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foundations macroeconomics

Questions and Answers of Foundations Macroeconomics

1. When the U.S. dollar decreases in value relative to the euro, it has (A) depreciated (B) appreciated (C) equalized (D) changed to a fixed exchange rate (E) changed to a floating exchange rate
1. In one to three paragraphs, explain how currency exchange rates are determined and impacted by changes in import and export activity
1. Which component of the balance of payments accounts is affected by the following economic developments? Explain your answers for each. (a) A U.S. company sells a brand-new airplane to an
3. The balance of payments is (A) when the sum of the current account (CA) and capital financial account (CFA) are zero (B) when the current account (CA) is greater than the capital financial account
2. What is the difference between current accounts (CA) and capital financial accounts (CFA)? (A) CAs are the total goods trade deficit; CFAs are the total assets deficit for a nation. (B) CAs show
1. The table above shows the 2020 current accounts (CA) for Zambonia. Determine the missing figures to complete the CA table total. (A) (1) $939 (2) $863 (B) (1) $939 (2) –$619 (C) (1) $2,563 (2)
1. In one to three paragraphs, explain how balance of payments (BOP) accounts measure the goods, services, and financial trade between countries.
1. Assume the country of Strongland is operating at full employment with a balanced budget. (a) Draw a correctly labeled Phillips curve that illustrates the country’s current economic situation and
3. How does the patent system encourage inventors? (A) By allowing them to profit from their inventions (B) By easing government regulations (C) By helping finance production (D) By providing
2. What is the most common reason modern governments impose tariffs? (A) To raise money (B) To reduce the budget deficit (C) To protect domestic producers (D) To help domestic producers reduce their
1. Which of the following public policies is most likely to promote longrun economic growth? (A) A decrease in unemployment benefits (B) A decrease in income taxes (C) An increase in transfer
1. In one to three paragraphs, explain how public policies affect economic growth.
3. An increase in capital stock will have which of the following effects on income per capita and aggregate production? Income Per Capita Aggregate Production (A) Decrease Increase (B) Decrease
2. Which of the following is most likely to promote long-term economic growth? (A) Private savings (B) Technological progress and increased human capital (C) Production of consumer goods (D) Private
1. The term human capital refers to (A) the number of workers in an economy (B) equipment furnished to workers by their employers for use on the job (C) cash recruitment incentives offered to new
1. In one to three paragraphs, explain how the economy expands and contracts but grows in the long run.
3. The national debt is created when a government (A) operates at a deficit more than it operates at a surplus (B) spends more money than it takes in (C) borrows money from other entities and
2. A balanced budget is achieved when (A) tax revenues exceed government spending (B) government spending exceeds tax revenues (C) the government stops excess spending and lowers income tax (D) tax
1. What effect does fiscal policy have on a government’s budget? (A) Fiscal policy alone determines the amount of revenue a government will have to work with. (B) Fiscal policy determines both the
1. In one to three paragraphs, describe the long-run implications of monetary and fiscal policy
determine the supply of money.
3. What happens to the demand for money when an economy enters an inflationary period? (A) The demand for money decreases. (B) The demand for money increases. (C) The demand for money stays the same.
2. On the money market graph, what happens to the supply curve when the Fed increases the money supply? (A) It shifts to the right. (B) It shifts to the left. (C) It shifts upward. (D) It shifts
1. What economic indicator does the Fed prefer to use to measure inflation? (A) The discount rate (B) The consumer price index (C) The producers price index (D) The gross domestic product (E) The
1. In one to three paragraphs, explain how monetary policy affects inflation.
1. Assume the United States economy is experiencing an inflationary period caused by an increase in government spending. (a) On the short run Phillips curve, would the economy, in its current state,
3. What impact would a negative supply shock have on the Phillips curve? (A) It would cause the SRPC to shift to the left as both inflation and unemployment fall. (B) It would cause the SRPC to shift
2. Where does expansionary monetary policy eventually move the economy in relation to the long-run Phillips curve? (A) It shifts it to the right of the LRPC. (B) It shifts it to the left of the LRPC.
1. According to the Phillips curve model, an increase in the expected rate of inflation will cause (A) a corresponding rise in employment (B) the short-run Phillips curve to shift to the right (C)
1. In one to three paragraphs, explain how the Phillips curve model represents the relationship between inflation and unemployment and the effects of macroeconomic shocks on both.
3. Assume the economy is experiencing an inflationary period. Which of the following would happen if an expansionary monetary policy were to be applied? Employment Price Level Aggregate Demand (A)
2. The goal of expansionary fiscal and monetary policy is (A) an increase in output and a decrease in price level (B) an decrease in output and a decrease in price level (C) an increase in aggregate
1. Which of the following is an example of expansionary fiscal policy? (A) Raising taxes (B) Increasing government spending (C) Cutting government spending (D) Increasing the money supply (E)
1. In one to three paragraphs, explain the short-term effects of fiscal and monetary policy on macroeconomic outcomes.
1. Country X is currently in a recession, and the Central Bank decides to take action to bring the country back to full employment. (a) Identify an open-market operation that the central bank should
3. What happens when a government spends more than it collects in tax revenues? (A) There is a budget surplus amounting to an increase in the demand of loanable funds. (B) There is a budget surplus
2. Why is the supply of loanable funds upward sloping? (A) As the real interest rate decreases, people are willing to save more. (B) As the real interest rate increases, people are willing to save
1. Which of the following will result in an increase in the real interest rate? (A) An increase in household saving (B) An increase in national saving (C) An increase in the supply of loanable funds
1. In one to three paragraphs, explain how the interactions of borrowers and savers determine the equilibrium interest rate of loanable funds.
3. Which of the following is a short-run effect of an increase in the money supply? (A) Interest rates increase. (B) Demand for money increases. (C) Price level increases. (D) Aggregate demand for
2. If the reserve ratio is 5 percent, how much could an initial deposit of $10,000 grow to as a result of the money multiplier? (A) $20,000 (B) $40,000 (C) $100,000 (D) $200,000 (E) $400,000
1. Which of the following best describes the discount rate? (A) It is the interest rate set by the Fed for overnight interbank lending. (B) It is the interest rate charged by a central bank for loans
1. In one to three paragraphs, describe the short-run effects of monetary policy on macroeconomic outcomes.
3. What happens when the Federal Reserve buys bonds? (A) The transaction demand for money increases, and the supply of money decreases. (B) The transaction demand for money decreases, and the supply
2. As a country comes out of a recession and the price level and income levels increase, (A) the demand for money increases, which increases nominal interest rates (B) the demand for money decreases,
1. According to Keynes, the three motives for holding money are (A) the transactions motive, the precautionary motive, and the speculative motive (B) the transactions motive, the precautionary
1. In one to three paragraphs, explain how the demand for and supply of money determine the equilibrium nominal interest rate and influence the value of other financial assets.
1. Use the following balance sheet to answer all parts of the questions that follow: Seaside Bank Assets Liabilities Required Reserves $ 10,000 Demand deposits $100,000 Excess Reserves $90,000
3. Which of the following is true of the Fed’s reserve requirements? (A) Larger banks have a smaller reserve requirement than do smaller banks. (B) A bank’s required reserves are based on the
2. Which of the following represents a bank’s largest liability? (A) Loans (B) Reserve requirement (C) Excess reserves (D) Demand deposits (E) Securities
1. The money multiplier is (A) the amount of money generated on the balance sheet (B) the amount of loans that can be called in on a balance sheet (C) the way in which one finds the dollar amount
1. In one to three paragraphs, explain the role of the banking system in the expansion of the money supply.
1. Use the following scenario to answer all parts of the following questions: Diego opens a new checking account in Bank A with $5,000. (a) If Diego uses the debit card that accompanies this account,
3. Money held by the public that includes demand deposits and currency is measured as (A) M1 (B) M2 (C) M0 (D) Fiat money (E) Commodity money
2. Which of the following best describes fiat money? (A) Money that is backed by a commodity such as gold (B) Money that is backed by the government that issued it (C) U.S. dollars held in foreign
1. Which of the following is an example of money as a unit of account? (A) A monthly credit card statement (B) A money market account (C) A checking account (D) Pricing of items in a grocery store
1. In one to three paragraphs, explain the functions of money and how economists measure it.
1. Use the following scenario to answer all parts of the free-response questions below. Bank A is offering fixed-rate loans at a 5 percent nominal interest rate. The actual inflation rate is 4
3. If the nominal interest rate is 7 percent and the rate of inflation is 4 percent, what is the real interest rate? (A) −28 percent (B) −11 percent (C) –3 percent (D) 3 percent (E) 11 percent
2. Who sets short-term nominal interest rates in the United States? (A) The president (B) The World Bank (C) The Federal Reserve (D) The banking industry (E) The Consumer Price Index
1. How do banks make most of their money? (A) By charging depositors interest on their savings accounts (B) By selling stocks and bonds (C) By investing in U.S. Treasury notes (D) By charging
1. In one to three paragraphs, explain how interest rates provide a measure of the price of money that is borrowed or saved.
1. For each of the following assets, briefly describe the relation between risk and rate of return. (a) Savings account (b) Certificate of deposit (c) Corporate bond (d) Treasury bond (e) Stock in a
3. When the prevailing market interest rate drops, one effect on previously issued bonds is that (A) their interest rate also drops (B) their interest rate rises (C) their value also drops (D) their
2. One example of financial assets that can be withdrawn at will are (A) nonliquid assets (B) interest rates (C) municipal bonds (D) demand deposits (E) corporate bonds
1. Which of the following assets would be most liquid? (A) Fine art (B) Antiques (C) Real estate (D) Commodities such as oil (E) Stock in a corporation
1. In one to three paragraphs, discuss financial assets and the opportunity cost of money
1. Assume that Curuguay, a country that makes capital goods and consumer goods, is operating at below full employment. (a) Using a correctly labeled graph of aggregate demand, aggregate supply, and
1. Answer all parts of the questions that follow.(a) The graph depicts the beginning of a recession. Explain what will happen to the aggregate supply curve as the recession worsens. (b) Identify one
3. Who most directly funds the unemployment insurance system? (A) All employees (B) The federal government (C) All employers (D) Individual states (E) Employers who wrongfully fire workers
2. Why are government transfers more effective than tax cuts as automatic stabilizers? (A) Tax cuts only happen when annual taxes are filed. (B) Transfers have a greater multiplier effect. (C) Tax
1. What is the primary purpose of automatic stabilizers as fiscal policy? (A) To replace direct cash payments with vouchers (B) To moderate fluctuations in the economy (C) To increase the
1. In one to three paragraphs, explain how automatic stabilizers moderate business cycles and impact aggregate demand and GDP.
1. Assume the graph below shows the economy of Freedonia. Answer all parts of the questions that follow.(a) Which kind of GDP gap is Freedonia experiencing? Explain. (b) Which kind of fiscal
3. To eliminate a recessionary gap, the government is most likely to do which of the following? (A) Increase interest rates (B) Decrease government spending (C) Decrease taxes (D) Increase taxes (E)
2. Which type of fiscal policy might the government institute to respond to an inflationary gap in the economy? (A) Hike import taxes on all foreign goods (B) Raise the national minimum wage (C)
1. When governments increase spending on goods and services, which indicator is the spending intended to directly affect? (A) Nominal wages (B) Short-run aggregate supply (C) Aggregate demand (D)
1. In one to three paragraphs, explain how government fiscal policies involving spending and taxation affect demand, GDP, and employment.
1. Assume there has been a negative demand shock to the economy. Use the graph below to answer all parts of the questions that follow.(a) What does the shift from AD1 to AD2 signify? (b) What happens
3. What do shifts in the long-run aggregate supply curve indicate? (A) Economic growth (B) Falling price levels (C) Rising producer costs (D) Stable nominal wages (E) GDP fluctuations over time
2. How do supply shocks differ from demand shocks regarding GDP and price levels? (A) Demand shocks cause prices and GDP to decrease sharply. (B) Demand shocks affect prices and GDP in opposite
1. Assuming a negative supply shock, in which of the following ways could the economy self-adjust and be restored to full employment? (A) The government could decrease spending. (B) The federal
1. In one to three paragraphs, explain how the long run adjusts to supply and demand shocks in order to return to full employment and economic growth.
1. Use the graph below to answer all parts of the questions that follow. For these questions, one does not build upon the others.(a) What would be the short-run effect of a negative shock like the
3. A supply shock, such as a severe drought, would lead to (A) a decrease in price level and an increase in employment (B) a decrease in price level and an increase in unemployment (C) an increase in
2. Which does NOT contribute to demand-pull inflation? (A) Growth in GDP (B) Increased exports (C) Expectation of rising prices (D) Increase in workers’ wages (E) Federal spending programs
1. If there is a positive demand shock, which best describes how aggregate price levels react? (A) Aggregate price levels will remain generally static. (B) Aggregate price levels are not affected by
1. In one to three paragraphs, explain how positive and negative shocks to both supply and demand impact employment, prices, and output in the short run.
1. Assume the federal government institutes a large stimulus program for infrastructure repair. Use the graph below to answer all parts of the questions that follow.(a) In what direction would this
3. Assuming an economy is in a recession, if the aggregate supply curve increases (shifts to the right), which of the following would occur? Price Level Real Output (A) Increase Decrease (B) Increase
2. If price level is above long-run equilibrium, what must happen to help price levels return to long-run equilibrium? (A) Real GDP must decrease in the short run. (B) Long-run supply estimates must
levels
1. Which must be at the same levels to attain short-run macroeconomic equilibrium? (A) real GDP and potential output (B) the SRAS curve and the LRAS curve (C) aggregate output and demand for goods
1. In one to three paragraphs, explain how the AD-AS model is used as a tool to reflect economic fluctuations and production decisions that affect prices and GDP.
1. Use the graph below to answer all parts of the questions that follow(a) Explain what the long-run aggregate supply curve represents in an economy. (b) Identify one factor that would create growth,
3. In what ways are the production possibilities curve and long-run aggregate supply related? (A) Both show two different products. (B) Both show the different time periods in an economy. (C) Both
2. Which of the following is a reason the LRAS will shift to the right over time? (A) rising commodity costs (B) potential output is revised downward (C) nominal wage increases (D) advances in
1. Which best describes a primary reason the LRAS curve is a vertical line in a graph? (A) Because it represents where aggregate prices and real GDP intersect (B) Because LRAS is tied to production
1. In one to three paragraphs, explain how the flexibility of the long run affects pricing and production costs for businesses.
1. Use the graph below, which depicts the SRAS during the Depression, to answer all parts of the questions that follow.(a) Describe what happened to the aggregate price level between 1929 and 1933

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