Macroeconomic Principles (Econ 2305)
Quiz 2 (type B)
Name : ______________________ SSN :_________________
1. Suppose the U.S. government allowed taxpayers to earn their first $5,000 of interest income tax free. This would shift the
a. supply for loanable funds right making interest rates fall.
b. supply of loanable funds left making interest rates rise.
c. demand for loanable funds right making the interest rate rise.
d. demand for loanable funds left making the interest rate fall.
ANSWER: a. supply for loanable funds right making interest rates fall.
2. Use the graph below to answer the following four questions.
If the minimum wage rose from $5 to $7, unemployment would
a. rise by 40.
b. rise by 20.
c. fall by 20.
d. fall by 40.
ANSWER: a. rise by 40.
3. The money supply in Freedonia is $200 billion. Nominal GDP is $800 billion and real GDP is $400 billion. The central bank of Freedonia has instituted a policy of zero inflation. Assuming that velocity is stable, if real GDP grows by 10 percent this year, how will the central bank of Freedonia change the money supply this year?
a. It will not change the money supply at all.
b. It will reduce the money supply by 10 percent.
c. It will increase the money supply by 10 percent.
d. It will increase the money supply by 2.5 percent.
ANSWER: c. It will increase the money supply by 10 percent.
4. Angela reads financial advice columns and concludes the following. Which, if any, of her conclusions are incorrect?
a. Higher average returns come at the price of higher risk.
b. People who are risk averse should never hold stock.
c. Diversification cannot eliminate all of the risk in stock portfolio.
d. None of her conclusions are incorrect.
ANSWER: b. People who are risk averse should never hold stock.
5. If the reserve ratio is 10 percent, $1,000 of excess reserves can create
a. $100 of new money.
b. $1,000 of new money.
c. $10,000 of new money.
d. None of the above are correct.
ANSWER: c. $10,000 of new money.
6. Use the figure below for the next two questions.
Which of the graphs in the figure above shows the effects of an increase in the tax rate on saving?
a. graph 1
b. graph 2
c. graph 3
d. None of the above are correct.
ANSWER: a. graph 1
7. Which of the following is correct?
a. All economists believe that unions are bad for the economy as a whole.
b. Unions raise wages above the competitive equilibrium level.
c. Unions increase the level of employment in unionized firms.
d. Unions decrease the level of employment in nonunionized firms.
ANSWER: b. Unions raise wages above the competitive equilibrium level.
8. The Fisher effect says that
a. the nominal interest rate adjusts one for one with the inflation rate.
b. the growth rate of the money supply determines the inflation rate.
c. real variables are heavily influenced by the monetary system.
d. All of the above are correct.
ANSWER: a. the nominal interest rate adjusts one for one with the inflation rate.
9. Fred puts $150 into an account when the interest rate is 4 percent. Later he checks his balance and finds he has about $168.73. How long did Fred wait to check his balance?
a. 3 years
b. 3.5 years
c. 4 years
d. 4.5 years
ANSWER: a. 3 years
10. Which list ranks assets from most to least liquid?
a. currency, fine art, stocks
b. currency, stocks, fine art
c. fine art, currency, stocks
d. fine art, stocks, currency
ANSWER: b. currency, stocks, fine art
11. Suppose that in a closed economy GDP is equal to 10,000, Taxes are equal to 1,500, Consumption equals 6,500, and Government expenditures equal 2,000. What is national saving?
a. –500
b. 0
c. 1500
d. None of the above are correct.
ANSWER: c. 1500
12. The BLS recently reported that there were 48.6 million people over age 25 who had at least a bachelor’s degree. Of this number, 38.0 million were in the labor force and 36.9 million were employed. What was the labor-force participation rate and the unemployment rate for this group?
a. about 97 percent and about 2.9 percent
b. about 97 percent and about 2.3 percent
c. about 78 percent and about 2.9 percent
d. about 78 percent and about 2.3 percent
ANSWER: c. about 78 percent and about 2.9 percent
13. When the money market is drawn with the value of money on the vertical axis, the price level increases if
a. either money demand or money supply shifts right.
b. either money demand or money supply shifts left.
c. money demand shifts right or money supply shifts left.
d. money demand shifts left or money supply shifts right.
ANSWER: d. money demand shifts left or money supply shifts right.
14. A risk-averse person
a. would necessarily not play a game where she had a 50 percent chance of winning $1 and a 50 percent chance of losing $1.
b. would necessarily not play a game where she had a 75 percent chance of winning $1 and a 25 percent chance of losing $1.
c. both of the above are correct.
d. Neither of the above are correct.
ANSWER: a. would necessarily not play a game where she had a 50 percent chance of winning $1 and a 50 percent chance of losing $1.
15. Suppose that the reserve ratio is 5 percent and that a bank has $1,000 in deposits. Its required reserves are
a. $5.
b. $50.
c. $95.
d. $950.
ANSWER: b. $50.
16. According to the quantity equation, if P = 12, Y = 6, M= 8, then V =
a. 16.
b. 9.
c. 4.
d. None of the above is correct.
ANSWER: b. 9.
17. Ross thinks that if Acme Corporation has high revenues, then Zenith Corporation will have low revenues, and that if Acme Corporation has low revenues, Zenith Corporation will have high revenues. He buys stock in both corporations.
a. He has reduced idiosyncratic risk but not aggregate risk.
b. He has reduced aggregate risk, but not idiosyncratic risk.
c. He had reduce both idiosyncratic risk and aggregate risk.
d. He has reduced neither idiosyncratic risk nor aggregate risk.
ANSWER: a. He has reduced idiosyncratic risk but not aggregate risk.
18. Suppose a bank has $200,000 in deposits and $190,000 in loans. It has a reserve ratio of
a. 5 percent
b. 9.5 percent
c. 10 percent
d. None of the above is correct.
ANSWER: a. 5 percent
19. An increase in the budget deficit
a. changes the supply of loanable funds.
b. changes the demand for loanable funds.
c. changes both the supply of and demand for loanable funds.
d. does not influence the supply of or the demand for loanable funds.
ANSWER: a. changes the supply of loanable funds.
20. Which of the following causes of unemployment is not associated with an excess supply of labor?
a. minimum-wage laws
b. unions
c. job search
d. efficiency wages
ANSWER: c. job search
21. The cost of changing price tags and price listings is known as
a. inflation-induced tax distortions.
b. relative-price variability costs.
c. shoeleather costs.
d. menu costs.
ANSWER: d. menu costs.
22. Your accountant tells you that if you can continue to earn the current interest rate on your balance of $500 for ten years, you will have about $983.58. What rate of interest does your accountant expect you to earn?
a. 5 percent
b. 6 percent
c. 7 percent
d. 8 percent
ANSWER: c. 7 percent
23. To decrease the money supply, the Fed could
a. sell government bonds.
b. increase the discount rate.
c. increase the reserve requirement.
d. All of the above are correct.
ANSWER: d. All of the above are correct.
24. If Microsoft sells a bond they are
a. borrowing directly from the public.
b. borrowing indirectly from the public.
c. lending directly to the public.
d. lending indirectly to the public.
ANSWER: a. borrowing directly from the public.
25. Which of the following definitions is correct?
a. Labor force = number of employed.
b. Labor force = population – number of unemployed.
c. Unemployment Rate = (number of unemployed ¸ [number of employed + number of unemployed]) ´ 100.
d. Unemployment Rate = (number of unemployed ¸ adult population) ´ 100.
ANSWER: c. Unemployment Rate = (number of unemployed ¸ [number of employed + number of unemployed] ´ 100.
26. The supply of money is determined by
a. the price level.
b. the Treasury and Congressional Budget Office.
c. the Federal Reserve System.
d. the demand for money.
ANSWER: c. the Federal Reserve System.
27. Kelly deposited $1,000 into an account three years ago. The first two years she earned 5 percent interest, the third she earned 6 percent. How much money does she have in her account today?
a. $1,157.90
b. $1,168.65
c. $1,176.00
d. None of the above are correct to the nearest penny.
ANSWER: b. $1,168.65
28. In a 100-percent-reserve banking system,
a. banks can create money by issuing currency.
b. banks can create money by lending out reserves.
c. the Fed can increase the money supply with open market sales.
d. banks hold as many reserves as they hold deposits.
ANSWER: d. banks hold as many reserves as they hold deposits.
29. The country of Nemedia does not trade with any other country. Its GDP is $20 billion. Its government collects $4 billion in taxes and pays out $3 billion to households in the form of transfer payments. Consumption equals $15 billion and investment equals $2 billion. What is public saving in Nemedia, and what is the value of the goods and services purchased by the government of Nemedia?
a. –$2 billion and $3 billion
b. $1 billion and $3 billion
c. –$1 billion and $4 billion
d. There is not enough information to answer the question.
ANSWER: a. –$2 billion and $3 billion
30. If the minimum wage was currently above the equilibrium wage, than a decrease in the minimum wage would
a. increase both the quantity demanded and the quantity supplied of labor.
b. decrease both the quantity demanded and the quantity supplied of labor.
c. increase the quantity of labor demanded and decrease the quantity supplied.
d. decrease the quantity of labor demanded and increase the quantity supplied.
ANSWER: c. increase the quantity of labor demanded and decrease the quantity supplied.