SECTION A: MULTIPLE CHOICE QUESTIONS (60 MARKS)

1. You receive money as payment for ironing your neighbor's clothes. This best

illustrates which function of money?

A. Unit of account.

B. Medium of exchange.

C. Store of value.

D. Liquidity.

2. In a system of 100-percent-reserve banking, the purpose of a bank is to

A. make loans to households.

B. influence the money supply.

C. give depositors a safe place to keep their money.

D. buy and sell gold.

3. If the central bank in country A lowered the reserve requirement, then the money

multiplier for that country A

A. would increase.

B. would not change.

C. would decrease.

D. could do any of the above.

4. The central bank can increase the money supply by conducting open-market

A. sales or by raising the discount rate.

B. sales or by lowering the discount rate.

C. purchases or by rising the discount rate.

D. purchases or by lowering the discount rate.

5. The Bank Negara Malaysia increases the reserve requirement, but later it wants to

offset the effects on the money supply. Which of the following should it do?

A. Sell bonds to increase reserves.

B. Sell bonds to decrease reserves.

C. Buy bonds to increase reserves.

D. Buy bonds to decrease reserves.

6. Suppose an economy produces only water bottles. If the price level rises, the value

of currency

A. rises, because one unit of currency buys more water bottles.

B. rises, because one unit of currency buys fewer water bottles.

C. falls, because one unit of currency buys more water bottles.

D. falls, because one unit of currency buys fewer water bottles.

7. With the value of money on the vertical axis, the money supply curve is

A. upward sloping because people supply a larger quantity of money when the value

of money increases.

B. downward sloping because people supply a larger quantity of money when the

value of money decreases.

C. horizontal because we assume the central bank controls the money supply.

D. vertical because we assume the central bank controls the money supply.

8. When the money market is drawn with the value of money on the vertical axis, if the

value of money is above the equilibrium level, there is an

A. excess demand for money, so the price level will rise.

B. excess demand for money, so the price level will fall.

C. excess supply of money, so the price level will rise.

D. excess supply of money, so the price level will fall.

9. The price level falls. This might be because the central bank

A. bought bonds which raised the money supply.

B. bought bonds which reduced the money supply.

C. sold bonds which raised the money supply.

D. sold bonds which reduced the money supply.

10. The principle of monetary neutrality implies that an increase in the money supply

will

A. increase real GDP and the price level.

B. increase real GDP, but not the price level.

C. increase the price level, but not real GDP.

D. increase neither the price level nor real GDP.

11. If Malaysia purchased more goods and services abroad than it sold abroad last year,

then it had

A. positive net exports which is a trade surplus.

B. positive net exports which is a trade deficit.

C. negative net exports which is a trade surplus.

D. negative net exports which is a trade deficit.

12. If domestic residents of Singapore purchase 1.2 trillion dollars of foreign assets and

foreigners purchase 1.5 trillion dollars of Singapore assets, then Singapore's net

capital outflow is

A. -0.3 trillion dollars, so it must have a trade deficit.

B. -0.3 trillion dollars, so it must have a trade surplus.

C. 0.3 trillion dollars, so it must have a trade deficit.

D. 0.3 trillion dollars, so it must have a trade surplus.

13. When Malaysia sells chocolate to Singapore, Singapore net exports

A. increase, and Singapore net capital outflow increases.

B. increase, and Singapore net capital outflow decreases.

C. decrease, and Singapore net capital outflow increases.

D. decrease, and Singapore net capital outflow decreases.

14. A country's saving is greater than its domestic investment. This difference means

that its

A. net capital outflow and net exports are positive

B. net capital outflow and net exports are negative.

C. net capital outflow is positive and net exports are negative.

D. net capital outflow is negative and net exports are positive.

15. Other things the same, if the exchange rate changes from 30 Thai baht per U.S. dollar

to 25 Thai baht per U.S. dollar, then the dollar has

A. appreciated and so buys more Thai goods.

B. appreciated and so buys fewer Thai goods.

C. depreciated and so buys more Thai goods.

D. depreciated and so buys fewer Thai goods.

16. Other things the same, a decrease in the price level makes consumers feel

A. less wealthy, so the quantity of goods and services demanded falls.

B. less wealthy, so the quantity of goods and services demanded rises.

C. more wealthy, so the quantity of goods and services demanded rises.

D. more wealthy, so the quantity of goods and services demanded falls.

17. When the price level falls

A. people want to hold more money.

B. the interest rate rises.

C. investment spending rises.

D. All the above are correct.

18. When the ringgit (RM) appreciates, Malaysia

A. export decrease, while imports increase.

B. exports and imports decrease.

C. exports and imports increase.

D. export increase, while imports decrease.

19. Which of the following would shift the long-run aggregate supply curve to the right?

A. Both an increase in the capital stock and an increase in the price level.

B. An increase in the capital stock, but not an increase in the price level.

C. An increase in the money supply, but not an increase in the capital stock.

D. Neither an increase in the money supply nor an increase in the capital stock.

20. The sticky-wage theory of the short-run aggregate supply curve says that the quantity

of output firms supply will increase if

A. the price level is higher than expected making production more profitable.

B. the price level is higher than expected making production less profitable.

C. the price level is lower than expected making production more profitable.

D. the price level is higher than expected making production less profitable.

21. People are likely to hold more money if the interest rate

A. increases, making the opportunity cost of holding money rise.

B. increases, making the opportunity cost of holding money fall.

C. decreases, making the opportunity cost of holding money rise.

D. decreases, making the opportunity cost of holding money fall.

22. The interest rate would fall and the quantity of money demanded would

A. increase if there were a surplus in the money market.

B. increase if there were a shortage in the money market.

C. decrease if there were a surplus in the money market.

D. decrease if there were a shortage in the money market.

23. Other things the same, which of the following happens if the price level falls?

A. Money demand shifts rightward.

B. Initially there is an excess demand for money in the money market.

C. The interest rate falls.

D. None of the above is correct.

24. If the multiplier is 5, then the marginal propensity to consume (MPC) is

A. 0.05

B. 0.5

C. 0.6

D. 0.8

25. To reduce the effects of crowding out caused by an increase in government

expenditures, the central bank could

A. increase the money supply by buying bonds.

B. increase the money supply by selling bonds.

C. decrease the money supply by buying bonds.

D. increase the money supply by selling bonds.

26. According to the Philips curve, policymakers could reduce both inflation and

unemployment by

A. increasing the money supply.

B. increasing the government expenditures.

C. raising taxes.

D. None of the above is correct.

27. As aggregate demand shifts right along the short-run aggregate supply curve,

A. inflation and unemployment are higher.

B. inflation is higher and unemployment is lower.

C. unemployment is higher and inflation is lower.

D. unemployment and inflation are lower.

28. In the long-run, policy that changes aggregate demand changes

A. both unemployment and the price level.

B. neither unemployment nor the price level.

C. only unemployment.

D. only the price level.

29. Suppose the central bank pursues an unexpectedly tight monetary policy. In the short-

run the effects of this are shown by

A. moving to the left along the short run Phillips curve.

B. moving to the right along the short run Phillips curve.

C. shifting the short run Phillips curve to the right.

D. shifting the short run Phillips curve to the left.

30. A decrease in expected inflation shifts

A. the long-run Phillips curve left.

B. the short-run Phillips curve left.

C. neither the short-run nor long-run Phillips curve left.

D. both the short-run and long-run Phillips curve left.