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ECON 101

Frazier
Fall 2013
Practice Macro Problems

I dont know if I practiced more than anybody, but I sure practiced enough.
I still wonder if somebody somewhere was practicing more than me.
- Larry Bird
1. As the price level decreases, the value of money
(a)
(b)
(c)
(d)

increases, so people want to hold more of it.


increases, so people want to hold less of it.
decreases, so people want to hold more of it.
decreases, so people want to hold less of it.

Answer: B
2. The supply curve of money is vertical because the quantity of money supplied increases
(a)
(b)
(c)
(d)

when the value of money increases.


when the value of money decreases.
only if people desire to hold more money.
only if the central bank increases the money supply.

Answer: D
3. Suppose the money market,drawn with the value of money on the vertical axis, is in
equilibrium. If the money supply increases, then at the old value of money there is
(a)
(b)
(c)
(d)

a
a
a
a

shortage that will increase spending.


shortage that will reduce spending.
surplus that will increase spending.
surplus that will reduce spending.

Answer: C
4. Consider Figure 1. If the money supply is MS2 and the value of money is 2, there is excess
(a)
(b)
(c)
(d)

demand equal to the distance between A and C.


demand equal to the distance between A and B.
supply equal to the distance between A and C.
supply equal to the distance between A and B.

Figure 1:
Answer: D
5. Most economists believe that after a few years, changes in the money supply change
(a)
(b)
(c)
(d)

only nominal variables, but not real variables.


only real variables, but not nominal variables.
neither nominal nor real variables.
both nominal and real variables

Answer: A
6. The aggregate demand curve
(a) has a slope that is explained in the same way as the slope of the demand curve
for a particular product.
(b) is vertical in the long run.
(c) shows an inverse relation between the price level and the quantity of all goods
and services demanded.
(d) All of the above are correct.
Answer: C
7. Other things the same, an increase in the price level induces people to hold
(a)
(b)
(c)
(d)

less money, so they lend less, and the interest rate rises.
less money, so they lend more, and the interest rate falls.
more money, so they lend more, and the interest rate falls.
more money, so they lend less, and the interest rate rises.

Answer: D

8. Other things the same, as the price level decreases it induces greater spending on
(a)
(b)
(c)
(d)

both net exports and investment.


net exports but not investment.
investment but not net exports.
neither net exports nor investment.

Answer: A
9. From 2001 to 2005 there was a dramatic rise in the price of houses. If this made people
feel wealthier, then it would shift
(a)
(b)
(c)
(d)

aggregate
aggregate
aggregate
aggregate

demand right.
demand left.
supply right.
supply left.

Answer: A
10. Other things the same, an increase in the amount of capital firms wish to purchase would
initially shift
(a)
(b)
(c)
(d)

aggregate
aggregate
aggregate
aggregate

demand right.
demand left.
supply right.
supply left.

Answer: A
11. When taxes decrease, consumption
(a)
(b)
(c)
(d)

increases, so aggregate demand shifts right.


increases, so aggregate supply shifts right.
decreases, so aggregate demand shifts left.
decreases, so aggregate supply shifts left.

Answer: A
12. Which of the following shifts aggregate demand to the right?
(a)
(b)
(c)
(d)

Congress reduces purchases of new weapons systems.


The Fed buys bonds in the open market.
The price level falls.
Net exports fall.

Answer: B
13. Which of the following is not a determinant of the long-run level of real GDP?
(a)
(b)
(c)
(d)

the price level


the supply of labor
available natural resources
available technology

Answer: A
14. The long-run aggregate supply curve would shift right if immigration from abroad
(a)
(b)
(c)
(d)

increased or Congress made a substantial increase in the minimum wage.


decreased or Congress abolished the minimum wage.
increased or Congress abolished the minimum wage.
decreased or Congress made a substantial increase in the minimum wage.

Answer: C
15. Imagine two economies that are identical except that for a long time, economy A has had
a money supply of $500 billion while economy B has had a money supply of $1,000 billion.
It follows that
(a)
(b)
(c)
(d)

real GDP and the price level are higher in country B.


real GDP, but not the price level, is higher in country B.
the price level, but not real GDP is higher in country B.
neither the price level nor real GDP is higher in country B.

Answer: C
16. The long-run aggregate supply curve shifts left if
(a) the capital stock increases.
(b) there is a hurricane.
(c) the government removes some environmental regulations that limit production
methods.
(d) None of the above is correct.
Answer: B

17. Some countries have high minimum wages and require a lengthy and costly process to get
permission to open a business
(a) Reducing either the minimum wage or the time and cost to open a business
would have no effect on the longrun aggregate supply curve.
(b) Reducing the minimum wage and the time and cost to open a business would
both shift the long-run aggregate supply curve to the right.
(c) Reducing the minimum wage would shift long-run aggregate supply to the right.
Reducing the time and cost to open a business would have no affect on the longrun aggregate supply curve.
(d) Reducing the minimum wage would have no affect on the long-run aggregate
supply curve. Reducing the time and cost to open a business would shift the
long-run aggregate supply curve to the right.
Answer: B
18. Other things the same, if the long-run aggregate supply curve shifts left, prices
(a)
(b)
(c)
(d)

and output both increase.


and output both decrease.
increase and output decreases.
decrease and output increases.

Answer: C
19. The sticky-wage theory of the short-run aggregate supply curve says that when the price
level is lower than expected,
(a)
(b)
(c)
(d)

production
production
production
production

is
is
is
is

more profitable and employment rises.


more profitable and employment falls.
less profitable and employment rises.
less profitable and employment falls.

Answer: D
20. Other things the same, if prices fell when firms and workers were expecting them to rise,
then
(a)
(b)
(c)
(d)

employment
employment
employment
employment

and production would rise.


would rise and production would fall.
would fall and production would rise.
and production would fall.

Answer: D

21. Other things the same, an unexpected fall in the price level results in some firms having
(a)
(b)
(c)
(d)

lower than desired prices which increases their sales.


lower than desired prices which depresses their sales.
higher than desired prices which increases their sales.
higher than desired prices which depresses their sales.

Answer: D
22. Other things the same, if the price level rises by 2% and people were expecting it to rise
by 5%, then some firms have
(a)
(b)
(c)
(d)

higher than desired prices which increases their sales.


higher than desired prices which depresses their sales.
lower than desired prices which increases their sales.
lower than desired prices which depresses their sales.

Answer: B
23. An increase in the expected price level shifts short-run aggregate supply to the
(a) right, and an increase in the actual price level shifts short-run aggregate supply
to the right.
(b) right, and an increase in the actual price level does not shift short-run aggregate
supply.
(c) left, and an increase in the actual price level shifts short-run aggregate supply
to the left.
(d) left, and an increase in the actual price level does not shift short-run aggregate
supply.
Answer: D
24. Which of the following shifts both short-run and long-run aggregate supply left?
(a)
(b)
(c)
(d)

a
a
a
a

decrease
decrease
decrease
decrease

in
in
in
in

the
the
the
the

actual price level


expected price level
capital stock
money supply

Answer: C

25. Which of the following shifts short-run aggregate supply right?


(a)
(b)
(c)
(d)

an
an
an
an

increase
increase
increase
increase

in
in
in
in

the minimum wage


immigration from abroad
the price of oil
the actual price level

Answer: B
26. In the short run Recessions in South Korea and Indonesia will cause
(a)
(b)
(c)
(d)

the
the
the
the

U.S.
U.S.
U.S.
U.S.

price
price
price
price

level
level
level
level

and real GDP to rise.


and real GDP to fall.
to rise and real GDP to fall.
to fall and real GDP to rise.

Answer: B
27. Which of the following would cause prices to rise and real GDP to fall in the short run?
(a)
(b)
(c)
(d)

an increase in the expected price level


an increase in the capital stock
an increase in the quantity of labor available
All of the above are correct.

Answer: A
28. Consider Figure 2. If the economy starts at C and a hurricane destroys a large amount of
physical capital, the economy goes to
(a)
(b)
(c)
(d)

D in the short run and A in the long run.


B in the short run and A in the long run.
B in the short run and C in the long run.
D in the short run and the supply curve shifts farther left in the long run.

Answer: D
29. The long-run effect of an increase in government spending is to raise
(a)
(b)
(c)
(d)

both real output and the price level.


real output and lower the price level.
real output and leave the price level unchanged.
the price level and leave real output unchanged.

Answer: D

Figure 2:
30. Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers people become pessimistic
regarding the future and retain that level of pessimism for some time. What happens to
the expected price level and whats the result for wage bargaining?
(a)
(b)
(c)
(d)

The
The
The
The

expected
expected
expected
expected

price
price
price
price

level
level
level
level

rises. Bargains are struck for higher wages.


rises. Bargains are struck for lower wages.
falls. Bargains are struck for higher wages.
falls. Bargains are struck for lower wages.

Answer: D
31. An increase in the price level and a decrease in real GDP in the short run could be created
by
(a)
(b)
(c)
(d)

an increase in the money supply.


an increase in government expenditures.
a fall in stock prices.
bad weather in farm states.

Answer: D

32. Which of the following would cause stagflation?


(a)
(b)
(c)
(d)

aggregate
aggregate
aggregate
aggregate

demand shifts right


demand shifts left
supply shifts right
supply shifts left

Answer: D
33. Imagine the U.S. economy is in long-run equilibrium. Then suppose the value of the U.S.
dollar increases. At the same time, people in the U.S. revise their expectations so that the
expected price level falls. We would expect that in the short-run
(a)
(b)
(c)
(d)

real GDP will rise and the price level might rise, fall, or stay the
real GDP will fall and the price level might rise, fall, or stay the same.
the price level will rise, and real GDP might rise, fall, or stay the same.
the price level will fall, and real GDP might rise, fall, or stay the same.

Answer: D
34. Suppose the economy is in long-run equilibrium. In a short span of time, there is a decline
in the money supply, a tax increase, a pessimistic revision of expectations about future
business conditions, and a rise in the value of the dollar. In the short run, we would expect
(a)
(b)
(c)
(d)

the price level and real GDP both to rise.


the price level and real GDP both to fall.
the price level and real GDP both to stay the same.
All of the above are possible.

Answer: B
35. According to liquidity preference theory, the money supply curve would shift right
(a)
(b)
(c)
(d)

if the money demand curve shifted right.


if the Federal Reserve chose to increase money supply.
if the interest rate increased.
All of the above are correct.

Answer: B

Figure 3:
36. Consider Figure 3. If the current interest rate is 3 percent and the Fed buys bonds,
(a) there will be a shortage of money, driving interest rates up.
(b) money demand will exceed money supply, causing individuals to sell bonds,
driving interest rates up.
(c) there will be a surplus of money, causing individuals to purchase bonds, driving
interest rates down.
(d) It is impossible to determine from the graph.
Answer: C
37. According to liquidity preference theory, if the quantity of money supplied is greater than
the quantity demanded the interest rate will
(a)
(b)
(c)
(d)

increase and the quantity of money demanded will decrease.


increase and the quantity of money demanded will increase.
decrease and the quantity of money demanded will decrease.
decrease and the quantity of money demanded will increase.

Answer: D
38. A surplus or shortage in the money market is eliminated by adjustments in the price level
according to
(a)
(b)
(c)
(d)

both liquidity preference theory and classical theory.


neither liquidity preference theory nor classical theory.
liquidity preference theory, but not classical theory.
classical theory, but not liquidity preference theory

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Answer: D
39. Which of the following statements is correct?
(a) In the long run, output is determined by the amount of capital, labor, and
technology; the interest rate adjusts to balance the supply and demand for
money; the price level adjusts to balance the supply and demand for loanable
funds.
(b) In the long run, output is determined by the amount of capital, labor, and
technology; the interest rate adjusts to balance the supply and demand for
loanable funds; the price level adjusts to balance the supply and demand for
money.
(c) In the long run, output is determined by the amount of capital, labor, and
technology; the interest rate adjusts to balance the supply and demand for
loanable funds; the price level is stuck.
(d) In the long run, output responds to the aggregate demand for goods and services;
the interest rate adjusts to balance the supply and demand for loanable funds;
the price level adjusts to balance the supply and demand for money.
Answer: C
40. If the Federal Reserve decided to lower interest rates, it could
(a)
(b)
(c)
(d)

buy bonds to lower the money supply.


buy bonds to raise the money supply.
sell bonds to lower the money supply.
sell bonds to raise the money supply.

Answer: B
41. In which case does the aggregate demand curve shift right?
(a)
(b)
(c)
(d)

the
the
the
the

price level rises, making the interest rate drop


price level falls, making the interest rate drop
money supply increases, making the interest rate drop
money supply decreases, making the interest rate drop

Answer: C

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42. The economy is in long-run equilibrium. Suppose that automatic teller machines become
cheaper and more convenient to use, and as a result the demand for money falls. Other
things equal, we would expect that in the short run,
(a) the price level and real GDP would rise, but in the long run they would both
be unaffected.
(b) the price level and real GDP would rise, but in the long run the price level would
rise and real GDP would be unaffected.
(c) the price level and real GDP would fall, but in the long run they would both be
unaffected.
(d) the price level and real GDP would fall, but in the long run the price level would
fall and real GDP would be unaffected.
Answer: B
43. If the stock market crashes,
(a) aggregate demand increases, which the Fed could offset by increasing the money
supply.
(b) aggregate demand increases, which the Fed could offset by decreasing the money
supply.
(c) aggregate demand decreases, which the Fed could offset by increasing the money
supply.
(d) aggregate demand decreases, which the Fed could offset by decreasing the money
supply.
Answer: C
44. According to the crowding-out effect, an increase in government spending
(a)
(b)
(c)
(d)

increases the interest rate and so increases investment spending.


increases the interest rate and so decreases investment spending.
decreases the interest rate and so increases investment spending.
decreases the interest rate and so decreases investment spending.

Answer: B
45. Long-term bonds are generally
(a)
(b)
(c)
(d)

less risky than short-term bonds and so pay higher interest.


less risky than short-term bonds and so pay lower interest.
more risky than short-term bonds and so pay higher interest.
more risky than short-term bonds and so pay lower interest.

Answer: C
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46. People who buy newly issued stock in a corporation such as Crate and Barrel provide
(a)
(b)
(c)
(d)

debt finance and so become part owners of Crate and Barrel.


debt finance and so become creditors of Crate and Barrel.
equity finance and so become part owners of Crate and Barrel.
equity finance and so become creditors of Crate and Barrel.

Answer: C
47. Tom buys a bond issued by Budweiser, which uses the funds to buy new machinery for one
of its breweries.
(a)
(b)
(c)
(d)

Tom
Tom
Tom
Tom

and Budweiser are both investing.


and Budweiser are both saving.
is investing; Budweiser is saving.
is saving; Budweiser is investing.

Answer: D
48. The source of the supply of loanable funds
(a)
(b)
(c)
(d)

is saving and the source of demand for loanable funds is investment.


is investment and the source of demand for loanable funds is saving.
and the demand for loanable funds is saving.
and the demand for loanable funds is investment.

Answer: A
49. The supply of loanable funds slopes
(a)
(b)
(c)
(d)

upward because an increase in the interest rate induces people to save more.
downward because an increase in the interest rate induces people to save less.
downward because an increase in the interest rate induces people to invest less.
upward because an increase in the interest rate induces people to invest more.

Answer: A
50. If the demand for loanable funds shifts right, the equilibrium interest rate
(a)
(b)
(c)
(d)

and quantity of loanable funds rise.


and quantity of loanable funds fall.
rises and the quantity of loanable funds falls.
falls and the quantity of loanable funds rises.

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Answer: A
51. In 2002 mortgage rates fell and mortgage lending increased. Which of the following could
explain both of these changes?
(a)
(b)
(c)
(d)

The
The
The
The

demand for loanable funds shifted right.


demand for loanable funds shifted left.
supply of loanable funds shifted right.
supply of loanable funds shifted left.

Answer: C
52. What would happen in the market for loanable funds if the government were to increase
the tax on interest income?
(a)
(b)
(c)
(d)

Interest rates would rise.


Interest rates would be unaffected.
Interest rates would fall.
The effect on the interest rate is uncertain.

Answer: A
53. Suppose that the US offered a tax credit for firms who would build new factories in the
US. Then,
(a) the demand for loanable funds would shift right, initially creating a surplus
loanable funds at the original interest rate.
(b) the demand for loanable funds would shift right, initially creating a shortage
loanable funds at the original interest rate.
(c) the supply of loanable funds would shift right, initially creating a surplus
loanable funds at the original interest rate.
(d) the supply of loanable funds would shift right, initially creating a shortage
loanable funds at the original interest rate.
Answer: B

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