a correct economic statement? a. Mary Jane has a comparative advantage in law so she should specialize in law & hire a carpenter to make her cabinets. b. Mary Jane has an absolute & comparative advantage in both law and carpentry, so she should make her own cabinets while continuing to practice law. c. Mary Jane is three times faster than any carpenter so she could give up her law practice to become a carpenter. d. When carpenters work for lawyers, they should charge $150 per hour instead of $20 per hour. e. Because Mary Jane is an excellent carpenter, when the best carpenter works for Mary Jane, he can only charge one third as much, or $6.67 per hour.

  3. GDP 7. (*79%) Which of the following would represent an addition to a nation’s GDP? a. Ms. Smith purchases a share of stock in an automobile company. b. A retailer increases her stock of imported shoes. c. The government increases its domestic purchases of food for use by the military. d. A corporation sells shoes from last year’s inventory. e. A mother sells her car to her daughter. 8. (*70%) If real GDP is increasing at 3% per year & nominal GDP is increasing at 7% per year, which of the following is necessarily true? a. Unemployment is increasing d. The economy is in a recession. b. The price level is increasing. e. The government is running a budget deficit. c. Exports exceed imports. 9. (*44%) Which of the following would best explain a decline in potential GDP? a. Negative net investment d. A decrease in the infant mortality rate b. The discovery of vast new oil deposits e. A decrease in wages and profits c. A lower price level 10. (*60%) As a measure of economic welfare, GDP underestimates a country’s production of goods and services when there is an increase in a. the production of military goods d. household production b. the production of anti-pollution devices e. legal services c. crime prevention services

  4. 11. (75%) If purchases of education and medical care were counted as investment rather than consumption, GDP would a. not change, because there is no change in total(aggregate) expenditures b. increase, because investment is included in GDP but consumption is not c. increase, because consumption is included in GDP but investment is not d. decrease, because investment is weighted more heavily than consumption in calculating GDP e. decrease because consumption is weighted more heavily than investment in calculating GDP. Unemployment, inflation, & business cycles 12. (72%) The official unemployment rate is not an accurate indicator of actual unemployment in the economy because a. structural unemployment is greater than cyclical unemployment at the going wage rate b. full employment is greater than natural unemployment c. the unemployment rate is less than natural unemployment d. the official rate does not include persons who have given up looking for work 13. (64%) An increase in energy costs will most likely cause the price level and real GDP to change in which of the following ways? Price LevelReal GDP a. increase increase b. increase decrease c. increase not change d. decrease increase e. decrease decrease

  5. 14. (58%) A contractionary supply shock would most likely result in a. an increase in AD d. a decrease in the general price level b. an increase in national income e. a decrease in employment c. an increase in GDP 15. (82%) If the economy is operating in the intermediate rangeof the AS curve and if AD increases due to an increase in net exports, then the price level, output, & the unemployment rate are most likely to change in which of the following ways? Price LevelOutputUnemployment Rate a. increase increase increase b. increase increase decrease c. increase decrease increase d. increase decrease decrease e. decrease decrease increase 16. (78%) The short-run AS curve is likely to shift to the left when there is an increase in a. the cost of productive resources d. the federal budget deficit b. productivity e. imports c. the money supply 17. (54%) Which of the following best explains how an economy could simultaneously experience high inflation and high unemployment? a. The government increases spending without increasing taxes. b. The government increases taxes without increasing spending. c. Inflationary expectations decline. d. Women and teen-agers stay out of the labor force. e. Negative supply shocks cause factor prices to increase

  6. 18. (89%) The intersection of the AS & the AD curve occurs at the economy’s equilibrium level of a. real investment and the interest rate d. government expenditures & taxes b. real disposable income and unemployment e. imports and exports c. real domestic output(GDP) and the price level 19. (47%) Which of the following would most likely cause the U.S. economy to fall into recession? a. increase in welfare payments d. a decrease in the required reserve ratio b. increase in exports e. an open market sale of bonds by the Fed c. a decrease in savings by consumers 20. (58%) Which of the following would cause a rightward shift of the AS curve? a. an increase in interest rates b. a tax increase of 50 cents per gallon for gasoline c. an across-the-board reduction of wages in the manufacturing sector d. the passage of legislation mandating a reduction in automobile pollution e. the shutdown of plants and movement of production of goods abroad 21. (38%) Which changes in the AD & AS curves is likely to result in stagflation? a. the AD curve shifts to the left when the economy is in the classical range of the AS curve. b. the AD curve shifts to the right when the economy is in the classical range of the AS curve. c. the AD curve shifts to the right when the economy is in the Keynesian range of the AS curve. d. The AS curve shifts to the left. e. The AS curve shifts to the right.

  7. Classical/Keynesian Economics 22. (80%) Which argument is typically associated with classical economists? a. A market economy is self-correcting and thus will not remain in a recession indefinitely. b. A market economy has stable prices and thus is usually free from inflation. c. A market economy requires a strong government to ensure that the market meets the needs of the people. d. A market economy needs only moderate assistance from the government to avoid an extended recession. e. A market economy eventually results in monopolies in both the input & output markets. 23. (62%) According to the Keynesian saving schedule, when aggregate income increases by a given amount, savings will a. remain the same b. decrease by the amount of the change in income c. increase by the amount of the change in income d. increase by less than the amount of the change in income e. increase by more than the amount of the change in income 24. (49%) An importantassumption in Keynesiantheory is that a. prices are rigid downward & decreases in AD will lead to an increase in unemployment. b. price rigidity will cause downturns in the economy to self-correct. c. When AD is inadequate, prices will fall. d. When interest rates are high, many businesses borrow money. e. changes in the money supply are the major cause of changes in real output & price level.

  8. 25. (73%) What would be the effect of a large increase in labor productivity on the real GDP and the price level? Real GDPPrice Level a. Increase Increase b. Increase Decrease c. No effect Increase d. decrease Increase e. Decrease Decrease 26. (46%) Which of the following is true of supply shocks? a. They tend to change both relative prices and the general price level in the economy. b. They affect only the general PL. c. They can be anticipated and offset with appropriate fiscal policy. d. They can be anticipated and offset with appropriate monetary policy. e. They make the AS curve vertical. 27. (45%) Suppose that from 2003 to 2004, unemployment fell from 7.2 to 7.0%and inflation fell from 3.8 to 1.1%. An explanation of these changes might be that the a. AD curve shifted to the left c. AS curve shifted to the left b. AD curve shifted to the right d. AS curve shifted to the right e. short-run Phillips curve shifted to the right 28. (46%) Which of the following is a key feature of Keynesian economics? a. The level of saving depends mostly on interest rates. b. The level of government expenditure depends mostly on interest rates. c. Supply creates its own demand. d. Macroeconomic equilibrium can occur at less than full employment. e. Wages are more flexible than prices. 1995 AP Exam AD AS1 AS2 PL1 PL2

  9. 29. (35%) According to Keynesian theory, the most important determinant of saving and consumption is the a. interest rate b. price level c. level of income d. level of employment e. flexibility of wages and prices 30. (70%) An inflationary gapcould be reduced by a. an increase in government spending b. an increase in the supply of money c. an increase in the income tax rate d. a decrease in the discount rate e. a decrease in the reserve requirement 31. (75%) Which of the following would most likely lead to a decrease in AD? a. a decrease in taxes b. a decrease in interest rates c. an increase in household savings d. an increase in household consumption e. an increase in business firms’ purchases of capital equipment from retained earnings 32. (52%) Which of the following would result in the largest increase in AD? a. $30 billion increase in military spending and a $30 billion open-market purchase of G bonds b. $30 billion increase in military spending and a $30 billion open-market sale of G bonds c. $30 billion tax cut and a $30 billion open-market sale of G bonds d. $30 billion tax increase and a $30 billion open-market purchase of G bonds e. $30 billion increase in social security payments and a $30 billion open-market sale of G bonds

  10. SRAS/LRAS Question on 95 Exam 33. If AD remains constant, the equilibrium price levels in the short run and in the long run will be _____ & _____? 34. If the government uses fiscal policy to get out of the recession, price level will end up at _____?

  11. 35. (81%) The value of the spending multiplier(ME) decreases when a. tax rates are reduced d. government spending increases b. exports decline e. the marginal propensity to save increases c. imports decline 36. (75%) Which of the following policies would a Keynesian recommend during a period of high unemployment and low inflation? a. decreasing the MS to reduce AD b. decreasing taxes to stimulate AD c. decreasing government spending to stimulate AS d. balancing the budget to stimulate AS 37. (47%) Which of the following best explains why equilibrium income will increase by more than $100 in response to a $100 increase inG? a. Incomes will rise, resulting in a tax decrease. b. Incomes will rise, resulting in higher consumption. c. The increased spending raises the aggregate price level. d. The increased spending increases the money supply, lowering interest rates. e. The higher budget deficit reduces investment. 38. (56%) Unexpected increases in inventories usually precede a. increases in inflation b. increases in imports c. stagflation d. decreases in production e. decreases in unemployment

  12. 39. (63%) The economy on the right is currently experiencing a. inflation b. recession c. expansion d. stagflation e. rapid growth 40. (77%) Correct monetary policy to reach FE GDP is to increase a. the MS b. the RR c. discount rate d. taxes e. exports 41. (36%) The minimum increase in government spendingto reach full employment is a. $2,000 b. $1,000 c. $500 d. $200 e. $100 42. (58%) In the simple Keynesian AE model[not AD/AS]of an economy, changes in Ig or G will lead to a change in which of the following? a. the price level b. the level of output and employment c. interest rates d. the AS curve 43. (83%) In a closed-private in which the APC is .75, which of following is true? a. If income is $100, then saving is $75. d. If income is $200, then “C” is $75 b. If income is $100, then “C” is $50 e. If income is $500, then saving is $100 c. If income is $200, then saving is $50 AE S C+Ig E $500 C A $400 Full.Employ. 0 $800$1,000 $2,000

  13. 44. (63%) Suppose that DI is $1,000, consumption is $700, and the MPC is .6. If DI then increases by $100, consumption and savings will equal which of the following? ConsumptionSavings a. $420 $280 b. $600 $400 c. $660 $320 d. $660 $440 e. $760 $340 Fiscal Policy 45. (73%) An inflationary gapcan be eliminated by all of the following EXCEPT a. an increase in personal income taxes d. a decrease in G b. an increase in the MS e. a decrease in Xn c. an increase in the interest rate 46. (56%) A major advantage of automatic stabilizers in fiscal policy is that they a. reduce the public debt b. increase the possibility of a balanced budget c. stabilize the unemployment rate d. go into effect without passage of new legislation e. automatically reduce the inflation rate

  14. 47. (70%) In the short run, a contractionary fiscal policy will cause AD, output, and the price level to change in which of the following ways? ADOutput Price level a. decrease decrease decrease b. decrease increase increase c. increase decrease decrease d. increase increase increase 48. (52%) Crowding out due to government borrowing occurs when a. lower interest rates increase private sector investment b. lower interest rates decrease private sector investment c. higher interest rates decrease private sector investment d. a smaller money supply increases private sector investment 49. (41%) If, at FE, the G wants to increase its spending by $100 billion without increasing inflation in the short run, it must do which of the following? a. raise taxes by more than $100 billion c. raise taxes by less than $100 b. raise taxes by $100 billion d. lower taxes by $100 billion 50. (42%) Compared to expansionary monetary policies adopted to counteract a recession, expansionary fiscal policies tend to result in a. less public spending c. a high rate of economic growth b. higher interest rates d. lower prices

  15. 51. (71%) An increase inwhich willincrease the value of the ME? a. The supply of money d. The marginal propensity to consume b. Equilibrium output e. The required reserve ratio c. Personal income tax rates 52. (61%)An AS curve may be horizontal over some range because within that range a. a higher PL leads to higher interest rates, which reduces the MS & “C” b. changes in the aggregate PL do not induce substitution c. output cannot be increased unless prices and interest rates increase d. rigid prices prevent employment from fluctuating e. resources are underemployed & an increase in AD will be satisfied without any pressure on the PL 53. (45%)What could cause simultaneous increases in inflation & unemployment a. a decrease in government spending d. An increase in inflationary expectations b. A decrease in the money supply e. An increase in productivity c. A decrease in the velocity of money 54. (85%) Which of the following will result in the greatest increase in AD? a. A $100 increase in taxes b. A $100 decrease in taxes c. A $100 increase in government expenditures d. A $100 increase in government expenditures, coupled with a $100 increase in taxes e. A $100 increase in government expenditures, couples with a $100 decrease in taxes 55. (65%) Which of the following will result from a decrease in government spending? a. An increase in output d. A decrease in AS b. An increase in the price level e. A decrease in AD c. An increase in employment 1995 AP Exam

  16. Questions 22-23 refer to the diagram(rt), which depicts an economy’s “C” function. 56. (56%)If the MPC increases, the equilibrium levels of income and consumption will change in which of the following ways? Equil. LevelEquil. Level of Incomeof Consumption a. No change No change b. No change Increase c. Increase No change d. Increase Increase e. Decrease Decrease S C+Ig C Expenditures C2 + $100 Ig C1 $700 0 $1,500$2,000Real Income 57. (48%) If private investment of $100 is added to the economy, the equilibrium levels of incomeandconsumption will change in which of the following ways? Equil. LevelEquil. Level of Incomeof Income a. Increase Decrease b. Increase Increase c. Increase No change d. No change Increase e. No change No change

  17. C+Ig+G • 58. (61%) The graph indicates equilibrium at E • for a closed economy without G. If the • addition of G results in equilibrium atF, • which of the following is true? • a. G is $300 and the multiplier is 5. • b. G is $100 and the multiplier is 5. • c. G is $100 and consumption increased by $500. • d. G and Ig increase by $500. • e. Consumption and GDP increase by $500 each. AE F C+Ig E $300 $200 0 $1,000$1,500 GDP 59. (84%) According to Keynesian theory, decreasing taxes and increasing G will most likelychange consumptionand unemployment in which of the following ways? ConsumptionUnemployment a. Decrease No change b. Decrease No change c. Increase Decrease d. Increase Increase e. No change Decrease 60. (79%) In an economy at full employment, a presidential candidate proposes cutting the government debt in half in 4 years by increase T and reducing G. According to Keynesian theory, implementation of these policies is most likely to increase a. unemployment d. aggregate supply b. consumer prices e. the rate of economic growth c. aggregate demand

  18. 61. (79%) If the economy is in a severe recession, which of the following is the fiscal policy most effective in stimulating production and employment? a. Government spending increases. b. Government spending decreases. c. Personal income taxes are increased. d. The Fed sells bonds on the open market. e. The Fed buys bonds on the open market. 62. (27%) Faced with a large federal budget deficit, the government decides to decrease expenditures and tax revenuesby the same amount. This action will affect output and interest rates in which of the following ways? OutputInterest Rates a. Increase Increase b. Increase Decrease c. No change Decrease d. Decrease Increase e. Decrease Decrease 63. (28%) If crowding out only partially offsets the effects of a tax cut, which of the following changes in interest rates and GDP are most likely to occur. Interest RatesGDP a. Increase Increase b. Increase Remain unchanged c. Increase Decrease d. Remain unchanged Increase e. Decrease Decrease

  19. Money and the Fed 64. (61%)In theKeynesian model, an expansionary monetary policywill lead to a. lower real interest rates and more investment b. lower real interest rates and lower prices c. higher real interest rates and lower prices d. higher real interest rates and higher real income e. higher nominal interest rates and more investment 65. (58%) Which of the following will most likely occur in an economy if more money is demanded than is supplied? a. the amount of investment spending will increase. d. interest rates will decrease b. the demand curve for money will shift to the left e. interest rates will increase. c. the demand curve for money will shift to the right. 66. (64%) When consumers hold money rather than bonds because they expect the interest rate to increase in the future, they are holding money for what purposes? a. transactions c. speculation (asset) b. unforeseen expenditures d. illiquidity Money Creation 67. (80%) If on receiving a checking deposit of $300 a bank’s ER increased by $255, the RRmust be: a. 5% b. 15% c. 25% d. 35% e. 45%

  20. 68. (62%) The money-creating ability of the banking systemwill be less than the maximum amount indicated by the money multiplier when a. interest rates are high b. the velocity of money is rising c. people hold a portion of their money in the form of currency d. the unemployment rate is low 69. (71%) RR is 20%. If a bank initially has no ER and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is a. $2,000 b. $8,000 c. $10,000 d. $20,000 e. $50,000 70. (86%) RR is 15% and that bank receives a new DD of $200. Which of the following will most likely occur in the bank’s balance sheet? Liabilities(DD)Required Reserves a. increase by $200 increase by $170 b. increase by $200 increase by $30 c. increase by $200 no change d. decrease by $200 decrease by $30 e. decrease by $200 decrease by $170 The Fed and Monetary Policy 71. (89%) The Federal Reservecan increase the money supply by a. selling gold reserves to the banks b. selling foreign currency holdings c. buying government bonds on the open market d. borrowing reserves from foreign governments

  21. 72. (73%) An increase in the money supply is most likely to have which of the followingshort-run effects on real interest rates and real output? Real Interest RatesReal Output a. decrease decrease b. decrease increase c. increase decrease d. increase no change e. no change increase 73. (81%) Under which of the following conditions would a restrictive (contractionary) monetary policybe most appropriate? a. high inflation d. low interest rates b. high unemployment e. a budget deficit c. full employment with stable prices 74. (82%) The Fed can change the U.S. money supply by changing the a. number of banks in operation d. prime rate b. velocity of money e. discount rate c. price level 75. (*30%) If the money stock decreases but nominal GDP remains constant, which of the following has occurred? a. income velocity of money has increased. d. price level has decreased. b. income velocity of money has decreased. e. real output has decreased. c. price level has increased.

  22. 76. (54%) Policy-makers concerned about fostering long-run growth in an economy that is currently in a recession would most likely recommend which of the following combinations of monetary and fiscal policy actions? Monetary PolicyFiscal Policy a. sell bonds reduce taxes b. sell bonds raise taxes c. no change raise taxes d. buy bonds reduce spending e. buy bonds no change 77. (76%) Open market operations refer to which of the following activities? a. the buying and selling of stocks in the New York stock Market b. the loans made by the Fed to member commercial banks c. the buying and selling of government securities by the Federal Reserve d. the government’s purchases and sales of municipal bonds e. the government’s contribution to net exports 78. (58%) An open market sale of bonds by theFed willmost likelychange the money supply, the interest rate, and the value of the U.S. dollar in which of the following ways? Money SupplyInterest RateValue of the Dollar a. increase decrease decrease b. increase decrease increase c. decrease decrease decrease d. decrease increase increase e. decrease increase decrease

  23. 79. (82%)Commercial banks can create money by a. transferring depositors’ accounts at the Fed for conversion to cash b. buying Treasury bills from the Federal Reserve c. sending vault cash to the Fed d. maintaining a 100% reserve requirement e. lending excess reserves to customers 80. (65%) If the RR is 20%, the existence of $100 worth of ER in the banking system can lead to a maximum expansion of the money supply equal to a. $20 b. $100 c. $300 d. $500 e. $750 81. (71%) If the Fed lowers the RR, which of the following would most likely occur? a. Imports will rise, decreasing the trade deficit. b. The rate of saving will increase. c. Unemployment and inflation will both increase. d. Businesses will purchase more factories and equipment. e. The budget deficit will increase. 82. (61%) If the public’s desire to hold money as currency increases, what will the impact be on the banking system? a. Banks would be more able to reduce unemployment. b. Banks would be more able to decrease AS. c. Banks would be less able to decrease AS. d. Banks would be more able to expand credit. e. Banks would be less able to expand credit

  24. 83. (86%) Which of the combinations is most likely to cure a severe recession? Open-Market OperationsTaxesGov. Spending a. Buy securities Increase Decrease b. Buy securities Decrease Increase c. Buy securities Decrease Decrease d. Sell securities Decrease Decrease e. Sell securities Increase Increase 84. (61%) The demand for money increases whennational income increasesbecause a. spending on goods and services increases d. the MS increases b. interest rates increase e. the budget deficit increases c. the public becomes more optimistic about the future 85. (76%) Suppose the RR is 20% and a single bank with no ER receives a $100 DD from a new customer. The bank now has excess reserves equal to a. $20 b. $80 c. $100 d. $400 e. $500 86. (45%) Which of the following is most likely to increase if the public decides to increase its holding of currency? a. Interest rate d. Employment b. The price level e. The reserve requirement c. Disposable personal income 87. (47%) During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the following policies would be most appropriate? a. Equal increases in government expenditure and taxes b. An increase in government expenditure only c. An increase in transfer payments d. An increase in the reserve requirement e. Purchase of government securities by the Fed

  25. 88. (73%) Which of the following monetary and fiscal policy combinations would most likely result in a decrease in AD? Discount RateOpen-Market OperationsGov. Spending a. Lower Buy bonds Increase b. Lower Buy bonds Decrease c. Raise Sell bonds Increase d. Raise Buy bonds Increase e. Raise Sell bonds Decrease 89. (35%) Under which of the following circumstances would increasing the MS be most effective in increasing real GDP? Interest RatesEmploymentBusiness Optimism a. High Full High b. High Less than full High c. Low Full High d. Low Full Low e. Low Less than full Low 90. (57%) According to both Monetarists and Keynesians, which of the following happens when the Fed reduces the discount rate? a. The demand for money decreases and market interest rates decrease. b. The demand for money increases and market interest rates increase. c. The supply of money increases and market interest rates decrease. d. The supply of money increases and market interest rates increase. e. Both the demand for money and the MS increase and market interest rates increase. 91. (79%) All of the following are components of the MS in the U.S. EXCEPT a. paper money b. gold bullion c. checkable deposits d. coins e. demand deposits

  26. 92. (77%) If a banking system’s reserves (TR) are $100 billion, DD are $500 billion, and the banking system is fully loaned-up, then the RR must be a. 10% b. 12.5% c. 16.6% d. 20% e. 25% 93. (58%) Which of the following would increase the value of the ME? a. an increase in government expenditure b. An increase in exports c. a decrease in government unemployment benefits d. a decrease in the MPC e. a decrease in the MPS 94. (76%) According to the monetarists, inflation ismost often the result of a. high federal tax rates b. increased production of capital goods c. decreased production of capital goods d. an excessive growth of the money supply e. upward shifts in the consumption function 95. (67%) What would occur if the international value of the U.S. dollar decreased? a. U.S. exports would rise. b. More gold would flow into the U.S. c. U.S. demand for foreign currencies would increase. d. The U.S. trade deficit would increase. e. Americans would pay less for foreign goods. 96. (48%) According to the classical model, an increase in the MScauses an increase in which I. The price level II. Nominal Gross Domestic Product III. Nominal wages a. I only b. II only c. III only d. II and III only e. I, II, and III

  27. 97. (47%) If the Fed undertakes a policy to reduce interest rates, international capital flows(financial capital like CDs & bonds) will be affected in which of the following ways? a. Long-run capital outflows from the U.S. will decrease. b. Long-run capital inflows to the U.S. will increase. c. Short-run capital outflows from the U.S. will decrease. d. Short-run capital inflows to the U.S. will decrease. e. Short-run capital inflows to the U.S. will not change. 98. (73%) If the Fedwishes to use monetary policy to reinforce Congress’ fiscal policy changes, it should a. increase the MS when government spending is increased b. increase the MS when government spending is decreased c. decrease the Ms when government spending is increased d. increase interest rates when government spending is increased e. decrease interest rates when government spending is decreased Economic Schools of Thought 99. (53%) According to the monetarists, which is true of expansionary fiscal policy? a. It will cause interest rates to rise and crowd out private investment spending. b. It should not be used so long as there is a national debt. c. It should be used only when resources are unemployed and the inflation rate is low. d. It will decrease aggregate (total) income. The Debt and the Deficit 100. (71%) Which of the following will occur if the federal government runs a budget deficit. a. The expenditure multiplier will increase. b. The size of the national debt will increase. c. The economy’s output will decrease. d. State governments will run a budget surplus to offset the federal deficit. e. Interest rates will tend to decline.

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