Exam. Name. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

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1 Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 3) Liquidity is the A) ease with which an asset can be converted into money. B) same as the velocity of money. C) speed with which the price of an asset changes as its intrinsic value changes. D) inverse of the velocity of money. 4) The velocity of circulation is A) constant. B) the rate of change of the GDP deflator. C) the changes in the purchasing power of money over a given time period. D) the average number of times a dollar of money is used in a year to buy goods and services in GDP. 1) In the figure above, if the interest rate is 6 percent, A) there is a $0.1 trillion excess quantity of money and the interest rate will rise. B) the money market is in equilibrium and the interest rate will remain constant. C) there is a $0.1 trillion excess demand for money and the interest rate will rise. D) there is a $0.1 trillion excess quantity of money and the interest rate will fall. 2) The money multiplier determines how much A) the monetary base will be expanded given a change in the quantity of money. B) the quantity of money will be expanded given a change in the monetary base. C) real GDP will be expanded given an increase in autonomous investment. D) money demand will expand given a change in the quantity of money. 1

2 7) Banks make additional loans when desired reserves A) exceed actual reserves, a situation of positive excess reserves. B) exceed actual reserves, a situation of negative excess reserves. C) are less than actual reserves, a situation of positive excess reserves. D) are less than actual reserves, a situation of negative excess reserves. 5) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of a fall in the interest rate? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement downward along the demand for money curve MD1. D) There would be a movement upward along the demand for money curve MD1. 8) Suppose that the money multiplier is 3. If the monetary base increases by $1 million, the quantity of money will A) decrease by $3 million. B) decrease by $300,000. C) increase by $300,000. D) increase by $3 million. 9) The functions of money are A) medium of exchange, unit of account, and means of payment. B) medium of exchange and the ability to buy goods and services. C) medium of exchange, unit of account, and store of value. D) pricing, contracts, and means of payment. 6) According to the quantity theory of money, money growth and inflation are A) negatively correlated. B) positively correlated. C) independent, that is, not correlated. D) positively if the inflation rate is positive and negatively correlated if the inflation rate is negative. 2

3 10) In the above figure, the short-run aggregate supply curve is SAS and the aggregate demand curve is AD. An inflationary gap exists A) if the long-run aggregate supply curve is LAS3. B) if the long-run aggregate supply curve is LAS1. C) if the long-run aggregate supply curve is LAS2. D) All of the above answers are correct. 12) The above figure illustrates A) a recessionary gap. B) an equilibrium at the economy's physical limits. C) an inflationary gap. D) a full-employment equilibrium. 11) Which of the following changes while moving along the aggregate demand curve? A) the price level B) the amount of money in the economy C) future profits from investment projects D) future incomes of households 3

4 Price level Aggregate demand Short-run aggregate supply Long-run aggregate supply ) From the data in the above table, when the economy is at its short-run equilibrium, if aggregate demand does not change, then as time passes the A) short-run aggregate supply curve shifts leftward. B) long-run aggregate supply curve shifts rightward. C) short-run aggregate supply curve shifts rightward. D) long-run aggregate supply curve shifts leftward. 14) The short-run aggregate supply curve is upward sloping because A) money wage rates do not immediately change when the price level changes. B) most business firms operate with long-term contracts for output but not labor. C) lower taxes motivate people to work more. D) a lower price level creates a wealth effect. 15) One reason that the aggregate demand curve has a negative slope is because A) firms produce more when the price rises. B) people earn more money when output rises. C) The premise of the question is wrong because the aggregate demand curve has a positive slope. D) people buy fewer goods and save more when the price level rises because their real wealth decreases. 16) economists believe that the economy is self-regulating and always at full employment. A) Monetarist B) All C) Keynesian D) Classical 17) If the economy is at the natural unemployment rate, A) real GDP > potential GDP. B) real GDP = potential GDP. C) real GDP < potential GDP. D) All of the above can occur when the economy is at the natural unemployment rate. 18) You observe that unplanned inventories are increasing. You predict that there will be. A) a trough B) an expansion C) a business cycle D) a recession 19) An economy has no imports and no taxes. The marginal propensity to save is 0.1. A increase in autonomous expenditure increases equilibrium expenditure by $60 billion and the multiplier is. A) $6 billion; 10 B) $12 billion; 5 C) $60 billion; 5 D) $60 billion; 10 20) An increase in disposable income shifts A) both the consumption and savings functions downward. B) both the consumption and savings functions upward. C) neither the consumption function or the savings function because it leads to a movement along both the consumption and savings function. D) the consumption function upward and leads to a movement along the savings function. 4

5 21) In the Keynesian model of aggregate expenditure, real GDP is determined by the A) level of aggregate demand. B) level of aggregate supply. C) price level. D) level of taxes. 22) Given an MPC of 0.80, if there are no income taxes or imports and prices are constant, then when investment increases by $50 million, when prices are fixed equilibrium GDP would A) increase by $50 million. B) increase by $400 million. C) increase by $250 million. D) To answer the question more information on income is needed. 24) In the above figure, autonomous expenditure along AE1 equals A) $4 trillion. B) $2 trillion. C) $8 trillion. D) an amount not given in the above answers. 23) In the above figure, consumption and disposable income are equal at A) any point along the consumption function. B) a disposable income level of $200 billion. C) a disposable income level of $0. D) a saving level of $100 billion and disposable income level of $400 billion. 25) When the economy is at full employment and investment increases, in the long run the price level will and, if potential GDP does not change, in the long run real GDP will. A) increase; not change B) decrease; not change C) increase; increase D) decrease; decrease 5