Section 6 Practice Test
Figure 31-1: Money Market I
1.Use the “Money Market I” Figure 31-1. If the money market is initially in equilibrium at point E and the central bank _____ bonds, then the interest rate will:
A. / sells; move toward point H.B. / sells; move toward point L.
C. / buys; remain at point E.
D. / sells; remain at point E.
E. / buys; move toward point H.
Figure 32-2: Classical Model of the Price Level
2.Use the “Classical Model of the Price Level” Figure 32-2. If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, then, according to this classical model, the price level would:
A. / not change.B. / increase from P1 to P2.
C. / increase from P2 to P3.
D. / decrease from P1 to P2.
E. / increase from P1 to P3.
3. In the long run, the only effect of monetary policy is on:
A. / the long-run aggregate supply.B. / the interest rate.
C. / the aggregate output level.
D. / the aggregate price level.
E. / the rate of employment.
Figure 31-2: Changes in the Money Supply
4.Use the “Changes in the Money Supply” Figure 31-2. Fed policy to increase the supply of money and hence to lower the interest rate from 6% to 4%, is accomplished by action that ______the ______government bonds.
A. / lowers; price ofB. / increases; interest rate on
C. / decreases; issuing of
D. / increases; supply of
E. / increases; demand for
5.Budget deficits:
A. / always decrease with inflation and increase with deflation.B. / always increase when unemployment increases and fall when unemployment falls.
C. / always decrease when unemployment increases and increase when unemployment falls.
D. / always increase when aggregate price level increases and fall when aggregate price level falls.
E. / always increase when unemployment increases and increase when real GDP increases.
6.The negative relationship between the inflation rate and the unemployment rate is known as the:
A. / short-run Phillips curve.B. / short-run aggregate supply curve.
C. / long-run Phillips curve.
D. / aggregate demand curve.
E. / long-run aggregate supply curve.
Figure 34-1: Expected Inflation and the Short-Run Phillips Curve
SRPC0 is the Phillips curve with an expected inflation rate of 0%; SRPC2 is the Phillips curve with an expected inflation rate of 2%.
7.Use the “Expected Inflation and the Short-Run Phillips Curve” Figure 34-1. Suppose that this economy currently has an unemployment rate of 6%, inflation of 0%, and no expectation of future inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation would:
A. / decrease to –2%.B. / not change.
C. / increase to 2%.
D. / increase to 4%.
E. / increase to 8%.
8.When the government borrows funds in financial markets to pay for budget deficits:
A. / planned aggregate spending decreases rather than increases.B. / the multiplier effect of government purchases increases.
C. / private investment spending may be crowded out.
D. / the interest rate and savings decrease.
E. / the interest rate rises and consumption spending increases.
9.Monetary policy attempts to affect the overall level of spending in the economy through:
A. / changes in the inflation rate.B. / changes in the quantity of money or the interest rate.
C. / changes in tax policy or government spending.
D. / discretionary regulation of profits and wages.
E. / changes to imports and exports.
10.The budget balance is calculated as:
A. / T – G – TRB. / T + G – TR
C. / T – G + TR
D. / T + G + TR
E. / TR – T – G
Figure 32-3: AD–AS
11.Use the “AD–AS” Figure 32-3. Refer to the AD–AS diagram. Suppose the economy is initially at E1, and then moves to E2 where AD2 intersects SRAS1. Now, suppose that the SRAS1 shifts to SRAS2, because:
A. / real wages rise in the long run.B. / nominal wages rise in the long run.
C. / the real money supply rises in the long run.
D. / aggregate real output rises in the long run.
E. / nominal wages fall in the long run.
12.If the public holds $300 billion in monetary purchasing power and the inflation rate is 5%, then the inflation tax that year is:
A. / $5 billion.B. / $15 billion.
C. / $60 billion.
D. / $1500 billion.
E. / $1.5 billion.
13.Contractionary monetary policy causes ______in the price level in the short run and ______in the price level in the long run.
A. / no change; a decreaseB. / a decrease; a decrease
C. / a decrease; no change
D. / no change; no change
E. / a decrease; an increase
14.Suppose that commodity prices across the economy begin to fall and consumers and firms begin to expect a lower rate of future inflation. What do we expect to happen to the SRAS curve and short-run Phillips curve?
A. / The SRAS curve will shift to the left, and the short-run Phillips curve will shift downward.B. / The SRAS curve will shift to the right, and the short-run Phillips curve will shift downward.
C. / The SRAS curve will shift to the left, and the short-run Phillips curve will shift upward.
D. / The SRAS curve will shift to the right, and the short-run Phillips curve will shift upward.
E. / The LRAS curve will shift to the right, and the short-run Phillips curve will shift upward.
15.Suppose that U.S. debt is $7 trillion dollars at the beginning of the fiscal year. During the fiscal year, the government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion. At the end of the fiscal year, the debt is:
A. / $10.5 trillion.B. / $6.5 trillion.
C. / $9 trillion.
D. / $7.5 trillion.
E. / $8.5 trillion.
16.During an inflationary gap:
A. / the unemployment rate is less than the natural rate of unemployment.B. / actual output is less than potential output.
C. / the unemployment rate is equal to the natural rate of unemployment.
D. / wages and prices will need to fall in order to restore the economy to its potential output.
E. / the unemployment rate is equal to zero.
17.In 1958, which of the following economists came up with a theory regarding the tradeoff relationship between unemployment and inflation?
A. / A.W.H. PhillipsB. / John Maynard Keynes
C. / Joseph Schumpeter
D. / Milton Friedman
E. / Karl Marx
18.According to the classical model of the price level, an increase in the money supply will create:
A. / inflation with no long-run increase in real GDP.B. / inflation and a long-run increase in real GDP.
C. / no inflation and a long-run increase in real GDP.
D. / deflation with no long-run increase in real GDP.
E. / disinflation with no long-run increase in real GDP.
Figure 31-4: Economic Adjustments
19. Use the “Economic Adjustments” Figure 31-4. Assume that the economy is at point c. An increase in the money supply would cause:
A. / a shift of the SRAS1 curve to SRAS2.B. / a shift of the SRAS2 curve to SRAS1.
C. / a shift of the AD1 curve to AD2.
D. / a shift of the AD2 curve to AD1.
E. / a shift of the AD1 curve to AD2 and a shift of the SRAS2 curve to SRAS1.
20.When a central bank prints money to pay government debts, causing rising prices that erode the purchasing power of money held by the public, it is called:
A. / a payroll tax.B. / an excise tax.
C. / a currency tax.
D. / a budget tax.
E. / an inflation tax.