1. How do gross domestic product and gross national product differ?

A. Gross national product does not include depreciation.

B. Gross domestic product does not include intermediate goods.

C. Gross national product does not include goods produced domestically by foreign companies.

D. Gross domestic product is specified in real terms: gross national product is specified in nominal terms.

E. Gross national product includes only final goods and services.

3. If real GDP rises and nominal GDP falls, which of the following must be true?

A. The price level has decreased.

B. Production in the country by foreign firms has grown faster than has production outside of the country by domestic firms.

C. Either A or B, but possibly A and B.

D. Both A and B.

E. Either A or B, but not both.

4. If the price level rises by 10%, which of the following must be true?

A. All consumers will increase their spending by 10% if they are to buy the same things they used to buy.

B. All prices have risen by 10%.

C. The prices of each of the goods included in the relevant basket of goods have risen by 10%.

D. All real incomes have fallen by 10%.

None of these must be true.

5. Over the course of the business cycle, which of the following is must often true?

A. When unemployment is high, inflation will be high.

B. When unemployment is low, interest rates will be low.

C. When the economy is in a trough, unemployment will be low.

D. When inflation is low, economic growth rates are high.

E. When unemployment is high, economic growth rates are low.

6. Which of the following must be true in an economy with a government but with no

foreign trade?

A. Household saving will be equal to investment.

B. The sum of consumption and saving will be equal to the sum of income and taxes.

C. The sum of household income and business profits must be equal to the sum, of consumption, government spending, and investment.

D. An increase in the government deficit will force an increase in investments.

E. If the government has a balanced budget, household consumption will equal the difference between income and saving.

7. For an economy operating all full employment, which of the following is true?

A. There is no frictional unemployment.

B. Expansionary fiscal policy will result only in higher price levels and will have no effect on output.

C. The classical model will accurately predict the effects of monetary and fiscaL policies, both in the short run and in the long run.

D. The calculated unemployment rate is zero.

E. The Keynesian model will over-estimate the effect of a change in expenditures on GDP.

8. Which of the following will lead to the greatest decrease in a country's net exports?

A. An increase in household consumption.

B. Contractionary fiscal policy.

C. Inflation in foreign countries with no change in the exchange rate.

D. A large purchase of foreign currency on the country's central bank.

E. A large increase in interest rates in the country.

9. Assume an economy with lump sum taxes and no international trade. If there is full

employment and a marginal propensity to consume of 0.8, what will be the effect of an

$800 increase in autonomous expenditures?

A. An increase of less than $4,000 in real output.

B. An increase in real output of $4,000.

C. An increase in real output of at least $4,000.

D. An increase in the price level and in increase in output of approximately $4,000.

E. The answer depends critically on whether the economy is in the Keynesian region of the aggregate supply curve, and the answer cannot be predicted without knowing this.

10. According to the Keynesian model, equal increases in government spending and taxes

will result in which of the following?

A. Increases in the price level accompanied by increases in output.

B. Increased imports due to the effects of interest rate changes on exchange rates.

C. Decreased imports due to effects of tax changes on exchange rates.

D. No change in the price level and a decrease in output.

E. An increase in output and no change in the price level.

11 To reduce the possibility of inflation in the U.S. economy, the Fed should:

A. Lower the reserve requirement and buy securities on the open market.

B. Raise the discount rate and buy securities on the open market.

C. Lower the discount rate and sell securities on the open market.

D. Raise the reserve requirement and sell securities on the open market.

E. Raise the reserve requirement and lower the discount rate.

12. The classical model may have contributed to the severity of the Great Depression of the

1930s because:

A. It prescribed no fiscal response by the government.

B. It suggested that the Fed should increase taxes to avoid a deficit.

C. It failed to recognize the severity of the decrease in the money supply resulting from bank failure.

D. It failed to recognize that price levels can change when aggregate demand shifts.

E. It suggested that a contractionary fiscal policy could reduce government budget problems.

13. Expansionary fiscal policy conducted in an economy at full employment will have which

combination of effects in the short run?

A. An increase in real output and a smaller increase in nominal output.

B. An increase in real output, but a decrease in nominal output.

C. A decrease in real output, but an increase in nominal output.

D. An increase in real output and a larger increase in nominal output.

E. An increase in output, but no decrease in unemployment.

14. If the U.S. government conducts contractionary fiscal policy at the same time the Fed

conducts expansionary monetary policy, what will be the most likely effects?

A. An increase in interest rates and a decrease in unemployment.

B. A decrease in interest rates and an indeterminate change in output.

C. An increase in the price level and a decrease in interest rates.

D. An interest in the value of the dollar in foreign exchange markets and an increase in U.S. imports.

E. An increase in interest rates, an increase in the value of the dollar, and an

indeterminate change in unemployment.

15. Which of the following will be an effect of unexpectedly low inflation?

A. Lenders will benefit at the expense of borrowers.

B. Workers with long-term wage contracts will suffer a decrease in real income.

C. The real money supply will increase, and the value of the currency will decrease.

D. Workers productivity will rise.

E. None of the above.

16. According to the Keynesian model, expansionary fiscal policy will have what effect?

A. An increase in output and price levels.

B. A decrease in unemployment and inflation.

C. An increase in output and a decrease in the price level.

D. No change in the price level and an increase in output.

E. No change in output and an increase in the price level. 17. Which of the following is an important criticism of the consumer price index?

A. It fails to recognize that consumers change their behavior in response to changes in the relative prices of goods and, as a result, generates an inflation rate that is too high.

B. It calculates the cost of a basket of goods purchased by an average consumer, which matches the actual basket of goods purchased by the average consumer.

C. It fails to recognize that consumers change their behavior in response to changes in the relative prices of goods and, as a result, generates an inflation rate that is too low.

D. Because it does not include all goods produced in an economy, it will result in real interest rate calculations that are too high.

E. Because it includes only consumer goods, it fails to capture what is actually happening in the economy. 18. Which statement correctly describes the relationship between policy actions, interest

rates, and bond prices?

A. If the Fed conducts expansionary monetary policy, the supply of bonds will increase, their price will decrease, and interest rates will decrease.

B. If the government conducts contractionary fiscal policy, the supply of bonds will increase, their price will decrease, and interest rates will increase.

C. If the government conducts expansionary fiscal policy, the supply of bonds will increase, their price will decrease, and interest rates will decrease.

D. If the Fed conducts contractionary monetary policy, the supply of bonds will increase, their price will decrease, and interest rates will decrease.

E. If the Fed conducts expansionary monetary policy, the demand for bonds will increase, their price will increase, and interest rates will decrease.

19. An increase in autonomous expenditures will have which of the following effects?

A. An increase in GDP, but no increase in the price level if the economy is in the Keynesian portion of the aggregate supply curve.

B An increase in both GDP and the price level regardless of the level of unemployment.

C. A small increase in GDP and a relatively large increase in the price level if the economy is in the Keynesian portion of the aggregate supply curve.

D. An increase in GDP, but no increase in the price level if the assumptions of the classical model are correct,

E. An increase in unemployment and a decrease in the price level if the economy is operating in a region where the assumptions of the classical model are satisfied.

20 Why is stagflation inconsistent with the idea of a Phillips curve?

A. Along a Phillips curve, growth is highest when inflation is low.

B. The Phillips curve suggests a tradeoff between inflation and unemployment.

C. Stagflation forces economists to accept the fact that the Phillips curve is upward rather than downward sloping

D. Stagflation is a result of demand shocks rather than supply shocks.

E. Stagflation is inconsistent with the classical model of the economy.

21. According to the Keynesian model, under which conditions will an open market operation by the Fed have the greatest effect on national income?

A. When the marginal propensity to save is high.

B. When the marginal propensity to consume is high.

C. When both the marginal propensity to consume and the marginal propensity to save are high.

D. When the economy is at full employment.

E. When the investment demand curve is relatively steep.