Macroeconomics_Quize.pdf

Week 1 Quiz - An Overview of Modern Macroeconomics

Question 1 Learning the principles of macroeconomics can help you make better decisions in both your personal and professional life. True False Question 2 If consumer confidence falls and unemployment rises, what happens to the probability of a recession? It goes up Not sure It goes down There is no effect Question 3 Which type of unemployment do economists primarily focus on curing? Frictional Structural Cyclical Pervasive

Question 4 If a world wide drought causes a rise in food prices and conflict in the Middle East causes oil prices to rise, this will contribute to: 1. Cost-push Inflation 2. Demand-pull Inflation Both 1 and 2 Neither Question 5 Which type of inflation index measures changes in the cost of important raw materials? The PPI The CPI The FBI The I don’t know Question 6 If price inflation rises faster than wages, what happens to our purchasing power? Falls Rises Stays the same We need to find a new job

Question 7 Unexpected inflation can: Benefit Borrowers Benefit Lenders Not Sure Benefit Nobody Question 8 The “Flow of Expenditures” approach is calculated by adding: Real GDP plus Nominal GDP Wages, rents, interest, and profits Not sure Consumption, investment, government spending, and net exports Question 9 If actual output is above potential output, we run the risk of: Inflation Recession Stagflation Armageddon Question 10 Real Gross Domestic Product (GDP) is equal to:

Nominal GDP minus inflation Virtual GDP plus interest Nominal GDP plus stagflation Nominal GDP plus inflation Question 11 Forecasting the business cycle is important to: Business executives interested in implementing their plans and strategies Policymakers interested in fighting recession or inflation Stock market investors interested in allocating funds to various assets All of the above Question 12 If the government wants to use fiscal policy to stimulate the economy, it will: Cut government spending and raise taxes Increase government spending and increase taxes Increase government spending and cut taxes Cut government spending and cut taxes Question 13 If the government wants to use monetary policy to fight inflation, it will: Increase government spending Increase the money supply

Decrease the money supply Decrease government spending Question 14 The Kennedy Tax Cut of 1964 was a modern day version of: Classical economics Keynesian economics Marxism Monetarism Question 15 President Lyndon Johnson’s refusal to cut his Great Society programs to finance the Vietnam War resulted in: Stagflation Hyperinflation Cost-push Inflation Demand-pull inflation Question 16 What is the Keynesian dilemma when it comes to curing stagflation? Stimulating the economy to cure unemployment decreases inflation. Not sure Stimulating the economy to cure unemployment increases inflation

Question 17 When the economy simultaneously suffers from inflation and unemployment, this is called: Stagflation Hyperinflation Demand-pull inflation Cost-push inflation Question 18 The Classical economists believed that: The economic cycle depends on the phases of the moon The economy needs fiscal or monetary stimulus to recover from a recession The 56 Chevy is the best classic car ever built The economy is self-correcting Question 19 The Monetarists believe that inflation is caused by: Printing too much money Counterfeiting money Not sure Printing too little money Question 20

Who famously said “in the long run, we’re all dead.” John Maynard Keynes Franklin Delano Roosevelt Jean Baptiste Say Freddy Krueger Question 21 Fiscal policy relies on: 1. Changes in government expenditures 2. Changes in taxes 3. Changes in the money supply Both 1 and 2 Both 2 and 3 Question 22 Supply side economics promises to: Lower taxes to increase the budget deficit Raise taxes to lower the budget deficit Raise taxes to increase the budget deficit Lower taxes to lower the budget deficit Question 23 The theory of Rational Expectations supports the use of discretionary fiscal and monetary policies to control inflation and solve unemployment.

False True Not sure Question 24 Which was the most prosperous decade? The 2000s The 1980s The 1990s The 1970s Question 25 What contributed to the slow growth of the United States during the 2000s? Wars in Iraq and Afghanistan Collapse of a housing bubble China’s entry into the World Trade Organization All of the above Question 26 The application of a massive fiscal and monetary policy after the Great Recession of 2007: Was moderately successful Was applauded by the ghost of Milton Friedman Was a total failure

Was highly successful

Week 2 Quiz - The Aggregate Supply-Aggregate Demand Model and the Classical-Keynesian Debate

Question 1 The Classical versus Keynesian controversy is primarily a dispute about: How the free market works Not sure How economies adjust and find their way back to full employment Whether tax cuts or increased government spending should be used to stimulate an economy Question 2 The Classical view is that: A price adjustment mechanism will bring the economy back to full employment An income adjustment mechanism will bring the economy back to full employment A currency adjustment mechanism will bring the economy back to full employment Not sure/don’t know Question 3

Laissez Faire economists believe: A relatively small government sector is best A relatively big government sector is best No government is best Not sure Question 4 Classical economics views unemployment: As a natural part of the business cycle and is self-correcting As an aberration that government must fix As healthy because it keeps wages low Not sure Question 5 John Maynard Keynes believed that: Unemployment would be solved through government expenditures Not sure Unemployment would be solved through adjustments in wages and prices Unemployment would be solved by tax increases Question 6 Say’s Law says that: Not sure Supply must always exceed demand to curb inflation

Supply creates its own demand Demand creates its own supply Question 7 The equation PQ=MV is referred to as: Not sure The Quantity Theory of Money The Velocity Theory of Money The Price Theory of Money Question 8 Who stated this critique of Say’s Law: “If people don’t spend all of their money, there will be a glut of goods and people would be out of work.” Thomas Malthus Adam Smith Not sure David Ricardo Question 9 Say and the Classical Economists believed what had to adjust for unemployment to go away? 1. Interest rates 2. Prices 3. Wages

All of the above 1 & 2 only Question 10 How is real, inflation-adjusted output measured in the equation of exchange? P/Q M/P Not sure MV PQ Question 11 If the quantity of money increases in the quantity theory of money equation, what must increase? Not sure Price Velocity Quantity Question 12 The veil of money assumption means that: Real output is not influenced by the money supply Increasing M will increase Q Nominal output is not influenced by the money supply

Not sure Question 13 Keynes believed that the Classical economist’s price adjustment mechanism would: eBy dwarfed by a more powerful income adjustment mechanism Not sure Solve the Great Depression through the quantity of money equation Work together with the income adjustment mechanism to cure recessions Question 14 To Keynes, recessions are cause by a fall in: 1. Consumption 2. Investment 3. Savings All of the above 1 & 2 only Question 15 The AS-AD framework: Not sure Is independent of prices Allows for price adjustments Assumes prices are fixed

Question 16 Which statement is true? The aggregate demand curve slopes downward The aggregate demand curve is a horizontal line Not sure The aggregate demand curve slopes upward Question 17 The “real balance” or “wealth effect” means that as prices fall: Purchasing power stays the same Purchasing power rises Purchasing power falls Not sure Question 18 The “net export effect” means that as domestic prices falls: 1. Exports rise 2. Imports fall 3. Aggregate quantity demanded decreases All of the above 1 & 2 only Question 19

The aggregate demand curve will shift out or to the right if: 1. Taxes are cut 2. Interest rates fall 3. Excess capacity rises All of the above 1 & 2 only Question 20 The aggregate demand curve will shift in or to the left if: Government spending rises Consumer confidence improves Excess capacity increases Not sure Question 21 The aggregate supply curve: Slopes down Is a horizontal line Slopes up Not sure Question 22 Which way will the aggregate supply shift if the price of imported oil rises? In

Not sure Out Right Question 23 Cost-push inflation: 1. Shifts the aggregate supply curve in 2. Increases prices 3. Increases output All of the above 1 & 2 only Question 24 Which event will shift the aggregate supply curve in? 1. An increase in the excise tax 2. A decrease in the sales tax 3. A decrease in the payroll tax 1 & 2 only Not sure Question 25 In which range of the economy are prices fixed? Classical range

Intermediate range Keynesian range Not sure Question 26 In the Classical range of the economy, expansionary fiscal policy will lead to: A large increase in the price level and a small increase in output A small increase in the price level and a large increase in output A large increase in the price level only A large increase in output only Question 27 In the Intermediate range of the economy, there is: Any increase in output results in an increase in the price level Any increase in output results in a decrease in the price level Any increase in output has no impact on the price level Not sure Question 28 The Classical Price Adjustment Mechanism will return the economy to full employment at: With no impact on the price level A lower price level Not sure

A higher price level

Week 3 Quiz - The Keynesian Model and Fiscal Policy

Question 1 Fiscal policy: Uses changes in the money supply to stimulate or contract the economy Not sure Uses changes in the size of the trade deficit to stimulate or contract the economy. Uses changes in government expenditures and taxes to stimulate the economy Question 2 Stagflation: Not sure Validated the use of Keynesian economics Validated the use of Monetarism Showed that Keynesian solutions didn’t always work Question 3 The fixed price assumption is valid in the Intermediate range of the economy because: Not sure

Prices vary a lot with output Prices vary little with output Prices are fixed Question 4 Who was responsible for developing the textbook Keynesian model? Not sure Alvin Hansen and Paul Samuelson Milton Friedman and Arthur Laffer Delano Roosevelt Question 5 Which of these is a leakage in the Circular Flow Diagram? Savings Not sure Government spending Investment Question 6 Which of these is an injection? Exports Taxes Not sure

Imports Question 7 Aggregate production 1. Is the total amount of goods and services produced in the economy 2. Creates an equal amount of income 3. Is a 45 degree line All of the above 1 & 3 only Question 8 Aggregate expenditures 1. Represents total spending 2. Equals consumption plus investment plus government spending plus net exports 3. Is the horizontal summation of four curves All of the above 1 & 2 only Question 9 Why does the AE curve intersect the vertical axis above zero? Fractional consumption Autonomous consumption Not sure

Induced consumption Question 10 Which is the largest component of Aggregate Expenditures? Consumption Net Exports Investment Government spending Question 11 In the Keynesian consumption function, total consumption equals: Autonomous consumption minus induced consumption Autonomous consumption divided by induced consumption Autonomous consumption plus induced consumption Not sure Question 12 The amount of money left after paying taxes to the government is referred to as: Disposable consumption Disposable income Disposable consumption Induced consumption

Question 13 The extra amount people consume when they receive an extra dollar of disposable income is referred to as the: MPS MPI MPC Not sure Question 14 What is the formula for the marginal propensity to save? Not sure MPS = 1 + MPC MPS = 1 – MPC MPS = 1/MPC Question 15 Suppose people spend 60 cents of every dollar of their disposable income and save 40 cents. What is the MPC? .40 .20 .60 .80 Question 16

MPC = 0.6, MPS = 0.4

The aggregate expenditures curve is flatter than the 45 degree line in the Keynesian model because the MPC is: Less than one Equal to one Not sure Greater than one Question 17 What is the slope of the consumption function? 1. MPC 2. 1 – MPS 3. MPS All of the above 1 & 2 only Question 18 In the investment function in the Keynesian model, expenditures: Not sure Are independent of income Fall with income Rise with income Question 19 Investment increases when:

Not sure Interest rates rise Both prices and interest rates rise Interest rates fall Question 20 “Animals spirits” in the Keynesian model is important because: 1. If businesses are bearishly pessimistic on the economy, they will cut back on investment 2. If businesses are bullishly optimistic on the economy, they will increase investment 3. If businesses believe the economy will go bad, it could become a self-fulfilling prophecy All of the above 1 & 2 only Question 21 Which of these components of the aggregate expenditure function is not represented by a horizontal line? Not sure Consumption function Investment function Government function Question 22

Which of these are the primary tools of fiscal policy? 1. Decreased or increased government expenditures 2. Decreased or increased taxes 3. Decreases or increases in the money supply All of the above 1 & 2 only Question 23 What type of expansionary fiscal policies can be used to close a recessionary gap? 1. A tax cut 2. An increase in government expenditures 3. A decrease in the money supply All of the above 1 & 2 only Question 24 The purpose of contractionary fiscal policy is to: Fight stagflation Cool down an overheated economy Close a recessionary gap Not sure

Question 25 Transfer payments like unemployment compensation and welfare payments act as automatic stabilizers because: Not sure They automatically rise during recessions and fall during expansions. They contract the economy They stimulate the economy Question 26 Which part of the net export function adds to aggregate expenditures? Exchange rates Exports Imports Not sure Question 27 A closed economy excludes: Government expenditures Investment Consumption Net exports Question 28

Vertically summing the consumption, investment, and government expenditure curves yields the AE function. It’s slope is: The MPC MV Not sure The MPS PQ Question 29 The Keynesian multiplier is greater than one because: Induced consumption is less than disposable income Income is re-spent many times after the initial increase. Autonomous consumption is greater than zero Not sure Question 30 Suppose the U.S. permanently decreases defense spending by $100 billion after troops pull out of Afghanistan. How much will GDP be reduced assuming an MPC of 0.75? $400 billion $300 billion $200 billion $100 billion

100B * 1 / (1 - 0.75)

$500 billion Question 31 Compared to increases in government expenditures, tax cuts have: Less of an expansionary effect More of an expansionary effect Not sure The same expansionary effect Question 32 The tax cut multiplier equals: The expenditure multiplier/MPC The expenditure multiplier * MPC Not sure The expenditure multiplier – MPC Question 33 Assume a recessionary gap of $180 billion and an MPS of .25. How much should taxes be cut to close the gap? $60 billion multiplier = 1 / MPS = 1 / 0.25 = 4 yield a tax multiplier = multiplier * MPC = 4 * (1 - 0.25) = 3 tax = 180B / 3 = 60B

$20 billion $80 billion

$40 billion Question 34 Suppose you want to close an inflationary gap of $100 billion and the MPC is .5. What fiscal policy options are available? Raise taxes by $100 billion or cut G by $50 billion multiplier = 1 / MPS = 1 / (1 - 0.5) = 2 tax = 100B / (multiplier * MPC) = 100B / (2 * 0.5) = 100B G = 100B / multiplier = 100B / 2 = 50B Cut taxes by $50 billion or raise G by $100 billion Raise taxes by $50 billion or cut G by $100 billion Cut taxes by $100 billion or raise G by $50 billion Question 35 Is it better to cut taxes or increase government expenditures to close a recessionary gap? Cut taxes Not sure Increase government expenditures It depends on whether you are a conservative or a liberal Question 36 The paradox of thrift occurs when: People try to save more during a recession but wind up saving less because their incomes fall

People try to save less during a recession but wind up saving more because their incomes fall Not sure Question 37 When the government increases its expenditures to close a recessionary gap and finances those expenditures through increased borrowing, this can: Drive up interest rates and investment Drive down interest rates and drive up investment Drive up interest rates and drive down investment Drive down interest rates and investment Question 38 Crowding out means that: The net effect of a fiscal policy stimulus may be more than intended Not sure The net effect of a fiscal policy stimulus is unaffected The net effect of a fiscal policy stimulus may be less than intended Question 39 A key weakness of the Keynesian model is that it: 1. Assumes prices are fixed 2. Assumes away inflation 3. Assumes prices are flexible

All of the above 1 & 2 only

Week 4 Quiz - The Federal Reserve and Monetary Policy

Question 1 Monetary Policy involves changes in the money supply to: 1. Contract the economy 2. Expand the economy 3. Diversify the economy 1 & 2 only 2 & 3 only Question 2 Richard Nixon may have lost the 1960 presidential election to John F. Kennedy because of: Monetary policy Not sure Exchange rate policy Fiscal policy Question 3

Checkbooks represent a form of: Commodity money Fiat or paper money Not sure Bank Money Question 4 Which is NOT a function of money? Standard of value Store of value Medium of exchange Medium of barter Question 5 When we say that one stick of butter exchanges for two loaves of bread, we are referring to what function of money? Medium of barter Medium of exchange Store of value Standard of value Question 6 In the presence of inflation, the value of money: Not sure

Is unaffected Decreases Increases Question 7 Interest is: 1. The payment made for the use of money 2. The “price of money” 3. The rate of return from commodity money All of the above 1 & 2 only Question 8 Suppose the interest rate is 8% and you deposit $5000 in the bank. What will your deposit be worth in a year? $5400

5000 * 1.08 = 5400

$5200 $5600 $5800 Question 9 The longer the term of a loan: The higher the interest rate The lower the interest rate

There is no difference in the interest rate Not sure Question 10 Which of these investments would have the lowest interest paid out? The bonds of the U.S. government The municipal bonds of cities with shrinking tax bases, The bonds of countries with large overseas debt and unstable political systems. The “junk bonds” of businesses close to bankruptcy, Question 11 The more liquid the loan: Not sure There is no difference in the interest rate The higher the interest rate The lower the interest rate Question 12 If you want to adjust for inflation when evaluating an investment, you would rely on the: Nominal interest rate Not sure Real interest rate

Normalized interest rate Question 13 Suppose the nominal interest rate is 12% and the real interest rate is 6%. What must be the rate of inflation? 6%

nominal interest rate - real interest rate = 12% - 6% = 6%

24% 18% 3% Question 14 The major determinants of money demand are: 1. Asset demand 2. Transactions demand 3. Withdrawal demand All of the above 1 & 2 only Question 15 The basic determinant of transactions demand is: Real GDP Nominal GDP Not sure Normalized GDP

Question 16 If prices and (real GDP plus inflation) triple, what happens to the transactions demand for money? Triples Stays the same Doubles Not sure Question 17 When you hold cash rather than invest it in stocks or bonds and wait for a better price, such speculation is an example of what kind of demand for money? 1. Asset demand 2. Transactions demand 3. Withdrawal demand All of the above 1 & 2 only Question 18 Inflation: Decreases the value of money Increases the value of money Has no effect on the value of money

Not sure Question 19 Examples of the “opportunity cost” of holding money include: 1. The interest that could have been earned by lending the money. 2. The rate of return that could have been earned by investing the money in stocks. 3. The increase in value from holding money during inflation. All of the above 1 & 2 only Question 20 If interest rates rise, what happens to the asset demand for money? Stays the same Increases Decreases Not sure Question 21 The goldsmiths of several hundred years ago accounted for the first: 1. Bank interest 2. Paper money 3. Fractional reserve banking All of the above

1 & 2 only Question 22 A system of fractional reserve banking works because: Banks can close temporarily if they run of cash Banks can loan to one another if one gets into trouble Not sure No more than a small amount of consumers are likely to come in for their cash Question 23 The money multiplier equals: 1/MPS 1/RR 1/RR – MPC Not sure Question 24 If the money multiplier is 5, what must be the reserve requirement? 20% MM(money multiplier) = 1 / RR(reserve requirement) RR = 1 / MM = 1 / 5 = 0.2 10% 50% 40%

30% Question 25 The money multiplier and reserve requirement are: Inversely related Equal to one another Directly related Not sure Question 26 Which of these statements are true about bank runs? 1. Bank runs usually happen when people suddenly believe they may not be able to get their money out of their bank. 2. When everybody tries to get their money at once during a bank run, the bank fails 3. The fear that a bank may fail sets in motion a chain of events that can lead to the actual failure of a perfectly healthy bank All of the above 1 & 2 only Question 27 A major purpose of a nation’s central bank is to be: The lender of first resort The primary lender in the banking system Not sure

The lender of last resort Question 28 Which is the most important function of the U.S. Federal Reserve, America’s central bank? Regulate financial institutions Conduct monetary policy Issue currency Not sure Question 29 Which of these are objectives of monetary policy? 1. Provide a high level of employment 2. Insure stable prices 3. Provide moderate long-term interest rates All of the above 1 & 2 only Question 30 If the Federal Reserve wants to increase the money supply, it can: Increase the reserve requirement Decrease the money multiplier Not sure Decrease the reserve requirement

Question 31 If the Federal Reserve wants to decrease the money supply, it can: Increase the money multiplier Increase the discount rate Not sure Decrease the discount rate Question 32 If the Federal Reserve wants to use open market operations to increase the money supply, it will: Sell corporate bonds Not sure Sell government bonds Buy government bonds Question 33 Suppose the Federal Reserve wants to close a recessionary gap of $100 billion and the reserve requirement is 20%. How much money will it have to create to close this gap? Cannot be determined from the information $10 billion $20 billion $50 billion

Not sure Question 34 The monetary transmission mechanism involves which of the following to close a recessionary gap? 1. An increase in the money supply 2. A fall in interest rates 3. An increase in investment and consumption 4. An increase in exports All of the above 1, 2 & 3 only Question 35 In theory, which can be used with more precision to close a recessionary gap? Exchange rate policy Fiscal policy Not sure Monetary policy Question 36 Which school of macroeconomics supports an activist role for monetary policy? Classical economists Keynesians

Monetarists Not sure Question 37 Which type of gap is monetary policy likely to be most effective at closing, according to the Keynesians? Inflationary gap Not sure Recessionary gap Stagflationary gap Question 38 According to the Monetarists: 1. Inflation happens when the government prints too much money. 2. Recession happens when the government prints too little money. 3. Stagflation happens when the government refuses to print additional money All of the above 1 & 2 only Question 39 Milton Friedman believed that the Great Depression was caused by: 1. A dramatic cutback in government expenditures 2. A dramatic cutback in the money supply

3. A dramatic rise in the tax rate 4. All of the above 5. 1 & 2 only Question 40 Stagflation is characterized by: 1. Inflation 2. Recession 3. A balanced budget All of the above 1 & 2 only Question 41 How would you use fiscal policy to fight stagflation? 1. Increase government expenditures 2. Raise taxes 3. Cut taxes All of the above None of the above Question 42 If we want economic growth to proceed at a rate of 5%, the Monetarists would recommend: Increasing the money supply by 5% less the rate of inflation

Increasing the money supply by 5% plus the rate of inflation Increasing the money supply by 5% Not sure Question 43 To fight the stagflation of the late 1970s, Federal Reserve Chairman Paul Volcker: 1. Dramatically raised interest rates 2. Induced a recession 3. Cut taxes All of the above 1 & 2 only

Week 5 Quiz - Unemployment, Inflation, and Stagflation

Question 1 In most cases, macroeconomists can: 1. Solve an inflation problem by making unemployment worse. 2. Solving an unemployment problem by making inflation worse. 3. Solve unemployment and inflation at the same time 1 & 2 only

Don’t know Question 2 Which statement is true? Expansionary policies stimulate a recessionary economy – but cause inflation. Contractionary policies fight inflation– but can trigger unemployment and recession. Both Neither Question 3 What happens when an economy faces both high unemployment and inflation? It is necessary to use both Keynesian-style monetary and fiscal policy at the same time. Only monetary policy should be used Keynesian-style monetary and fiscal policies are counterproductive I don’t know Question 4 Which type of unemployment is the least of the macroeconomists’s worries? Structural Frictional Cyclical

Persistent Question 5 Which type of unemployment requires the most targeted policies? Cyclical Frictional Persistent Structural Question 6 Which of these types of people are not considered to be part of the labor force? 1. Homemakers 2. Prisoners 3. Retirees 4. Students All of the above 1, 3, & 4 only Question 7 If there are 100 million people in the labor force and 6 million of them are unemployed, what is the unemployment rate? 6% unemployment rate = Unemployed / Labor Force = 6 / 100 = 0.06

6% minus those not in the labor force 6% plus summer workers Don’t know Question 8 Much of teenage employment is considered to be: Due to too many video games Don’t know Frictional Persistent Question 9 Ideological conservatives tend to blame high rates of black unemployment among teenagers on: 1. The minimum wage 2. The welfare state 3. Racism 1 & 2 only Don’t know Question 10 According to Oken’s Law: Output and inflation move together Output and unemployment move together

Output and unemployment move in the opposite direction Don’t know Question 11 Suppose GDP falls by 2%. By Okun’s law, how much will inflation rise? 1% 2% 3% Can’t be determined Don’t know Question 12 Suppose GDP falls by 2%. By Okun’s law, how much will unemployment rise? 1% 2% 3% Can’t be determined Don’t know Question 13 Suppose the inflation rate exceeds the rate of growth in income. That would mean that purchasing power is: Falling Rising

Staying the same Don’t know Question 14 Demand pull inflation is caused by: Don’t know “Too much money chasing too few goods.” A rise in the savings rate Supply-side shocks like drought and oil price hikes. Question 15 Cost-push inflation is caused by: “Too much money chasing too few goods.” Supply-side shocks like drought and oil price hikes. A rise in the savings rate Don’t know Question 16 Which type of inflation can best be controlled by Keynesian policies? Cost-push inflation Demand-pull inflation Both Don’t know

Question 17 Stagflation is defined as: Don’t know Simultaneous inflation and wage declines Simultaneous unemployment and wage declines Simultaneous unemployment and inflation Question 18 Inflationary expectations are important because: 1. The expectation of inflation can significantly contribute to actual inflation. 2. Inflationary expectations strongly influence the behavior of businesses, investors, workers, and consumers! 3. They help fight both supply-side shocks and demand-pull inflation 1 & 2 only Don’t know Question 19 The “core or inertial” rate of inflation is defined as: The inflation that exists all a time Inflation that tends to persist at the same rate until a demand or supply side shock changes things The inflation that exists before Keynesian stimulus Don’t know

Question 20 Under adaptive expectations: Don’t know People believe that it is important to adapt one’s investment strategy to the inflation rate People believe next year’s rate of inflation will be the same as last year’s. People believe this year’s inflation rate was the same as last year’s. Question 21 Under an adaptive expectations model, suppose you are a labor negotiator in last year’s inflation rate was 3% and you believe that next year your workers will achieve a 2% increase in their productivity. What is the minimum wage increase for your workers for the next year that will you demand? 5% demand

= productivity gain + expected inflation rate = 2% + 3% = 5%

4% 2% Don’t know 3% Question 22 According to the theory of the Phillips Curve, what happens to prices went unemployment rises? They fall They rise

They stay the same Don’t know Question 23 The key policy implication of the Phillips Curve theory is that: Keynesian monetary policy will not be effective at stimulating the economy. Don’t know You can use expansionary policies to reduce unemployment and the only price will be a bit more inflation. Keynesian fiscal policy will not be effective at stimulating the economy. Question 24 The “natural rate of unemployment” refers to: The minimum unemployment rate consistent with steady inflation The unemployment rate that must be achieved in order to reduce inflation The unemployment rate associated with an economy that has failed to yet reach its full level of industrialization Don’t know Question 25 If it is impossible to drive the unemployment rate below the natural rate in the long run, what does this imply about the slope of the Phillips Curve? It is vertical It is a 45° line similar to the aggregate production curve Don’t know

It is horizontal Question 26 The natural rate of unemployment for any given country is: Constant Changing according to underlying structural factors Accelerating as a country grows Don’t know Question 27 If the government uses Keynesian stimulus in an attempt to drive the unemployment rate below the natural rate in the short run, what will be the inevitable result? Rising unemployment Rising inflation Rising growth in the real gross domestic product over the long run Don’t know Question 28 According to Monetarist theory, if a nation repeatedly uses Keynesian policies to try and keep unemployment below the natural rate, what will be the result in the long run? Don’t know An inflationary spiral A deflationary spiral

A supply-side shock Question 29 According to the Monetarists, the only way to stop an inflationary spiral is to: Push the actual unemployment rate above the natural rate using Keynesian stimulus. Push the actual unemployment rate above the natural rate by inducing a recession Reduce the natural rate of unemployment Don’t know Question 30 According to Keynesian economists, the traditional solution to an inflationary spiral is to: Impose wage and price controls until we inflation dissipates Increase the money supply Cut taxes Don’t know Question 31 Ronald Reagan ran on a supply-side economics platform that promise to: 1. Accelerate growth 2. Cut taxes 3. Increased tax revenues All of the above

1 & 2 only Question 32 The Laffer curve is: Don’t know Backward bending Forward bending A vertical line Question 33 According to the Laffer curve, it is possible to cut the marginal tax rate and: Don’t know Increase GDP growth Increase tax revenues Decrease tax revenues Reduce GDP growth Question 34 According to Supply Side economics theory, the regulation will: Shift out the aggregate demand curve and thereby increase both inflation and GDP growth. Shift out the aggregate demand curve and thereby decrease inflation and increase GDP growth

Shift out the aggregate supply curve and thereby increase both inflation and GDP growth Shift at the aggregate supply curve and thereby decrease inflation and increase GDP growth Don’t know

Week 6 Quiz - The Warring Schools of Macroeconomics

Question 1 New Classical Economics is based on: Rational expectations Adaptive expectations Traditional expectations Don’t know Question 2 If the inflation rate was 5% last year, rational expectations would predict that inflation next year will be: Cannot be determined from the information 10% 5% Don’t know

Question 3 The central policy implication of the rational expectations theory is that: Keynesian policies work in the short run but not the long run Keynesian policies work in the long run but not the short run Keynesian policies work in the short run and the long run Don’t know Question 4 Based on the theory of rational expectations, a Classical Economics advisor to the president would: Not recommend Keynesian policies Recommend Keynesian policies in a recession Recommend Keynesian policies to fight inflation Don’t know Question 5 Under the theory of rational expectations, if the Federal Reserve expands the money supply to close a recessionary gap: 1. Businesses will immediately raise prices 2. Workers will demand higher wages 3. The attempted expansionary monetary stimulus will be completely offset by inflation’s contractionary effects All of the above

1 and 2 only Don’t know Question 6 From 1947 to 2000, real GDP grew annually by 3.5%. However, over the next decade, GDP growth would fall by nearly 2%. How many jobs does the economy of the United States fail to create when GDP growth slows by 1% in a given year? 1 million 1% GPD growth lost = 1 million new jobs not created. 100,000 10 million Don’t know Question 7 During the 2000s, average median household income was roughly equal to: 0% over the decade 5% over the decade 10% over the decade Don’t know Question 8 Historically, the Federal Reserve has focused on: Lowering short-term interest rates to stimulate investment Lowering long-term interest rates to stimulate investment

Lowering both short and long-term interest rates to stimulate investment Don’t know Question 9 The Federal Reserve’s policy of “quantitative easing” that was ushered in in the late 2000s had what objective: Lower long-term interest rates Lower short-term interest rates Lower both short and long-term interest rates Don’t know Question 10 When the Federal Reserve lowers interest rates, this can stimulate: Both 1 & 2 Don’t know 1. Domestic investment 2. Exports to foreign countries Question 11 What is the relationship between bond prices and bond yields? As bond prices rise, bond yields fall As bond prices rise, bond yields rise As bond prices rise bond yields remain the same Don’t know

Question 12 The typical business cycle is characterized by: 1. An expansionary peak 2. A recessionary trough 3. A secular growth trend line All of the above 1 and 2 only Question 13 Which of the following are elements of the GDP forecasting equation? 1. Consumption 2. Investment 3. Government spending 4. Net exports All of the above 1, 2, and 3 only Don’t know Question 14 If a country’s imports are greater than its exports, the country is said to be running a: Trade deficit Trade surplus

Don’t know Question 15 Everything else being equal, a country that runs a trade deficit will have a: Lower GDP growth rate Higher GDP growth rate The GDP growth rate is not affected by the size of the trade deficit Not sure Question 16 Which of these leading economic indicators is not used to forecast consumption in the GDP forecasting model? ISM manufacturing index Consumer confidence Home sales Retail sales Don’t know Question 17 Why do economic forecasters pay very close attention to inflation measures? If inflation begins to rise, the Federal Reserve may raise interest rates to slow GDP growth If inflation begins to rise, the Federal Reserve may lower interest rates to slow GDP growth

If inflation begins to rise, the Federal Reserve may raise taxes to slow GDP growth Not sure Question 18 The offshoring of American jobs: Decreases the American GDP growth rate indirectly by reducing domestic investment Decreases the American GDP growth rate indirectly by reducing domestic consumption Decreases the American GDP growth rate indirectly by reducing government spending Not sure Question 19 The structural problem of a global trade imbalance includes: An export-dependent China, and import-dependent Europe, and an import-dependent America An export-dependent China, an export-dependent Europe, and an import-dependent America An export-dependent China, an import-dependent Europe, and an export-dependent America don’t know Question 20

Which one of these is not a “commodity country” whose economy depends heavily on the export of commodities such as coal, iron ore, soybeans, and energy? Switzerland Australia Brazil Russia Not sure Question 21 When export demand is weak in Europe and the United States because of slow growth, what is likely to happen to China’s import demand for commodities such as coal and iron ore? Falls Rises Stays the same Don’t know Question 22 A Keynesian stimulus when used to addressed structural imbalances causing an economic slowdown is likely to: Unlikely to resolve the structural imbalances Likely to resolve the structural imbalances Don’t know

Question 23 Keynesians believe that macroeconomic instability arises from: 1. Changes in investment and consumption that shift the aggregate demand curve in or out 2. Adverse supply-side shocks that shift the aggregate supply curve in 3. Adverse supply shocks that shift the aggregate supply curve out All of the above 1 and 2 only Don’t know Question 24 Monetarists believe that macroeconomic instability arises from: Bad government policies Price and wage flexibility Market processes Don’t know Question 25 From the Monetarist perspective, government policies like the minimum wage, farm price supports, and monopoly protections: Lead to increased instability in the macroeconomy because they don’t allow wages and prices to adjust quickly Are necessary to reduce instability in the macroeconomy

Lead to increased instability in the macroeconomy because they allow wages and prices to adjust to quickly Don’t know Question 26 Which is the equation of exchange? MV=PQ MP=VQ MQ=VP Not sure Question 27 If the velocity of money is stable and real output is independent of the price level, increasing the money supply will lead to: Increased inflation Decreased inflation Decreased real GDP growth Increased real GDP growth Not sure Question 28 Which school of macroeconomics believes that tends to be unstable? Keynesians Monetarists

Demand ciders Not sure Question 29 The Supply Side school of macroeconomics: 1. Agrees with Keynesians that macroeconomic stability can result from supply-side shocks 2. Agrees with Monetarists the macroeconomic stability can result from government failures 3. Prefers to focus on high tax rates and regulations that reduce supply incentives as a source of instability All of the above 2 and 3 only Don’t know Question 30 The view that when the economy diverges from full employment output, internal mechanisms automatically move back is associated with which school or schools of macroeconomics thought? 1. Keynesianism 2. Monetarism 3. Supply Side economics All of the above 2 and 3 only

Don’t know Question 31 The faster the speed of the adjustment process back to full potential output: The less the need for activist fiscal and monetary policies The more the need for activist fiscal and monetary policies The use of activist fiscal and monetary policies is independent of the speed of the adjustment process Don’t know Question 32 Under the theory of adaptive expectations, shifts of the aggregate supply and aggregate demand curves to bring the economy back to full employment: Occur very slowly Occur very quickly Cannot occur Don’t know Question 33 Which school or schools of macroeconomics thought believe that the government should adhere to rules that prohibit it from causing instability in the economy? Keynesians Monetarists New Classicals

All the above 2 and 3 only Don’t know Question 34 Which school of macroeconomic thought would most favor a rule that directed the Federal Reserve to expand the money supply at the same rate is the typical growth of the economy’s production capacity? Monetarists Keynesians Both Don’t know Question 35 Under the Rational Expectations theory, if the Federal Reserve lowers interest rates to stimulate economic growth: 1. Workers will demand higher wages 2. Firms will increase prices 3. Lenders will lower interest rates All the above 1 and 2 only Don’t know Question 36

Which theory of expectations holds that any attempt by the government to use activist fiscal and monetary policies to stimulate the economy will be immediately offset? Don’t know Rational expectations Irrational expectations Adaptive expectations Question 37 To finance a budget deficit, the US Treasury Department may sell bonds directly to the private capital markets. What is likely to be the effect on interest rates in the level of private sector investment? Interest rates rise and investment falls Interest rates fall and investment falls Interest rates rise and investment rises Don’t know Question 38 When a bond-financed budget deficit leads to a reduction in private sector investment, this is referred to as: Crowding out Crowding in The fallacy of composition Don’t know

Question 39 Which school of macroeconomic thought believes the following: Fiscal policy should not be used because increases in government spending are likely to be offset by declines in investment. Monetarists Keynesians Both Don’t know Question 40 According to Keynesians, a Balance Budget Rule would: Both Require contractionary fiscal policy during a recession and deepen it Require cutting taxes during an expansion in increased inflation Neither Not sure Question 41 Which school of macroeconomic thought most favors the use of discretionary monetary policy? Keynesians Monetarists Both

Not sure

Week 7 Quiz - Economic Growth and Productivity

Question 1 Living standards are measured by: 1. Output per capita 2. Consumption per household 3. Nominal wages All the above 1 & 2 only Don’t know Question 2 Living standards are primarily determined by: 1. The growth of a country 2. The level of worker productivity 3. Nominal wages 1 & 2 only Don’t know Question 3

Economic growth represents the expansion of the country’s potential GDP or national output. True False Don’t know Question 4 The growth rate of output per person determines the rate at which the country’s standard of living is rising. True False Don’t know Question 5 The four wheels of economic growth include: 1. Capital formation and Human resources 2. Natural resources and Technology 3. All of the above 1 only Don’t know Question 6 Which of these may be the single most important element in economic growth? The quality of labor inputs

The quantity of workers The level of wages Don’t know Question 7 Why is it necessary for the government to invest in certain types of projects to fuel growth? Some government projects involve external benefits that private firms cannot capture Some government projects involve internal benefits that private firms cannot capture The government has more expertise than private firms as a rule Don’t know Question 8 “Productive efficiency” refers to the process of a country: Using resources in the least costly way Deploying a specific mix of goods and services so that they maximize society’s well-being Building its manufacturing base Don’t know Question 9 According to a key study by Professor Edward Denison, which factor of growth has been the most instrumental in increasing labor productivity?

1. Economies of scale 2. An increase in the quantity of labor 3. An increase in the quantity of capital 4. Technological advance 1 & 2 only Don’t know Question 10 In Adam Smith’s growth model, what was the most critical assumption in allowing national output to double as population doubled? Unlimited capital Unlimited labor Unlimited land Don’t know Question 11 In Adam Smith’s growth model, output expands with population so: The real wage per worker stays constant The real wage per worker rises The real wage per worker falls Don’t know Question 12

When new workers are added to a fixed supply of land, the marginal product of each additional worker is likely to: Fall Rise Stay constant Don’t know Question 13 According to the law of diminishing returns, with a fixed supply of land, the marginal product of each additional worker must: Fall Rise Stay constant Don’t know Question 14 In Thomas Malthus’s growth model, population pressures will drive wages: To subsistence levels Steadily upward To a steady-state Don’t know Question 15 In the world of Thomas Malthus, population will rise:

Faster than the food supply Slower than the food supply At the same rate as the food supply Don’t know Question 16 The neoclassical growth model was pioneered by: Robert Solow Adam Smith David Ricardo Don’t know Question 17 Capital deepening refers to the process of: Increasing the amount of capital per worker Decreasing the amount of capital per worker Keeping the amount of capital per worker constant Don’t know Question 18 In the absence of technological change, why does capital deepening not lead to a proportional increase in output? The law of diminishing returns The law of decreasing costs

Economies of scale Don’t know Question 19 In the absence of technological change, in the neoclassical growth model, what happens to wages for workers and the returns to capital before the economy reaches a steady-state of stagnation? Wages rise and the returns to capital fall Wages fall and the returns to capital rise Both wages and the returns to capital rise Both wages and the returns to capital fall Don’t know Question 20 In the neoclassical growth model, if economic growth consists only of accumulating capital through replicating factories with existing methods of production, what happens to the standard of living? It eventually stops rising It falls It continues to rise Don’t know Question 21 In the neoclassical growth model, what happens to wages and returns to capital with technological change?

Both wages and the returns to capital rise Wages fall and the returns to capital rise Wages rise and the returns to capital fall Both wages and the returns to capital fall Don’t know Question 22 In traditional economics, what is the most essential measure of growth? GDP per capita GDP GDP per worker Don’t know Question 23 Examples of government policies to increase the ratio of capital labor include: Accelerated depreciation The minimum wage The capital gains tax All of the above Don’t know Question 24 A higher savings rate will:

Increase investment funds and increase productivity Reduce investment funds and decrease productivity Have no effect on investment funds and productivity Don’t know Question 25 Examples of government policies to boost the savings rate include: 1. Tax preferences for Individual Retirement Accounts 2. Tax preferences for pension funds 3. Tax increases on retirement income All of the above 1 & 2 only Don’t know

Week 8 Quiz - Budget Deficits and Public Debt

Question 1 Classical economists argue that: Budget deficits are a necessary byproduct of an expansionary fiscal policy during recessions. Budget deficits are bad and should be avoided except in wartime.

Budget deficits are normal for any developed economy Don’t know Question 2 How is government debt calculated? The accumulated budget deficits minus the accumulated surpluses. The accumulated budget deficits plus the accumulated surpluses. The accumulated budget deficits times the accumulated surpluses. Don’t know Question 3 Who holds the national debt for a country like the United States? 1. Households 2. Businesses 3. Foreigners All of the above 1 & 2 only Question 4 In comparing the debt burden across countries, one common yardstick is: Nominal GDP Real GDP Don’t know

The Debt-to-GDP Ratio Question 5 What is the correct formula for the Real Deficit? Real Deficit = Nominal Deficit – (Inflation * Total Debt) Don’t know Real Deficit = Nominal Deficit – (Inflation * Average Annual Debt) Real Deficit = Nominal Deficit + (Inflation * Total Debt) Question 6 Assume that the nominal deficit = $200 billion, the inflation rate = 20%, and the total debt = $5 trillion. What’s the real deficit? -$800 billion Real Deficit = Nominal Deficit – (Inflation * Total Debt) = 200B - (20% * 5000B) = 200B - 1000B = -800B -$400 billion 0 Don’t know Question 7 One strategy a government can use to lower its debt burden is to: Contractionary monetary policy Decrease inflation Don’t know

Increase inflation Question 8 That part of the budget deficit that would exist even if the economy were at full employment is called the: Persistent deficit Don’t know Cyclical deficit Structural deficit Question 9 Which of the following are automatic stabilizers? Food stamps Welfare benefits Unemployment insurance All of the above Don’t know Question 10 The structural deficit results primarily from the shortfall of tax revenues that arises when the economy’s resources are underutilized such as in the downward portions of the business cycle. True Don’t know

False Question 11 Okun’s Law says that a 1% fall in the unemployment rate will lead to a: 2% increase in the GDP growth rate A 1% fall in the unemployment rate will lead to a 2% increase in GDP 2% increase in the inflation rate Don’t know 2% increase in the rate of productivity Question 12 Suppose the GDP = $10 trillion, the budget deficit = $100 billion, the unemployment rate = 7%, the natural rate of unemployment is 6%, and the marginal tax rate = 30%. Which portion of the deficit is cyclical? $60 billion unemployment rate = unemployment rate - natural rate of unemployment = 7% - 6% = 1%(GDP increase 2%) new GDP = 10000B * 2% = 200B tax revenues = new GDP * marginal tax rate = 200B * 30% = 60B(cyclical) Strucural deficit = budget deficit - cyclical deficit = 100B - 60B = 40B $20 billion Don’t know $40 billion Question 13

Suppose you are attempting to calculate the structural component of the budget deficit. In your calculations, will that structural deficit be higher or lower at a 4% natural rate of unemployment as opposed to a 6% rate? Higher Don’t know Lower The same Question 14 Three major ways to finance a budget deficit include: 1. Lower taxes 2. Borrow money 3. Print money All of the above 2 & 3 only Don’t know Question 15 Suppose the government institutes a $10 billion stimulus and finances that stimulus package by raising taxes by $10 billion. Suppose further the MPC = .5. What will be the net stimulus? $5 billion multipler = 1 / MPS = 1 / (1 - 0.5) = 2 comsumption fall = raising taxes * MPC = 10B * 0.5 = 5B net = government institutes - comsumption fall = 10B - 5B = 5B

economic expansion = net * multipler = 5B * 2 = 10B When you simultaneously increase government expenditures and increase taxes by the same amount, you get an economic expansion exactly equal to the increase in government expenditures. $20 billion $10 billion Don’t know Question 16 “Crowding out” refers to: The reduction in both G and I when interest rates rise Don’t know The reduction in G that may come when I is increased The reduction in I that may come when G is increased Question 17 The view that crowding out is almost complete so that fiscal policy is totally ineffective is associated with what school of macroeconomics? Don’t know Libertarians Keynesians Monetarists Question 18

To avoid crowding out, the Federal Reserve “accommodates” the Treasury’s expansionary fiscal policy by: Selling Treasury securities Don’t know Contracting the money supply Buying Treasury securities Question 19 What can derail the Fed’s plans when it tries to avoid crowding out by accommodating government fiscal policy? Unemployment Don’t know Inflation Rising productivity Question 20 Budget deficits can cause trade deficits if: Deficit financing raises interest rates and lowers the value of the dollar Deficit financing lowers interest rates and raises the value of the dollar Don’t know Deficit financing raises interest rates and raises the value of the dollar Question 21 The Deficit Hawks argue that:

1. Internal debt leads to higher taxes 2. Internal debt redistributes income from the poor to the rich 3. Servicing the debt cuts government services All of the above 2 & 3 only Don’t know Question 22 The Deficit Doves argue that: 1. The national debt represents productive investment in public goods and infrastructure. 2. The debt is manageable relative to GDP. 3. Since we “owe it largely to ourselves,” it is not a problem. All of the above 2 & 3 only Don’t know Question 23 A balanced budget amendment would require the government to balance the budget during a recession by increasing taxes or by cutting spending. The result would be: A faster recovery A deeper recession

No effect on growth Don’t know

Week 9 Quiz - International Trade and Protectionism

Question 1 A country that can produce a good at a lower cost than another country has what kind of advantage in the production of that good. Don’t know Absolute Comparative Relative Question 2 The theory of comparative advantage predicts that: Only the country with no absolute advantage will benefit from trade. A country with an absolute advantage over another country in all goods will benefit from trade. Don’t know A country with an absolute advantage over another country in all goods will not benefit from trade. Question 3

The age-old political problem with free trade is this: 1. Domestic industries that gain jobs and profits from increased exports will use their political power to protect their industries. 2. Domestic industries that suffer job losses from imports will use their political power to protect their industries. 3. Domestic consumers that benefit from cheaper imports may be less politically powerful than the domestic industries that suffer job losses. All of the above 2 & 3 only Question 4 A quota may be defined as: Both Don’t know A tax levied on imports. A specific numerical restriction on imports Question 5 If a tariff is imposed on imports, which of these statements will be true: 1. Consumers pay higher prices 2. Imports fall 3. Domestic producers see profits fall All of the above 1 & 2 only

Don’t know Question 6 If a tariff is replaced with a quota, which of these statements is true? Foreign producers gain and the domestic government loses Foreign producers lose and the domestic government gains Both foreign producers and the domestic government loses Don’t know Question 7 In general, which is more likely to be used as a form of protectionism because of political reasons. Tariffs Quotas Don’t know Price supports Question 8 Dumping occurs when: Don’t know Producers sell off excess inventories at bargain prices Foreign producers sell exports below the cost of production to penetrate markets.

Domestic producers sell products below the cost of production to fend off imports Question 9 Strategically, dumping makes sense if it: 1. Drives competitors out of a market and allows the dumper to seize that market. 2. Provides the dumper with monopoly power to raise prices. 3. Allows the dumper to earn long term profits that offset earlier losses. All of the above 1 & 2 only Question 10 If one country engages in protectionism or dumping, retaliation may be a legitimate response. True False Don’t know Question 11 The use of restrictions or regulations that make it difficult for countries to sell their goods in foreign markets falls under the category of: Non-tariff barriers Quotas Tariffs

Don’t know Question 12 Under the Ricardian Free Trade Model, two countries that engage in unrestricted free trade and follow the principles of comparative advantage will both experience gains from trade. True False Don’t know Question 13 If two countries engage in trade and one protects its own markets while subsidizing its exports: Only the cheating country will gain Both countries will lose Both countries will still gain Don’t know Question 14 Which of these practices are illegal under the rules of international trade? Currency manipulation Illegal export subsidies Piracy Forced technology transfer

All of the above Don’t know Question 15 It takes Germany 100 labor hours to produce an automobile and 200 labor hours to produce an airplane. In contrast, it takes Canada 300 labor hours to produce an automobile and 400 labor hours to produce an airplane. Which statement is true? Germany has an absolute advantage in both autos and airplanes Don’t know Germany has a comparative advantage in autos and Canada has a comparative advantage in airplanes. Canada has an absolute advantage in both autos and airplanes Question 16 Which statement(s) accurately summarize the principle of comparative advantage? 1. Each country will benefit if it specializes in the export of those goods that it can produce at relatively low cost. 2. Each country will benefit if it imports those goods that it produces at relatively high cost. Both 1 & 2 Don’t know Question 17 The “deadweight loss” from a tariff equals:

Gain in producer surplus minus loss in consumer surplus Loss in producer surplus minus loss in consumer surplus Loss in producer surplus plus loss in consumer surplus Don’t know Question 18 In the context of free trade, a zero sum game may be defined as a game in which: Both countries gain One trading partner gains at the expense of another Both trading partner loses Don’t know Question 19 Shielding young domestic firms from the severe competition of more mature and more efficient foreign firms to give these firms a chance to develop and become efficient producers is called the: Infant industry argument Don’t know Mercantilist argument National defense argument Question 20 U.S. Congressmen Smoot and Hawley are most infamous for helping to trigger what major economic event?

Don’t know The Bank Run of 1907 The Great Recession of the late 2000s The Great Depression of the 1930s

Week 10 Quiz - Exchange Rates, The Balance of Payments, and Trade Deficits

Question 1 The basic “Trade Identity Equation” requires that: Don’t know The current account must equal the difference between the budget deficit and the trade deficit If a country runs a trade deficit in its current account, it must balance that deficit with outflows from its capital account! If a country runs a trade deficit in its current account, it must balance that deficit with inflows into its capital account. Question 2 When all countries have purely market-determined exchange rates, official-reserve changes equal: One hundred percent Don’t know

One Zero Question 3 When countries attempt to affect their exchange rates by buying and selling foreign currencies, this is called: Retribution Compounding Intervention Don’t know Question 4 Which statement is true? Exchange rates are quoted by currency pairs and therefore are relative values. Exchange rates are quoted for each country and therefore are absolute values. Don’t know Exchange rates are quoted in dollar terms and are typically pegged Question 5 A country’s currency that gains in value relative to another is said to: Appreciate. Depreciate Be manipulated

Don’t know Question 6 Suppose the exchange rate today is 1 dollar for 1.2 euros and next year it changes to 1 dollar for 1.4 euros. Has the euro appreciated or depreciated? Depreciated Appreciated No change Don’t know Question 7 Which of the following are reasons why exchange rates may change? 1. Differing rates of GDP growth between countries. 2. Differing rates of inflation between countries. 3. Currency speculation. All of the above 1 & 2 only Question 8 If Great Britain’s GDP grows faster than Canada’s, the British pound is like to do what relative to the Canadian dollar? Depreciate Appreciate No change

Don’t know Question 9 If Thailand experiences a more rapid rise in its inflation rate than Mexico, the Thai baht will do what relative to the Mexican peso? Depreciate Appreciate No change Don’t know Question 10 The “Law of One Price” predicts that exchange rates must adjust to insure that: 1. The nominal price of an identical good produced in two different countries must be the same. 2. The real, inflation-adjusted price of an identical good produced in two different countries must be the same. Both 1 & 2 Don’t know Question 11 Suppose the U.S. Federal Reserve raises interest rates while the Bank of England takes no such action. In this case, will the British pound appreciate or depreciate relative to the U.S. dollar? Depreciate Appreciate

No change Don’t know Question 12 Suppose that a new study comes out showing that Brazilian coffee has a higher cancer risk than other countries around the world. Will the Brazilian real appreciate or depreciate relative to the euro? Depreciate Appreciate No change Don’t know Question 13 Suppose currency traders believe the Bank of Venezuela is going to soon raise interest rates to fight inflation. Will currency speculators tend to buy or sell the Venezuela’s currency, the bolivar? Buy Sell Neither Buy nor Sell Don’t know Question 14 In a fixed exchange rate system: 1. A country will allow its currency to freely move in response to market conditions.

2. A country will peg the value of its currency to the value of another. Both 1& 2 Don’t know Question 15 Which of these is an example of a fixed exchange rate system? 1. The Gold Standard 2. The Dollar Standard 3. The International Monetary Fund All of the above 1 & 2 only Don’t know Question 16 Under the gold standard, a country that ran a trade surplus would: Increase its gold reserves Decrease its gold reserves Don’t know Experience no change in its gold reserves Question 17 The gold standard collapsed in large part because: 1. Some countries like France had their currencies undervalued

2. Some countries like Britain had their currencies overvalued 3. Gold reserves around the world rose dramatically All of the above 1 & 2 only Don’t know Question 18 A country that finds its currency significantly overvalued will: 1. Find it difficult to sell its exports 2. Be overwhelmed by cheap imports. 3. See its trade deficit fall All of the above 1 & 2 only Don’t know Question 19 Just before the start of the Great Depression, President Herbert Hoover sought to stem the flow of gold overseas by doing what? Ordering the mining of more gold Cutting interest rates Don’t know Raising interest rates

Question 20 When a country devalues its currency to boost exports and reduce imports, this is called: 1. A “competitive devaluation” 2. A “beggar thy neighbor” policy 3. A fixed exchange rate system All of the above 1 & 2 only Don’t know Question 21 The Dollar Standard established at Bretton Woods, New Hampshire, USA was: 1. Was a partially fixed or adjustable peg system. 2. Replaced the gold standard with a U.S. dollar standard. 3. Designated the U.S. dollar as the world’s key currency. 4. Set fixed exchange rate parities in both gold and dollar terms. All of the above 1, 2, & 3 only Don’t Know Question 22

Under the dollar standard, if the Swiss Franc was set at 10 francs per ounce of gold and the Canadian dollar was set at $20 per ounce, what was the exchange rate between the franc and the Canadian dollar? Two Canadian dollars per one Swiss franc Two Swiss francs per one Canadian dollar Both Don’t know Question 23 A big difference between the gold standard and the dollar standard was that: Under the dollar standard, exchange rates were partially fixed and could be periodically adjusted to reflect changes in currency values. Under the gold standard, exchange rates were partially fixed and could be periodically adjusted to reflect changes in currency values. Don’t know Under the dollar standard, currencies floated once a year in the currency markets Question 24 The Dollar Standard and Bretton Woods agreement collapsed primarily because of: America’s growing trade surpluses Don’t know America’s growing budget surpluses America’s growing trade deficits

Question 25 Which president abandoned the Dollar Standard? Richard Nixon Lyndon Johnson Jimmy Carter Don’t know Dwight Eisenhower Question 26 Under a “managed float”: 1. Markets determine the currency’s value. 2. There is very little intervention. 3. A country buys or sells its currency to reduce day-to-day volatility of currency fluctuations. All of the above 1 & 2 only Don’t know Question 27 When the United States runs a budget deficit, that tends to: Decrease its trade deficit Increase its trade deficit Have no impact on its trade deficit

Don’t know Question 28 Suppose the GDP of the United States falls because of a recession. What is likely to happen to European exports to the U.S. and European GDP growth? European exports rise and GDP falls. European exports and GDP rises European exports and GDP fall Don't know European exports fall and GDP rises Question 29 Suppose that America wants to reduce its trade deficit with Japan. Which would be an example of a cooperative policy between the two countries to achieve that goal? Don’t know The U.S. raises the value of its currency relative to the Japanese yen The U.S. imposes a new tariff on Japanese imports Japan engages in increased fiscal stimulus Question 30 Suppose the European Central Bank decides to raise interest rates to fight inflation and neither the U.S. Federal Reserve or Canada’s Central bank respond with matching rate hikes? What is likely to happen to the trade balance of Europe relative to the U.S. and Canada? Europe’s exports and imports will fall

Europe’s exports will fall and its imports rise Don’t know Europe’s exports will rise and it imports fall Question 31 Exchange rates tend to: Fall towards an asymptotic value Rise and fall over time. Tend to remain constant Don’t know

Week 11 Quiz - The Economics of Developing Countries

Question 1 Developing countries typically do NOT have: Low levels of literacy Poor health Low per capita incomes Don’t know High life expectancies Question 2

The Four Elements in Development include: 1. Human Resources 2. Natural Resources 3. Capital Formation All of the above 1 & 2 only Don’t know Question 3 Developing countries often cannot escape poverty because: GDP grows slower than population GDP grows faster than population Income grows faster than population Don’t know Question 4 As income rises in a country, the birth rate tends to: Fall Rise Stay the same Don’t know Question 5

In the developing countries, the marginal benefits of another child born: Are relatively large Are relatively small Are the same as in developed countries Don’t know Question 6 The marginal cost of children is much greater in developed countries because of the high costs of things like: 1. Food and healthcare 2. Daycare 3. Education All of the above 1 & 2 only Question 7 Pension and health care programs tend to: Don’t know Have no impact on the birth rate Decrease the birth rate Increase the birth rate Question 8 As labor becomes more skilled, it can:

1. Use capital more effectively 2. Adopt new technologies 3. Take more sick days All of the above 1 & 2 only Question 9 For developing countries: The emphasis on manufacturing versus farming will depend on the endowment of a country’s natural resources It is always better to emphasis farming over manufacturing Don’t know It is always better to emphasis manufacturing over farming Question 10 Methods to increase productivity in a developing country’s agriculture sector include: 1. Appropriate conservation 2. The use of fertilizers 3. Proper tillage All of the above 1 & 2 only Don’t know

Question 11 Oil and mineral wealth in a country provides: 1. A solid base of industrial expansion 2. An endowment subject to plunder and rent seeking by corrupt leaders and military cliques. 3. A guaranteed road to prosperity for a developing country All of the above 1 & 2 only Don’t know Question 12 When a small handful of the wealthy in a country own a large percentage of the land: Don’t know Political and social unrest is likely to decrease Farm productivity is likely to rise Farm productivity is likely to fall Question 13 A key constraint on the ability of poor agrarian countries to develop is: A low savings rate A high savings rate Don’t know

A high investment rate Question 14 In Max Weber’s theory of development, a key element for success was: The “Protestant ethic” as a driving force behind capitalism. Don’t know Powerful oligarchies A temperate climate Question 15 A Market Economy is NOT characterized by: Don’t know The promotion of small business High tariffs An outward orientation in trade policy Question 16 With a policy of “import substitution,” a country: Don’t know Develops foreign markets and keeps trade barriers low Builds high tariff walls around manufacturing industries so that local firms can produce and sell goods that would otherwise be imported. Minimizes interference with capital flows and allows supply and demand to operate in financial markets.

Question 17 An “open economy”: 1. Avoids a state monopoly on exports and imports. 2. Keeps government regulation to bare necessities for an orderly market economy. 3. Relies primarily on a private market system of profits and losses to guide production, rather than the commands of a government planning system. All of the above 1 & 2 only Don’t know Question 18 Which policy is NOT included in our list of nine policies to best promote growth in developing countries? Don’t know Stimulating population growth Encouraging foreign direct investment Opening economies to international trade Establishing the rule of law Question 19 Which policy is NOT included in your list of nine policies to best promote growth in developing countries? Don’t know

Establishing independent central banks. Building human capital. Establishing realistic exchange-rate policies. Nationalizing private industries. Question 20 Industrialized nations that open their markets to developing countries: 1. Help lift developing countries out of poverty 2. Run the risk of having their own workers compete against people willing to work for a dollar or less a day Both 1 & 2 Don’t know Question 21 When a developing countries runs up a heavy debt to other nations, monies that would otherwise go to investment in the country have to be used for servicing these debts. True False Don’t know Question 22 The “Brain Drain” refers to a phenomenon in which:

1. Many of the best and brightest workers in developing countries go to the industrialized nations temporarily to get an education but wind up staying permanently to work. 2. There is a deterioration in the overall skill level and productivity of the developing countries labor forces because of the loss of its best and brightest workers. Both 1 & 2 Don’t know Question 23 When industrialized nations sell weapons to developing countries, the result often is the diversion of precious public expenditures from infrastructure and education in the developing countries. False True Don’t know