Liberty University ECON 214 exam 3 solutions answers right

Liberty University ECON 214 exam 3 solutions answers right

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Question 1 During the Great Recession, government outlays were _________ and government revenues were _________ their long­run averages over the period 1960–2012.

Question 2 Use the following example to answer the questions that follow: Imagine that you deposit $25,000 in currency (which you had been storing in your closet), into your checking account at the bank. Assume that this institution has a required reserve ratio of 25%. As a result of this deposit, by how much will the bank’s excess reserves increase?

Question 3 Which federal budget category’s portion of total government outlays has decreased since 1960?

Question 4 A budget is:

Question 5 You receive a $1,000 check from your parents for your birthday, and you deposit this in a bank that faces a 10% reserve ratio. What is the consequence if the bank then deposits your check at the Federal Reserve?

Question 6 The federal budget deficit has grown so quickly in the past 5–10 years because of:

Question 7 Why did tax revenues fall so sharply after 2007?

Question 8 Refer to the following figure to answer the questions that follow According to the figure, if the government increases spending by only $4 billion in an effort to shift aggregate demand enough to return to long­run equilibrium, the marginal propensity to consume must be equal to:

Question 9 Refer to the following table to answer the questions that follow. Using the table, what is the value of M2 that is not part of M1?

Question 10 If Ann were to convert some of her checkable deposits into a certificate of deposit, which of the following changes would take place?

Question 11 Which of the following diagrams shows what supply­side fiscal policy initiatives try to do to the long­run aggregate supply curve?

Question 12 When an economy experiences inflation, the value of money:

Question 13 Assume that the government is currently balancing the national budget so that outlays equal tax revenue. Then the economy starts into an expansion, and the government decides to decrease government spending by $50 billion. As a result:

Question 14 How is owner’s equity calculated?

Question 15 If the marginal propensity to consume is equal to 0.75, the spending multiplier is equal to:

Question 16 A marginal tax rate is:

Question 17 If current savings increases the same amount as the federal stimulus:

Question 18 Some people argue that social insurance taxes should be increased to remedy the fiscal problems faced by Social Security. What is a potential unintended consequence of this proposed solution?

Question 19 Assume that the government is currently balancing the national budget so that outlays equal tax revenue. Then the economy slips into recession, and the government decides to increase government spending by $50 billion. The government must pay for this by borrowing; it must sell $50 billion worth of Treasury bonds. As a result:

Question 20 In a fiat money economy, M1 includes currency as well as:

Question 21 One proposed solution to the funding problems faced by Social Security and Medicare is to implement means­testing, so that only those with limited retirement funds would qualify for the government benefits. An unintended consequence of such a requirement may be:

Question 22 Monetary policy is:

Question 23 What is true about banks in a fractional reserve banking system?

Question 24 Federal government spending has grown quickly since 2007 primarily because of:

Question 25 The x axis for the Laffer curve represents:

Question 26 _____________ would be considered a mandatory outlay in your monthly budget.

Question 27 When gasoline gallons are priced in terms of number of seashells, seashells serve as:

Question 28 If a bank has a required reserve ratio of 15% and has required reserves of $225,000,000, how much does the bank hold in deposits?

Question 29 The purchase of existing U.S. Treasury securities by the Federal Reserve:

Question 30 Which of the following is an example of crowding­out?

Question 31 At ___________ tax rates, ___________ in those tax rates lead to ___________ in total tax revenue.

Question 32 Refer to the following table to answer the questions that follow. Using the table, what is the value of M1?

Question 33 Fiscal policy includes:

Question 34 Which of the following statements about traveler’s checks is true?

Question 35 In which of the following situations does money serve as a store of value?

Question 36 Which of the following would be the theoretical outcome of contractionary fiscal policy in the following aggregate demand–aggregate supply model, where LRAS is long­run aggregate supply and SRAS is short­run aggregate supply?

Question 37 As part of the Economic Stimulus Act of 2008, the typical family of four received:

Question 38 The first of two significant fiscal policy initiatives enacted by the government during the Great Recession, signed in February 2008 by President George W. Bush, was the:

Question 39 Government programs that automatically implement countercyclical fiscal policy in response to economic conditions are called:

Question 40 An illustration of the relationship between tax rates and tax revenues is called:

Question 1 Using a credit card is most like:

Question 2 The bank in your hometown has decided to double the number of its local branch offices. How will this affect the bank’s balance sheet?

Question 3 A U.S. federal government budget deficit occurs when:

Question 4 Suppose you land a job with Google right out of college. Your economics training is very valuable to them, so you receive a starting annual salary of $65,000. What is the total amount of social insurance taxes you will be responsible for after your first year of work?

Question 5 An example of the multiplier effect is when:

Question 6 The funds used for payments to Medicare recipients come primarily from:

Question 7 If the marginal propensity to consume is equal to 0.75, the spending multiplier is equal to:

Question 8 Refer to the following table to answer the questions that follow. Using the table, what is the marginal income tax rate of a $5,000 raise for someone who currently makes $85,650 per year?

Question 9 Which of the following is NOT considered part of M2?

Question 10 A budget is:

Question 11 The first of two significant fiscal policy initiatives enacted by the government during the Great Recession, signed in February 2008 by President George W. Bush, was the:

Question 12 By 1918, the top marginal income tax rate in the United States rose to:

Question 13 Why would a government want to use expansionary fiscal policy to help stimulate aggregate demand if, in the long run, we would expect prices to adjust and the economy to return to its long­run equilibrium on its own?

Question 14 What function of money is highlighted when I put cash under my mattress to have on hand for unexpected emergencies?

Question 16 The Laffer curve is:

Question 17 Supply­side fiscal policy involves the use of:

Question 18 The largest component of M2 is:

Question 19 Use the following example to answer the questions that follow: Imagine that you deposit $25,000 in currency (which you had been storing in your closet), into your checking account at the bank. Assume that this institution has a required reserve ratio of 25%. As a result of this deposit, by how much will the bank’s required reserves increase?

Question 20 An implementation lag happens because:

Question 21 Some proponents of entitlement­program reform suggest indexing Social Security benefits to the consumer price index (CPI):

Question 22 Which of the following would NOT increase the supply of money in a fiat money economy?

Question 23 If the required reserve ratio is 10%, what is the simple deposit multiplier?

Question 24 What are federal funds?

Question 25 Use the following table to answer the questions that follow. According to the table, which country appeared to be in the best fiscal shape in 2012?

Question 27 In economic terms, how would you state what has happened when your neighbor says he is unwilling to help you mow your lawn because you are unwilling to help him teach his kids how to speak with a British accent?

Question 28 One argument for tax cuts when the government is running a budget deficit is:

Question 29 For something to be considered money, it must:

Question 30 Refer to the following table to answer the questions that follow. Using the table, what is the value of M2 that is not part of M1?

Question 31 Fiscal policy includes:

Question 32 ___________ is an example of an automatic stabilizer.

Question 33 A marginal tax rate is:

Question 34 Fiscal policy is:

Question 35 The “crowding­out” critique is based on the idea that:

Question 36 The United States has a:

Question 37 According to the U.S. Federal Tax Rates chart from the textbook (Figure 15.6), a person earning $100,000 in a given year is in the 28% tax bracket. How much will this individual owe in taxes for that year?

Question 38 Social Security and Medicare spending continue to grow and take up larger shares of the federal budget because:

Question 39 A progressive income tax system is one in which:

Question 40 In most nations, one or more governing bodies must approve government spending or new tax policies. This causes ___________ between setting fiscal policy and seeing its effects.

1.     The highest marginal tax rate in U.S. history was:

2.     The highest marginal tax rate in 1913 was:

3.     By 1918, the top marginal income tax rate in the United States rose to:

4.     The United States has a:

5.      According to the table, the country with the highest average yearly budget deficit over the time period as a percentage of the yearly increase in GDP is:

6.     According to the table, the country with the largest decrease in the debt-to-GDP ratio over the time period is:

7.     According to the table, which country appeared to be in the worst fiscal shape in 2012?

8.     According to the table, which country appeared to be in the best fiscal shape in 2012?

9.     Reforming entitlement programs is difficult because:

10.  One proposed solution to the funding problems faced by Social Security and Medicare is to increase the retirement age from 67 to 70. Although this would mean billions of dollars in savings for these federal programs, an unintended consequence may be:

11.  A progressive income tax system is one in which:

12.  Why do wealthy citizens contribute much more tax revenues to the government than poor citizens?

13.  A U.S. federal government budget surplus occurs when:

14.  Over the next 20 years, the number of workers per Social Security beneficiary is predicted to be:

15.  A marginal tax rate is:

16.  Suppose you return to college and earn an MBA, after which you get an upper-management position with Yum! Brands. If your starting salary is $125,000, and the percentages are the same as they were in 2012, how much will you owe in Social Security taxes?

17.  The poorest 40% of households in the United States:

18.  Which federal budget category’s portion of total government outlays has decreased since 1960?

19.  What would happen if a country defaulted on its sovereign debt?

20.  Discretionary government spending includes payments made for:

21.   Using the table, what is the marginal income tax rate of a $5,000 raise for someone who currently makes $67,000 per year?

22.  Using the table, what is the marginal income tax rate of a $5,000 raise for someone who currently makes $85,650 per year?

23.  Using the table, what is the total payroll tax bill (assume zero state and local income taxes) for someone who makes $67,000 per year?

24.  Using the table, what is the new average tax rate for a person who currently makes $80,000 per year and receives a $10,000 raise?

25.  The funds used for payments to Medicare recipients come primarily from:

26.  Which of the following is not a revenue source for the U.S. federal government?

27.  Which of the following is considered discretionary government spending?

28.  Payroll taxes:

29.  Suppose you land a job with Google right out of college. Your economics training is very valuable to them, so you receive a starting annual salary of $65,000. What is the total amount of social insurance taxes you will be responsible for after your first year of work?

30.  Suppose you graduate with an accounting degree and then become a certified public accountant. You work for a big firm, but are offered a chance to prepare tax documents for your city government as an independent contractor. The city offers to pay you a consulting fee of $10,000. When deciding whether to accept the additional work, the most important tax factor in your decision is:

31.  Why do Social Security and Medicare pose problems for the federal government budget?

32.  Suppose you are offered a job with Amazon upon graduation. Your starting salary will be $70,000, which will put you in the 25% federal income tax bracket. The total amount of income taxes you pay is $13,530. Your average tax rate is approximately:

33.  Why was the world so concerned about Greece defaulting on its debt?

34.  The austerity measures imposed on Greece in 2011:

35.  the most relevant tax rate for making decisions about earning additional income is the:

36.  Why is a budget deficit not necessarily a bad thing?

37.  According to the U.S. Federal Tax Rates chart from the textbook (Figure 15.6), a person earning $100,000 in a given year is in the 28% tax bracket. How much will this individual owe in taxes for that year?

38.  Some people argue that social insurance taxes should be increased to remedy the fiscal problems faced by Social Security. What is a potential problem with this proposed solution?

39.  The number of workers per Social Security beneficiary in 1960 was approximately:

40.  The government withdraws social insurance taxes from the paychecks of workers to:

41.  Which of the following might be a good reason for running a budget deficit?

42.  In 2012, revenue from corporate income taxes totaled approximately:

43.  What is the most appropriate way to compare budget deficits/surpluses across time?

44.  Excise taxes are levied on:

45.  Budget deficits tend to:

46.  Why are interest payments considered mandatory spending in the federal budget?

47.  The U.S. government could reduce its budget deficit by:

48.  Some proponents of entitlement-program reform suggest indexing Social Security benefits to the consumer price index (CPI):

49.  ____________ a government-administered retirement program.

50.  Social Security and Medicare are funded by the collection of:

51.  The most recent federal budget surplus occurred:

52.  The federal government started running a budget surplus in 1998. By 2002, the budget surplus had turned into a budget deficit. Why do you think the budget deficit returned in 2002?

53.  Social Security and Medicare spending continue to grow and take up larger shares of the federal budget because:

54.   Which country faces the most severe fiscal challenges—in terms of debt-to-GDP ratio—according to the accompanying table?

55.  Why is foreign government ownership of U.S. debt not currently a huge concern among many economists?

Question 1 The federal government started running a budget surplus in 1998. By 2002, the budget surplus had turned into a budget deficit. Why do you think the budget deficit returned in 2002? .

Question 3 Refer to the following table to answer the questions that follow. Using the table, what is the value of M1?

Question 4 The Federal Reserve System was created in:

Question 7 If an initial increase in government spending of $100 billion leads to a total increase of $400 billion in income, the marginal propensity to consume in the economy is:

Question 11 In a fiat money economy, money is created when:

Question 12 At ___________ tax rates, ___________ in those tax rates lead to ___________ in total tax revenue.

Question 13 The y axis for the Laffer curve represents:

Question 14 When money is acting as a medium of exchange, it:

Question 15 Which of the following is not a characteristic of fiat money?

Question 22 In reality, individuals do not deposit all of their cash into the banking system. Consequently:

Question 24 ___________ is an example of an automatic stabilizer.

Question 27 Time lags, crowding­out, and savings shifts are all:

Question 33 The new classical critique of fiscal policy asserts that:

Question 39 In which of the following situations does money serve as a store of value?

Refer to the following graph to answer the questions that follow:

____     13.    Assuming the figure represents the market for loanable funds, it would be true that:

a.	line 1 represents savings (supply), and line 2 represents investment (demand).
b.	the vertical axis represents the interest rate, and the distance between points C and D represents the surplus of loanable funds at interest rate A.
c.	line 1 represents investment demand, and line 2 represents savings.
d.	the vertical axis represents the quantity of funds lent and borrowed, whereas the distance between points C and D represents the shortage of loanable funds at interest rate A.
e.	line 1 represents the interest rate, and line 2 represents the quantity of savings.

____     14.    Smiley Myrus owns a large corporation that is building a new shopping mall in Winston-Salem, North Carolina. In all likelihood:

a.	Smiley’s firm is a supplier of loanable funds.
b.	Smiley’s firm pays a higher rate of interest than most borrowers, based on the Fisher equation.
c.	Smiley’s firm is a borrower of loanable funds.
d.	Smiley’s firm pays a lower rate of interest than most borrowers, based on the Fisher equation.
e.	Smiley’s firm would loan its profits to foreign entities.

____     15.    The interest rate is:

a.	the price of money.
b.	only a cost to savers.
c.	a return to borrowers.
d.	both a cost to savers and a return to borrowers.
e.	both a return to savers and a cost to borrowers.

____     16.    An interest rate best represents _______________ to borrowers and _______________ to savers.

a.	cost; return
b.	return; cost
c.	rate of change; static value
d.	static value; rate of change
e.	nominal return; real return

____     17.    You are thinking about buying a new car and will borrow $20,000 for this purchase at a 5% fixed rate for exactly one year. The lender (correctly) assumes that inflation will be 2% this year. Based on the above information and assuming you adhere to the terms of the loan:

a.	you will pay back the lender exactly $20,000, which will represent $19,000 of purchasing power.
b.	you will pay back the lender exactly $21,000, which will represent $21,000 of purchasing power.
c.	you will pay back the lender exactly $21,000, which will represent $21,400 of purchasing power.
d.	you will pay back the lender exactly $21,000, which will represent $20,600 of purchasing power.
e.	you will pay back the lender exactly $19,600, which will represent $20,000 of purchasing power.

____     18.    If the federal government taxes the interest rate that savers receive:

a.	the rate of return to savers increases because of transfer payments and people save more.
b.	the demand for loanable funds increases.
c.	the supply of loanable funds increases.
d.	the supply of loanable funds decreases.
e.	corporations are more willing to borrow.

____     19.    You borrow $10,000 today at a nominal rate of 5%; inflation for the past 10 years has been exactly 2%. Today, inflation instantly rises to 4% and stays that way for the duration of your loan. Based on the above information and all else being equal, today:

a.	you are worse off because inflation has risen.
b.	you are better off strictly because 5% is still more than 4%.
c.	you are better off because you are paying back the loan with dollars that represent less purchasing power today than the dollars you borrowed before.
d.	the lender is better off because the real rate of interest automatically increases when inflation increases.
e.	both you and the lender are better off because real rates fall when inflation rises.

____     20.    If interest rates rise, holding all else constant, this would cause:

a.	an increase in both the demand and supply of loanable funds.
b.	a decrease in both the demand and supply of loanable funds.
c.	an increase in the supply of loanable funds but a decrease in the demand for loanable funds.
d.	an increase in the quantity supplied of loanable funds but a decrease in the quantity demanded of loanable funds.
e.	an increase in the supply of loanable funds but a decrease in the demand for loanable funds.

____     21.    The Fisher equation:

a.	relates time preferences to the level of borrowing.
b.	relates nominal interest rates to the level of borrowing.
c.	relates real interest rates to the level of borrowing.
d.	relates real interest rates, nominal interest rates, and inflation.
e.	relates real interest rates, nominal interest rates, and the level of saving.

____     22.    The interest rate represents:

a.	the opportunity cost of saving.
b.	the opportunity cost of consumption.
c.	the opportunity cost of saving plus the opportunity cost of inflation.
d.	only the opportunity cost of taking a different job.
e.	the price of savings, but not investment.

____     23.    The largest inflationary gap appeared:

a.	in the 1960s.
b.	in the 1950s during the great U.S. hyperinflation.
c.	at the end of the 1970s and in the early 1980s.
d.	during the Great Recession of 2007–2009.
e.	in the 1990s.

____     24.    The real interest rate in 2012 was:

a.	about 9%.
b.	about 7%.
c.	about 5%.
d.	about 3%.
e.	a negative number.

____     25.    Assuming inflation is positive, the real interest rate:

a.	must always be larger than the nominal interest rate.
b.	must always be smaller than the nominal interest rate.
c.	could be larger or smaller than the nominal interest rate depending on the rate of inflation.
d.	would normally be larger than the nominal interest rate.
e.	increases exactly as fast as inflation.

____     26.    Assume deflation is occurring in a nation; the implication(s):

a.	are that both real and nominal interest rates are positive.
b.	are that both real and nominal interest rates are negative.
c.	is that the nominal interest rate exceeds the real interest rate.
d.	is that the real rate of interest exceeds the nominal rate of interest.
e.	is that time preferences in the nation have fallen.

____     27.    Inflation reached its peak (of at least 14%) in the late 1970s/early 1980s. If this statement is true, then:

a.	it is certain the real rate of interest was greater than the nominal rate.
b.	it is certain the nominal rate of interest was greater than the real rate.
c.	borrowers would borrow more because, automatically, real rates would fall.
d.	the real rate of interest must have been constant, even if the nominal rate varied because of consumption smoothing.
e.	if higher nominal rates were charged, it would be certain that higher real rates would be received.

____     28.    Which combination of events could have caused the equilibrium interest rate to rise and the equilibrium quantity of loanable funds (both borrowed and lent) to fall?

a.	A baby boom begins, and investor confidence falls.
b.	A baby boom begins, and investor confidence rises.
c.	People have lower time preferences, and governments run larger deficits.
d.	People have lower time preferences, and capital is more productive.
e.	A baby boom begins, and people have higher time preferences.

____     29.    If household wealth rises and capital becomes less productive, we would correctly say that:

a.	the new equilibrium quantity of loanable funds would decrease, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.
b.	the new equilibrium quantity of loanable funds would increase, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.
c.	the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be higher than the original.
d.	the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be less than the original.
e.	based on this information and because both changes would affect the demand for loanable funds in the opposite way, we would be unable to say anything about the relationship of the new equilibrium interest rate and quantity to the original interest rate and quantity.

____     30.    If foreign entities save less and governments run more deficits, we would correctly say that:

a.	the new equilibrium quantity of loanable funds would decrease, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.
b.	the new equilibrium quantity of loanable funds would increase, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.
c.	the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be higher than the original.
d.	the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be less than the original.
e.	based on this information and because both changes would affect the demand for loanable funds in the opposite way, we would be unable to say anything about the relationship of the new equilibrium interest rate and quantity to the original interest rate and quantity.

____     31.    By 1981:

a.	interest rates were about 5%.
b.	interest rates were about 7%.
c.	interest rates were about 15%.
d.	the real interest rate was negative.
e.	the real interest rate was positive, but the nominal interest rate was less than the real rate.

Refer to the following graph to answer the questions that follow:

____     32.    Assuming the figure represents the market for loanable funds, which of the following would represent the government running a larger budget deficit?

a.	a shift from line 1 to line 4
b.	a shift from line 4 to line 1
c.	a shift from line 2 to line 3
d.	a shift from line 3 to line 2
e.	a new shortage of loanable funds represented by the distance from C to D

____     33.    Assuming the figure represents the market for loanable funds, which of the following would represent a general economic collapse in the United States, causing foreigners to become fearful about the U.S. economy?

a.	a shift from line 1 to line 4
b.	a shift from line 3 to line 2
c.	a shift from line 2 to line 3
d.	a shift from line 4 to line 1
e.	a new shortage of loanable funds represented by the distance from C to D

____     34.    If foreign income and wealth decrease, this would most likely:

a.	not affect the market for loanable funds.
b.	cause the supply of loanable funds to increase.
c.	cause the supply of loanable funds to decrease.
d.	cause the demand for loanable funds to increase in order for foreigners to maintain consumption.
e.	cause the demand for loanable funds to decrease.

____     35.    A non-price determinant of the supply of loanable funds would be:

a.	the interest rate.
b.	business future profit expectations.
c.	governments running higher deficits.
d.	a change in the level of household time preferences.
e.	better technology.

____     36.    Those with the least patience:

a.	have the greatest time preference.
b.	have the least time preference.
c.	will demand a higher nominal interest rate but not a higher real rate.
d.	will save the most.
e.	will engage in the most consumption smoothing.

____     37.    Your roommate arrives home and says, “I am so hungry, I would give up my iPhone for a bowl of chili right now.” You say, “Here is the chili—let’s trade.” Based on this information:

a.	you have a lower time preference than your roommate because you get the iPhone now.
b.	you have a lower time preference than your roommate because he gets the chili now.
c.	the one willing to accept a lower nominal interest rate has a higher time preference.
d.	your roommate would be a borrower and you a lender.
e.	your roommate would engage in consumption smoothing but you would not.

____     38.    T. D. Goneworth, a financial services firm, makes people want their money and want it now. If the firm is successful in advertising this message and convinces people to believe it, then, all else equal:

a.	T. D. Goneworth has caused people to increase their consumption smoothing.
b.	T. D. Goneworth has caused people to reduce their time preferences.
c.	T. D. Goneworth has equalized the real and nominal rates of interest.
d.	T. D. Goneworth has increased the rate of inflation.
e.	T. D. Goneworth has caused people to increase their time preferences.

____     39.    Assume an epidemic hits a nation hard. As a result, people now have lower life expectancies. The most likely result would be:

a.	a higher supply of loanable funds.
b.	a higher demand for loanable funds.
c.	a lower supply of loanable funds.
d.	higher productivity of capital.
e.	a decrease in equilibrium interest rates.

____     40.    If life expectancy falls due to AIDS and other diseases, we would expect:

a.	time preference to fall and savings to increase.
b.	time preference to rise and savings to increase.
c.	time preference to fall and savings to decrease.
d.	time preference to rise and savings to decrease.
e.	interest rates to fall to zero.

____     41.    Most people have a time preference. Since this is true:

a.	they must earn interest to consume now (save later) and are willing to pay interest to consume later (save now).
b.	they must be paid interest to consume later (save now) and are willing to pay interest to consume now (save later).
c.	they are willing to accept simple interest in the short run but only compound interest in the long run.
d.	they will accept positive rates of interest on checking accounts and negative rates of interest on savings accounts.
e.	they prefer more free time to less free time.

____     42.    If time preferences increase:

a.	the demand for loanable funds will increase.
b.	the demand for loanable funds will decrease.
c.	the supply of loanable funds will increase.
d.	the supply of loanable funds will decrease.
e.	wealth will increase.

____     43.    When people withdraw funds from their savings, economists call this:

a.	irrational.
b.	dissaving.
c.	disspending.
d.	consumption smoothing.
e.	the wealth effect.

____     44.    The notion of consumption smoothing means:

a.	people tend to spend about the same amount each month.
b.	people tend to spend about the same amount each year, and if more is spent this year than in the past, they would tend to spend less next year.
c.	consumption varies less than income over a person’s lifetime. In early life people tend to borrow, in late life people tend to dissave, but in their middle years they tend to save.
d.	consumption patterns tend to correlate perfectly with income. People spend the exact amount of their income over their lifetime.
e.	consumption tends to vary more than income over a person’s lifetime. Although people should smooth their consumption over the years, they don’t. If consumption were smoothed, people would be better off.

____     45.    If the demographics of a nation change and the average age of the nation is approaching middle age, we would expect:

a.	savings to increase.
b.	savings to decrease.
c.	borrowing to decline.
d.	consumption variation to increase.
e.	savings as a percentage of income to fall.

____     46.    An increase in the supply of loanable funds means:

a.	borrowers want to borrow more at every interest rate.
b.	savers want to borrow more at every interest rate.
c.	borrowers want to borrow more at a specific interest rate.
d.	savers want to save more at a specific interest rate.
e.	savers want to save more at every interest rate.

____     47.    If the U.S. economy experiences a major recession, then:

a.	the demand for loanable funds will shift right.
b.	the supply of loanable funds will shift right.
c.	the demand for loanable funds will shift left.
d.	the supply of loanable funds will shift left.
e.	both the supply and demand for loanable funds will increase.

____     48.    The measurement of personal savings may be distorted by:

a.	increased college tuition costs.
b.	reduced college tuition costs.
c.	higher marginal tax rates.
d.	greater levels of home equity.
e.	lower levels of home equity.

____     49.    One could correctly argue that higher capital productivity:

a.	would increase the value of capital and the supply of loanable funds.
b.	would reduce the value of capital and the supply of loanable funds.
c.	would only affect interest rates in the long run.
d.	would increase the value of capital and the demand for loanable funds.
e.	would reduce the value of capital and the demand for loanable funds.

____     50.    Firms expect more sales and profits in the near future; this would cause:

a.	the demand for loanable funds to increase.
b.	the supply of loanable funds to increase.
c.	both the demand and supply of loanable funds to increase.
d.	both the demand and supply of loanable funds to decrease.
e.	lower interest rates in the near future.

____     51.    If everyone began feeling better about the economic future:

a.	“animal spirits” would become negative.
b.	“animal spirits” would become more positive and firms would invest more, causing the demand for loanable funds to increase.
c.	“animal spirits” would become more positive and firms would invest more, causing the supply of loanable funds to increase.
d.	“animal spirits” would become more positive and firms would invest more, causing the supply of loanable funds to decrease.
e.	“animal spirits” would become more positive and firms would invest more, causing the demand for loanable funds to decrease.

____     52.    The demand for loanable funds increases while the supply of loanable funds remains constant. This would cause:

a.	the equilibrium quantity of loanable funds to decrease and the equilibrium interest rate to increase.
b.	the equilibrium quantity of loanable funds to increase and the equilibrium interest rate to decrease.
c.	both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase.
d.	the equilibrium interest rate to decrease, but the equilibrium quantity of loanable funds would remain unchanged.
e.	the equilibrium interest rate to increase, but the equilibrium quantity of loanable funds would remain unchanged.

____     53.    The supply of loanable funds increases while the demand for loanable funds remains constant. This would cause:

a.	the equilibrium quantity of loanable funds to decrease and the equilibrium interest rate to increase.
b.	the equilibrium quantity of loanable funds to increase and the equilibrium interest rate to decrease.
c.	both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase.
d.	the equilibrium interest rate to increase, leading to a new lower equilibrium quantity.
e.	the equilibrium interest rate to increase, but the equilibrium quantity of loanable funds would remain unchanged.

____     54.    The demand and supply of loanable funds increase simultaneously. This would cause:

a.	the equilibrium quantity of loanable funds to decrease and the equilibrium interest rate to increase.
b.	the equilibrium quantity of loanable funds to increase and the equilibrium interest rate to decrease.
c.	the equilibrium quantity of loanable funds to increase, but the effect on the equilibrium interest rate would be uncertain.
d.	the equilibrium interest rate to increase, but the new equilibrium quantity would be uncertain.
e.	the equilibrium interest rate to decrease, but the new equilibrium quantity would be uncertain.

____     55.    The demand and supply of loanable funds decrease simultaneously. This would cause:

a.	the equilibrium quantity of loanable funds to decrease and the equilibrium interest rate to increase.
b.	the equilibrium quantity of loanable funds to decrease, but the effect on the equilibrium interest rate would be uncertain.
c.	the equilibrium quantity of loanable funds to increase, but the effect on the equilibrium interest rate would be uncertain.
d.	the equilibrium interest rate to increase, but the new equilibrium quantity would be uncertain.
e.	the equilibrium interest rate to decrease, but the new equilibrium quantity would be uncertain.

____     56.    The demand for loanable funds decreases while the supply simultaneously increases. This would cause:

a.	the equilibrium quantity of loanable funds to decrease and the equilibrium interest rate to increase.
b.	the equilibrium quantity of loanable funds to increase and the equilibrium interest rate to decrease.
c.	the equilibrium quantity of loanable funds to increase, but the effect on the equilibrium interest rate would be uncertain.
d.	the equilibrium interest rate to increase, but the new equilibrium quantity would be uncertain.
e.	the equilibrium interest rate to decrease, but the new equilibrium quantity would be uncertain.

____     57.    The demand for loanable funds increases by the exact same percentage that the supply of loanable funds decreases. This would cause:

a.	the equilibrium quantity of loanable funds to decrease and the equilibrium interest rate to increase.
b.	the equilibrium quantity of loanable funds to increase and the equilibrium interest rate to decrease.
c.	the equilibrium quantity of loanable funds to increase, but the effect on the equilibrium interest rate would be uncertain.
d.	the equilibrium interest rate to increase, resulting in a new higher equilibrium quantity.
e.	the equilibrium interest rate to increase, but the equilibrium quantity would remain unchanged.

____     58.    Equilibrium in the loanable funds market means:

a.	the interest rate at which savings equals consumption.
b.	the interest rate at which investment equals consumption.
c.	the interest rate at which investment equals savings.
d.	the dollar price at which investment equals savings.
e.	the dollar price at which savings equals consumption.

____     59.    Businesses became more pessimistic during the Great Recession of 2007–2009. As a result:

a.	foreigners were less willing to lend to the United States.
b.	foreigners were more willing to lend to the United States.
c.	investment demand fell.
d.	investment demand increased.
e.	governments in the United States ran more surpluses.

____     60.    It is likely that as more baby boomers reach retirement:

a.	more babies will be born to replace them.
b.	the demand for loanable funds will shift right.
c.	the demand for loanable funds will shift left.
d.	the supply of loanable funds will shift right.
e.	the supply of loanable funds will shift left.

____     61.    Assume that two people save $100 per month (the same for both) and earn exactly the same positive annual interest rate of 2%. Also assume that one of them started saving at 20 years old, while the other stared saving at 40 years old. Which statement is correct?

a.	On their 60th birthday, the one who started saving later would have exactly half as much as the one who began saving earlier.
b.	On their 60th birthday, they would both have the same amount.
c.	On their 60th birthday, the one who started saving later would have less than half the amount that the one who began saving earlier has.
d.	On their 60th birthday, the one who started saving later would have received a larger real interest rate, but not enough to “catch up” to the one who began saving earlier.
e.	On their 60th birthday, neither would have anything if inflation had been negative during the period.

____     62.    The term ___________ is a popular way to describe the recession-expansion pattern followed by the economy.

a.	business cycle
b.	output cycle
c.	inflation cycle
d.	unemployment cycle
e.	long-run cycle

____     63.    Business-cycle theory focuses on time horizons of less than:

a.	five years.
b.	ten years.
c.	two years.
d.	one year.
e.	one month.

____     64.    The model used to study business cycles is the:

a.	labor model.
b.	savings model.
c.	growth model.
d.	aggregate demand–aggregate supply model.
e.	interest rate model.

____     65.    Aggregate demand is determined by adding up the spending of:

a.	domestic consumers who buy goods and services produced in the United States.
b.	domestic consumers and firms that buy goods and services produced in the United States.
c.	domestic and foreign consumers who buy goods and services produced in the United States.
d.	domestic and foreign consumers and firms that buy goods and services produced in the United States.
e.	consumers, firms, the government, and foreigners that buy goods and services produced in the United States.

____     66.    The aggregate demand curve is best represented by which of the following equations?

a.	AD = C + I + G + NX
b.	AD = C + I + G – NX
c.	AD = C + I + G
d.	AD = C + I
e.	AD = C + I – G – NX

____     67.    Which of the following would cause a downward movement along the aggregate demand curve?

a.	A rise in the price level makes U.S. goods relatively more expensive than foreign goods.
b.	The value of real wealth rises.
c.	There is a decline in the expected price level.
d.	A fall in the price level increases savings and lowers interest rates.
e.	The value of the dollar decreases.

____     68.    An increase in the price level that reduces the real value of wealth is likely to __________ consumption and __________ saving.

a.	increase; increase
b.	decrease; decrease
c.	decrease; increase
d.	increase; decrease
e.	have no effect on; have no effect on

____     69.    When a change in the price level leads to a change in saving, this is known as the:

a.	wealth effect.
b.	international trade effect.
c.	savings effect.
d.	interest rate effect.
e.	output effect.

____     70.    The interest rate effect results from people:

a.	saving less when the price level rises.
b.	consuming more when the price level rises.
c.	spending more when the interest rate rises.
d.	feeling more wealthy when the price level rises.
e.	spending more when the price level falls.

____     71.    Suppose that an increase in the price level reduces the value of real wealth, which then causes a reduction in consumption but no change in saving. In this case:

a.	there is both an interest rate effect and a wealth effect.
b.	there is no wealth effect.
c.	there is an interest rate effect but no wealth effect.
d.	there is a wealth effect but no interest rate effect.
e.	there is no wealth effect and no interest rate effect.

____     72.    When saving declines, the quantity of investment will __________, and therefore aggregate demand will __________.

a.	increase; increase
b.	decrease; decrease
c.	decrease; increase
d.	increase; decrease
e.	remain unchanged; decrease

____     73.    When the price level rises and U.S. goods become relatively more expensive than foreign goods, there will be:

a.	a rightward shift of the aggregate demand curve.
b.	a leftward shift of the aggregate demand curve.
c.	an upward movement along the aggregate demand curve.
d.	a downward movement along the aggregate demand curve.
e.	a downward movement along the aggregate supply curve.

____     74.    Shifts in the aggregate demand curve are caused by:

a.	the wealth effect.
b.	the interest rate effect.
c.	money illusion.
d.	changes in labor productivity.
e.	changes in spending.

____     75.    You read in the paper that there has been a significant increase in the consumer confidence index. Having taken an economics class, you predict that spending in the economy will __________ and aggregate demand will __________.

a.	decrease; increase
b.	decrease; decrease
c.	increase; be unaffected
d.	increase; decrease
e.	increase; increase

____     76.    If people expect higher income in the future, then spending today __________ and aggregate demand __________.

a.	increases; is unaffected
b.	increases; increases
c.	increases; decreases
d.	decreases; decreases
e.	is unaffected; is unaffected

____     77.    An increase in the value of the dollar will __________ exports and __________ imports.

a.	increase; increase
b.	decrease; decrease
c.	have no effect on; have no effect on
d.	decrease; increase
e.	increase; decrease

____     78.    When foreign income rises, U.S. aggregate:

a.	demand will shift to the right.
b.	supply will shift to the right.
c.	demand will shift to the left.
d.	supply will shift to the left.
e.	demand and aggregate supply will be unaffected.

____     79.    An increase in the value of the dollar will:

a.	have no effect on aggregate demand or supply.
b.	decrease aggregate supply.
c.	increase aggregate supply.
d.	increase aggregate demand.
e.	decrease aggregate demand.

____     80.    __________ would cause a rightward shift of the aggregate demand curve.

a.	A decrease in the expected price level
b.	A decrease in foreign income
c.	An increase in expected income
d.	A decrease in real wealth
e.	An increase in the value of the dollar

____     81.    If large emerging economies continue to grow rapidly, we can expect U.S. aggregate:

a.	demand to increase.
b.	demand to decrease.
c.	supply to increase.
d.	supply to decrease.
e.	demand and supply to be unaffected.

____     82.    Which of the following would shift aggregate demand to the right?

a.	College graduates are having a difficult time finding jobs.
b.	There is a decline in consumer confidence.
c.	Stock market values increase by 20%.
d.	A fall in the price level increases the value of real wealth.
e.	The value of the dollar increases.

____     83.    Which of the following would shift aggregate demand to the left?

a.	A study predicts that the recent drought will increase food prices this winter.
b.	There is a rise in the median price of houses.
c.	A rise in the price level reduces saving and increases interest rates.
d.	The value of the dollar increases.
e.	The European Union emerges from recession.

____     84.    Aggregate demand is about _________ and aggregate supply is about _________.

a.	income; spending
b.	spending; production
c.	production; spending
d.	production; income
e.	saving; profit

____     85.    Aggregate supply describes a relationship between:

a.	spending and income.
b.	output and prices.
c.	costs and revenue.
d.	spending and output.
e.	spending and prices.

____     86.    When decision makers have time to fully adjust to changes in the overall price level, we refer to this as:

a.	the short run.
b.	the long run.
c.	short-run equilibrium.
d.	a period of time longer than one year.
e.	equilibrium.

____     87.    When prices in the economy have not fully adjusted, we say that:

a.	we are in the short run.
b.	we are in the long run.
c.	it is a period of time less than one year.
d.	it is a period of time less than five years.
e.	the market is not in equilibrium.

____     88.    Which of the following is true?

a.	Long-run aggregate supply is independent of the price level.
b.	Short-run aggregate supply is independent of the price level.
c.	Long-run aggregate supply is positively related to the price level.
d.	Short-run aggregate supply is inversely related to the price level.
e.	Long-run aggregate supply is inversely related to the price level.

____     89.    A rightward shift of the long-run aggregate supply curve means there has been:

a.	a decrease in the unemployment rate.
b.	an increase in the unemployment rate.
c.	an increase in the price level.
d.	a decrease in the price level.
e.	economic growth.

____     90.    New computer technologies can be expected to:

a.	increase long-run aggregate supply.
b.	increase the price level.
c.	increase the unemployment rate.
d.	decrease aggregate demand.
e.	decrease aggregate supply.

____     91.    Which of the following would cause an increase in long-run aggregate supply?

a.	The price level increases.
b.	The price level decreases.
c.	Firms and workers expect the price level to fall.
d.	Firms and workers expect the price level to rise.
e.	The stock of capital increases.

____     92.    If the price level rises by 10%, then all else being equal, the long-run quantity of aggregate supply will:

a.	increase by 10%.
b.	decrease by 10%.
c.	remain unchanged.
d.	increase by more than 10%.
e.	increase by less than 10%.

____     93.    If the price level falls by 5%, then all else being equal, the long-run aggregate supply curve will:

a.	remain unchanged.
b.	shift to the right to reflect an increase in output of 5%.
c.	shift to the right to reflect an increase in output of more than 5%.
d.	shift to the left to reflect a decrease in output of 5%.
e.	shift to the left to reflect a decrease in output of more than 5%.

____     94.    All else being equal, as the population ages and many people leave the labor force:

a.	the unemployment rate will rise.
b.	the price level will fall.
c.	long-run aggregate supply will fall.
d.	long-run aggregate supply will be unaffected.
e.	aggregate demand must rise.

____     95.    When an economy has a more stable and well-developed financial system, it is reasonable to expect:

a.	an upward movement along the long-run aggregate supply curve.
b.	a downward movement along the long-run aggregate supply curve.
c.	a leftward shift of the long-run aggregate supply curve.
d.	a rightward shift of the long-run aggregate supply curve.
e.	no change in the long-run aggregate supply curve.

____     96.    An economy has experienced a rightward shift of its long-run aggregate supply curve and is now producing on that new long-run aggregate supply curve. It is reasonable to expect that:

a.	the unemployment rate has fallen.
b.	the unemployment rate has been unaffected.
c.	the inflation rate has risen.
d.	the price level has risen.
e.	productivity has fallen.

____     97.    When inflation pushes up prices in the economy, input prices are _________ and revenues _________ in the short run.

a.	flexible; remain unchanged
b.	sticky; increase
c.	sticky; remain unchanged
d.	flexible; decrease
e.	flexible; increase

____     98.    The slope of the short-run aggregate supply curve can be explained by:

a.	the fact that all prices are sticky in the short run.
b.	sticky input prices and flexible output prices.
c.	flexible input prices and sticky output prices.
d.	the fact that all prices are flexible in the short run.
e.	the fact that all prices except wages are flexible in the short run.

____     99.    Menu costs help to explain:

a.	the negative slope of the aggregate demand curve.
b.	the negative slope of the aggregate supply curve.
c.	the positive slope of the short-run aggregate supply curve.
d.	why the long-run aggregate supply curve is vertical.
e.	why the long-run aggregate supply curve is horizontal.

____   100.    If the price level falls but workers are reluctant to accept a pay cut, this is an example of:

a.	menu cost.
b.	money illusion.
c.	a legally binding contract.
d.	a supply shock.
e.	an implicit contract.

____   101.    If workers actively demand pay increases when the price level is rising and are willing to accept pay cuts when the price level is falling, then the short-run aggregate supply curve would be:

a.	negatively sloped.
b.	nearly vertical.
c.	nearly horizontal.
d.	positively sloped as usual.
e.	always shifting to the right or the left.

____   102.    Suppose an economy has a law that requires all wages to be adjusted quarterly to reflect changes in the general price level. This means wages either increase or decrease depending on the percent change in the general price level. In this economy:

a.	there are recessions but no expansions.
b.	output is always at the full employment level.
c.	business cycles are less severe.
d.	the price level will remain fixed.
e.	workers are worse off in real terms than if wages were not indexed.

____   103.    An increase in the general price level will lead to:

a.	an upward movement along the short-run aggregate supply curve as firms increase output.
b.	a rightward shift of the short-run aggregate supply curve as firms increase output.
c.	a downward movement along the short-run aggregate supply curve as firms decrease output.
d.	a leftward shift of the short-run aggregate supply curve as firms decrease output.
e.	no change in output because input prices are sticky.

____   104.    If inflation turns out to be higher than expected, this will:

a.	shift long-run aggregate supply to the right.
b.	shift long-run aggregate supply to the left.
c.	shift short-run aggregate supply to the left.
d.	shift short-run aggregate supply to the right.
e.	have no effect on aggregate supply.

____   105.    An increase in short-run aggregate supply could be the result of:

a.	an increase in the general price level.
b.	a negative supply shock.
c.	an increase in the price of oil.
d.	an increase in consumption spending.
e.	a reduction in expected future prices.

Refer to the following figure to answer the questions that follow.