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Introduction of Macroeconomics
1.
d. average
13. The concept of opportunity cost:
a. would be irrelevant if we eliminated poverty.
b. suggests a major increase in public health-care spending means an expansion in other areas will be harder
to achieve.
c. is relevant only for a capitalist economy like the United States.
d. suggests all our wants can be achieved.
14. Opportunity cost is
a. the cost incurred in the past before we make a decision about what to do in the future.
b. a cost that cannot be avoided, regardless of what is done in the future.
c. that which we forgo, or give up, when we make a choice or a decision.
d. the additional benefit of buying an additional unit of a product.
15. A graph showing all the combinations of goods and services that can be produced if all of society's resources are
used efficiently is a:
a. capital consumption frontier.
b. circular-flow diagram.
c. Lorenz curve.
d. production possibility curve.
16. Periods of less than full employment correspond to:
a. either points inside or outside the production possibility curve.
b. points inside the production possibility curve.
c. points outside the production possibility curve.
d. points on the production possibility curve.
17. The circular flow of goods and incomes shows the relationship between:
a. income and money.
b. goods and services.
c. wages and salaries.
d. firms and households.
18. In a free market system, the amount of goods and services that any one household gets depends upon its:
a. income.
b. wage and interest income.
c. income and wealth.
d. wealth.
19. In a planned or command economy, all the economic decisions are taken by the:
a. workers.
b. government.
c. voters.
d. consumers.
20. Which one of the following is a normative statement?
a. Inequality in the distribution of income is a more serious problem than unemployment.
b. Inflation is rising.
c. The proportion of people's income paid in taxes is higher under this government than under the previous
one.
d. The richest 10 per cent of the population has had a bigger percentage increase in incomes over the past 10
years than the poorest 10 per cent.
the functioning of individual industries and the behaviour of individual decision-making units - business
firms and households.
b. the economy as a whole.
c. only the long run adjustments to equilibrium in the economy.
d. imperfectly competitive markets.
22. The diagram that shows the income received and payments made by each sector of the economy is the:
a. circular flow diagram.
b. income-price diagram.
c. income-expenditures diagram.
d. aggregate demand-aggregate supply diagram.
23. Macroeconomic theory that emphasised the theories of Keynes and de-emphasised the classical theory developed as the
result of the failure of:
a. the economy to grow at a rapid rate during the 1950s.
b. economic theory to explain the simultaneous increases in inflation and unemployment during the 1970s.
c. fine tuning during the 1960s.
d. the classical model to explain the prolonged existence of high unemployment during the Great Depression.
24. The percentage of the labour force that is unemployed is the:
a. labour force rate.
b. unemployment population ratio.
c. unemployment rate.
d. employment rate.
25. The index used most often to measure inflation is the:
a. GDP deflator.
b. consumer price index.
c. wholesale price index.(WPI).
d. producer price index (PPI).
26. An index of prices of all domestically produced goods in the economy is the:
a. consumer price index (CPI).
b. wholesale price index (WPI).
c. producer price index (PPI).
d. GDP deflator.
27. It has become conventional to classify a recession as a period where national output falls for ______ or more.
a. a year
b. three years
c. six months
d. two years
28. The length of a business cycle would be measured from:
a. peak to trough.
b. the slump to the expansion.
c. trough to peak.
d. peak to peak.
29. Indicate below what is NOT a main macroeconomic goal.
a. Achieving a sustainable rate of economic growth.
b. Increasing North Sea oil production.
c. Reducing unemployment.
d. Reducing inflation.
30. Aggregate demand includes only:
a. consumer expenditure, investment, government expenditure, and exports less imports.
b. consumer expenditure, government expenditure and investment.
c. consumer expenditure and investment.
d. consumer debt, investment debt and government debt.
31. Total withdrawals from the circular flow of income include:
a. savings, taxes and imports.
b. savings, government expenditure and imports.
c. consumption, savings and taxes.
d. savings, taxes and exports.
32. Total injections are made up of:
a. savings + government expenditure + exports
b. Investment + government expenditure + exports
c. investment + government expenditure + imports
d. investment + tax + exports
33. Equilibrium in the circular flow of income occurs when:
a. Injections = withdrawals
b. Injections < withdrawals
c. There is a Bank Holiday.
d. Injections > withdrawals
34. There are three ways to measure GDP.
a. True
b. False
35. Real GDP is nominal GDP measured in constant:
a. prices.
b. interest rates.
c. taxes.
36. The underground economy consists of:
a. the water distribution system.
b. part of the rail network.
c. legal transactions.
d. legal transactions not declared for tax and illegal activities.
37. Purchasing power parity exchange rates are used to:
a. pay wages by multinational companies.
b. estimate the costs of economic growth.
c. convert nominal GDP to real GDP.
d. compare living standards of different countries.
38. Two of the major factors contributing to growth are:
a. money and luck.
b. resources and efficiency.
c. resources and a good climate.
d. money and efficiency.
39. According to the classical economists, the only gainers from growth would be:
a. peasants.
b. politicians.
c. landlords.
d. the army.
40. Aggregate supply is the total amount:
a. of goods and services produced in an economy.
b. produced by the government.
c. of products produced by a given industry.
d. of labour supplied by all households.
MCROECONOMISC ISSUES & ANALYSIS
41. The percentage of the labour force that is unemployed is the:
a. unemployment population ratio.
b. unemployment rate.
c. labour force rate.
d. employment rate.
42. The labour force can be defined as:
a. anyone who is working, or actively seeking work.
b. the population between school-leaving age and retirement age.
c. those of working age who are seeking work and are available to for work at current wage rates.
d. those who could claim benefit if they were to become unemployed.
43. Since 1998 the UK government has defined unemployment using:
a. the ILO/OECD standardised unemployment measurement.
b. a labour force survey.
c. the percentage of the labour force not in work.
d. the number out of work and claiming benefit.
44. An individual who is not working and who has given up looking for work is classified as:
a. unemployable.
b. a discouraged worker.
c. unemployed.
d. hard core unemployed.
45. Classifying discouraged workers as unemployed would:
a. not change the unemployment rate.
b. increase the unemployment rate.
c. have an indeterminate impact on the unemployment rate.
d. decrease the unemployment rate.
59. If interest rates rise, then costs are likely to ______ and demand is likely to ______.
a. fall; rise
b. fall; fall
c. rise; rise
d. rise; fall
60. If VAT rates rise, then costs are likely to ______ and demand is likely to ______.
a. rise; rise
b. fall; fall
c. rise; fall
d. fall; rise
61. An economy that trades with and has financial dealings with other countries is called a/an ______ economy.
a. open
b. free-trade
c. mixed
d. autarkic
62. The record of a country's imports and exports of goods is called its:
a. balance of payments on current account.
b. visible trade balance.
c. balance of payments.
d. balance of trade.
63. The record of a country's imports and exports of goods and services is called its:
a. balance of payments on current account.
b. visible trade balance.
c. balance of payments.
d. balance of trade.
64. The record of a country's imports and exports of goods and services plus net investment incomes and current transfers of
money to and from abroad, is called its:
a. visible trade balance.
b. balance of trade.
c. balance of payments on current account.
d. balance of payments.
65. The record of a country's transfers of shareholdings, property and bank deposits to and from abroad is called its:
a. capital account of the balance of payments.
b. financial account of the balance of payments.
c. balance of payments.
d. balance of payments on current account.
66. The record of a country's transfers of land, inter-government payments and money sent by migrants to and from abroad is
called its:
a. capital account of the balance of payments.
b. balance of payments on current account.
c. financial account of the balance of payments.
d. balance of payments.
67. The situation when a country imports more than it exports is:
a. a recession.
b. a trade deficit.
c. an expansion.
d. a trade surplus.
68. The price of one country's currency in terms of another country's currency is the:
a. exchange rate.
b. balance of trade.
c. terms of trade.
d. currency validation.
69. If the exchange rate between the UK and Japan changes from 1 = 100 yen to 1 = 150 yen, then, ceteris paribus, the
price of UK goods in Japan:
a. will decrease.
b. will increase.
c. could either increase or decrease.
d. will remain the same.
70. If a nation's interest rates are relatively low compared to those of other countries, then the exchange value of its currency
will tend to:
a. depreciate.
b. not be affected.
c. appreciate.
d. fluctuate more than if interest rates were high.
71. If the UK receives larger than expected revenues from exports, then the exchange value of its currency will tend to:
a. depreciate.
b. appreciate.
c. fluctuate more than if exports were lower.
d. not be affected.
72. If the UK takes part in a war in the Middle East, then the exchange value of its currency will tend to:
a. depreciate.
b. not be affected.
c. appreciate.
d. fluctuate more than if it were at peace.
73. If currency dealers expect the value of the pound to fall, then the exchange value will tend to:
a. not be affected.
b. appreciate.
c. depreciate.
d. fluctuate more than it would do otherwise.
74. If UK incomes rise faster than those in most other countries, then the exchange value will tend to:
a. depreciate.
b. fluctuate more than it would do otherwise.
c. not be affected.
d. appreciate.
75. If the US economy is forecast to come out of recession because military expenditure has increased, then the exchange
value of the UK pound will tend to:
a. fluctuate more than it would do otherwise.
b. depreciate.
c. appreciate.
d. not be affected.
76. If a large car importer in the UK wants to import many cars, then the exchange value of the UK pound will tend to:
a. appreciate.
b. depreciate.
c. fluctuate more than it would do otherwise.
d. not be affected.
77. If the economy is in the expansionary phase of the business cycle, aggregate demand ______, unemployment ______,
inflation ______ and the current account of the balance of payments is likely to move towards ______.
a. rises; falls; rises; deficit
b. falls; rises; falls; surplus
c. is static; low; rises; deficit
d. falls; falls; falls; surplus
78. If the economy is at the peak of the business cycle, aggregate demand ______, unemployment ______, inflation _______
and the current account of the balance of payments is likely to move towards ______.
a. is static; low; rises; deficit
b. falls; rises; falls; surplus
c. rises; falls; rises; deficit
d. falls; falls; falls; surplus
79. If the economy is in the recessionary phase of the business cycle, aggregate demand ______, unemployment ______,
inflation ______ and the current account of the balance of payments is likely to move towards ______.
a. falls; rises; falls; surplus
b. is static; low; rises; deficit
c. falls; falls; falls; surplus
d. rises; falls; rises; deficit
80. If the economy is in the trough phase of the business cycle, aggregate demand ______, unemployment ______, inflation
______ and the current account of the balance of payments is likely to move towards ______.
a. falls; falls; falls; surplus
b. falls; rises; falls; surplus
c. is static; low; rises; deficit
d. rises; falls; rises; deficit
c. Keynesians.
d. classical economists.
83. According to the classical economists, the economy:
a. requires fine tuning to reach full employment.
b. will never be at full employment.
c. can never deviate from full employment.
d. is self correcting.
84. According to classical models, the level of employment is determined primarily by:
a. interest rates.
b. the level of aggregate demand for goods and services.
c. prices and wages.
d. the quantity of money.
85. Keynesian economics became popular because it was able to explain:
a. demand-pull inflation in the 1960s.
b. stagflation in the late 1970s.
c. low growth rates in the 1950s.
d. the prolonged existence of high unemployment during the Great Depression.
86. According to Keynes, the level of employment is determined by:
a. the behaviour of trade unions.
b. price and wages.
c. the level of aggregate demand for goods and services.
d. the quantity of money.
87. The government increases government spending to try to reduce unemployment. This is an example of:
a. automatic stablisers.
b. fine tuning.
c. laissez-faire.
d. monetary policy.
88. The notion that the government can stabilise the macroeconomy is known as:
a. the classical model.
b. monetarism.
c. fine tuning.
d. microeconomic foundations of macroeconomics.
89. Rapid increases in the price level during periods of recession or high unemployment are known as:
a. inflation.
b. stagflation.
c. stagnation.
d. slump.
90. The hypothesis that people know the 'true model' of the economy and that they use this model to form their expectations
of the future is the:
a. rational-expectations hypothesis.
b. lagged-expectations hypothesis.
c. adaptive-expectations hypothesis.
d. passive-expectations hypothesis.
91. The rational-expectations hypothesis suggests that the forecasts that people make concerning future inflation rates:
a. consistently overestimate the actual rate of inflation in the future.
b. are always correct.
c. are correct on average, but are subject to errors that are distributed randomly.
d. consistently underestimate the actual rate of inflation in the future.
92. People are said to have rational expectations if they:
a. assume that this year's inflation rate will be the same as last year's inflation rate.
b. use all available information in forming their expectations.
c. merely guess at the inflation rate.
d. assume that this year's inflation rate will be equal to the average inflation rate over the past 10 years.
93. The persistence of a phenomenon such as unemployment, even when its causes have been removed, is called:
a. the fallacy of composition.
b. hysteresis.
c. negative entropy.
d. ceteris paribus.
94. The quantity theory of money implies that a given percentage change in the money supply will cause:
a. a larger percentage change in nominal GDP.
b. an equal percentage change in nominal GDP.
c. a smaller percentage change in nominal GDP.
d. an equal percentage change in real GDP.
95. If the demand for money depends on the interest rate, the velocity of circulation is:
a. not constant and the quantity theory of money does not hold.
b. not constant and the quantity theory of money does hold.
Macroeconomics Equilibrium
101. The total quantity of goods and services produced (or supplied) in an economy in a given period is:
a. aggregate demand.
b. aggregate expenditure.
c. aggregate output.
d. aggregate investment.
102. A variable whose value is determined by the model of which it is a part is termed:
a. endogenouse.
b. independent.
c. constant.
d. exogenous.
103. In the equation C = a + bY, which describes the aggregate consumption function, 'b' stands for?
a. The amount of income when consumption is zero.
b. The average consumption level.
c. The marginal propensity to consume.
d. The amount of consumption when income is zero.
104. The fraction of a change in income that is consumed or spent is called:
a. the average propensity to consume.
b. the marginal propensity to save.
c. the marginal propensity of expenditure.
105. Disposable income is the part of households' income left after the deduction of:
a. income tax.
b. contractual payments such as pensions and mortgages.
c. taxes and the addition of benefits.
d. income tax and social security payments.
106. Keynes suggested that decisions to consume and save were based on:
a. relative income.
b. absolute income.
c. previous decisions.
d. permanent income.
107. The marginal propensity to save (MPS) is:
a. the ratio of saving to income.
b. the ratio of income to saving.
c.
d.
132. If the quantity of money demanded exceeds the quantity of money supplied, then the interest rate will:
a. rise.
b. fall.
c. remain constant.
d. change in an uncertain direction.
133. When economists speak of the 'demand for money', which of the following questions are they asking?
a. How much cash do you wish you could have?
b. How much income would you like to earn?
c. How much wealth would you like?
d. What proportion of your financial assets do you want to hold in non-interest bearing forms?
134. Which of the following events will lead to an increase in the demand for money?
a. An increase in the supply of money.
b. A decrease in the price level.
c. An increase in the level of aggregate output.
d. An increase in the interest rate.
135. Which of the following events will lead to a decrease in the equilibrium interest rate?
a. An increase in the level of aggregate output.
b. A decrease in the price level.
c. A sale of government securities by the central bank
d. An increase in the discount rate.
136. The main reason that people hold money - 'to buy things' - is referred to as the:
a. speculation motive.
b. profit motive.
c. transactions motive.
137. The motive for holding money that encourages investors to hold bonds when interest rates are low, with the hope of
selling them when interest rates are high, is the:
a. precautionary motive.
b. speculation motive.
c. profit motive.
d. transactions motive.
138. The opportunity cost of holding money is determined by:
a. the inflation rate.
b. the level of aggregate output.
c. the interest rate.
d. the discount rate.
139. The demand for money represents the idea that there is:
a. a positive relationship between the interest rate and the quantity of money demanded.
b. a negative relationship between the level of aggregate output and the quantity of money demanded.
c. a negative relationship between the interest rate and the quantity of money demanded.
d. a negative relationship between the price level and the quantity of money demanded.
140. In terms of the demand for money, the interest rate represents:
a. the return on money that is saved for the future.
b. the rate at which current consumption can be exchanged for future consumption.
c. the opportunity cost of holding money.
d. the price of borrowing money.
aggregate output increases, the demand for money increases, the interest rate increases, planned investment
decreases, and aggregate output falls.
b. money demand increases, the interest rate decreases, planned investment increases, aggregate output
increases, and money demand increases.
c. money supply increases, the interest rate increases, planned investment increases, aggregate output
increases, and money demand increases.
d. money supply increases, the interest rate decreases, planned investment increases, aggregate output
increases, and money demand increases.
142. The equilibrium level of aggregate output is determined in:
a. the money and labour markets.
b. the money market.
c. the goods and labour markets.
143. The interest rate is determined in:
a. the money and labour markets.
c. GDP increases.
d. GDP decreases slightly.
167. Time lags which often erode effectiveness of monetary and fiscal policy measures represent:
a. the foreign response to price changes.
b. the change in export and import prices.
c. the change in exchange rates.
d. delays in the response of the economy to stabilisation policy.
168. The implementation lag for monetary policy is generally:
a. unrelated to central bank action.
b. much longer than it is for fiscal policy.
c. much shorter than it is for fiscal policy.
d. the same as it is for fiscal policy.
169. The response lag of stabilisation policy represents:
a. the time that is necessary to put the desired policy into effect.
b. the time that it takes for policy makers to recognise the existence of a boom or bust.
c. the time that it takes for the economy to adjust to the new conditions after a new policy has been
implemented.
170. The parable of 'Riding a Switchback' suggests that stabilizing policy:
a. is effective.
b. is desirable.
c. is not sufficiently stimulating or contracting the economy at any time.
d. is stimulating or contracting the economy at the wrong times.
171. The multiple by which total deposits can increase for every pound increase in reserves is the:
a. bank's line of credit.
b. money multiplier.
c. liquidity ratio.
d. required reserve ratio.
172. As the required reserve ratio is decreased, the money multiplier:
a. increases.
b. decreases.
c. remains the same, as long as banks hold no excess reserves.
d. could either increase or decrease.
173. Following the work of _________________ in the 1960s, and the controversy associated with these views in the 1970s,
there was a revival of interest by economists and government in monetary policy.
a. Margaret Thatcher
b. Ronald Reagan
c. Milton Friedman
d. John Maynard Keynes
174. The idea that the money supply should change to accommodate changes in aggregate demand is associated with the
ideas of:
a. John Maynard Keynes.
b. Ronald Reagan.
c. Margaret Thatcher.
d. Milton Friedman.
175. Goodhart's Law suggests that:
a. bad money drives out good.
b. controlling one part of the money supply will merely result in that item becoming less important.
c. monetary policy can only be effective if it is a long-term policy.
d. the money supply must only expand at the rate of growth of real national income.
176. By 'financial crowding out' economists mean:
a. government borrowing drives up interest rates.
b. Bank of England controls on commercial bank lending.
c. credit rationing.
d. what the government borrows cannot be used for private investment.
177. If the Bank of England wished to pursue a 'tight' monetary policy it would:
a. sell government securities on the open market.
b. lower interest rates.
c. reduce the minimum reserve asset ratio.
d. buy government securities on the open market.
178. If the Bank of England wished to pursue an expansionary monetary policy it would:
a. sell government securities on the open market.
b. buy government securities on the open market.
c. raise interest rates.
d. increase the minimum reserve asset ratio.
179. Over-funding is when the Bank of England:
a. sells less government bonds than are required to finance the PSBR.
b. sells more government bonds than are required to finance the PSBR.
c. buys government securities on the open market.
d. sells government securities on the open market.
180. By 'controlling the monetary base' economists mean:
a. not allowing commercial banks to issue notes and coins.
b. controlling the money multiplier.
c. making banks keep a certain % of their assets as M0.
d. restricting the amount of cash in circulation.
181. The record of a country's transactions in goods, services, and assets with the rest of the world is its:
a. balance of payments.
b. balance of trade.
c. current account.
d. capital account.
182. The difference between a country's merchandise exports and its merchandise imports is the:
a. capital account.
b. current account.
c. balance of trade.
d. balance of payments.
183. The balance of payments is divided into two major accounts, the:
a. current account and the reserve account.
b. trade account and the capital account.
c. current account and the trade account.
d. current account and the capital account.
184. Which of the following statements is correct?
a. If the current account is in deficit, then the capital account must also be in deficit.
b. The overall sum of all the entries in the balance of payments must be positive.
c. The overall sum of all the entries in the balance of payments must be zero.
d. If the current account is in surplus, then the capital account must also be in surplus.
185. Which of the following statements is TRUE?
a. A country runs a capital account deficit if it imports more than it exports.
b. If the current account is in surplus, the capital account must be in deficit.
c. A country runs a current account surplus if it sells more of its assets abroad than it buys abroad.
d. The overall sum of all the entries in the balance of payments must be positive.
186. The difference between the balance on current account and the balance on capital account is the:
a. trade deficit.
b. balance of trade.
c. statistical discrepancy.
d. balance of payments.
187. The price of one country's currency in terms of another country's currency is the:
a. balance of trade.
b. terms of trade.
c. exchange rate.
d. currency valuation.
188. All currencies other than the domestic currency of a given country are referred to as:
a. reserve currencies.
b. hard currency.
c. foreign exchange.
d. near monies.
189. The agreements that were reached at the Bretton Woods conference in 1944 established a system:
a. in which the values of currencies were fixed in terms of a specific number of ounces of gold, which in turn
determined their values in international trading.
b. of essentially fixed exchange rates under which each country agreed to intervene in the foreign exchange
market when necessary to maintain the agreed-upon value of its currency.
c. of floating exchange rates determined by the supply and demand of one nation's currency relative to the
currency of other nations.
d. that prohibited governments from intervening in the foreign exchange markets.
190. In 1971, most countries:
a. adopted a single, internationally accepted currency whose use is limited to international transactions.
b. returned to the gold standard.
c. adopted a new system of fixed exchange rates.
d.
gave up trying to fix exchange rates formally and began allowing them to be determined essentially by
supply and demand.
191. Exchange rates that are determined by the unregulated forces of supply and demand are:
a. fixed exchange rates.
b. floating exchange rates.
c. pegged exchange rates.
d. managed exchange rates.
192. If the Bank of England reduces the money supply to reduce inflation, a floating exchange rate will aid the Bank of
England in fighting inflation because:
a. as the money supply is decreased, the interest rate will increase, and the price of UK exports will rise and
the price of UK imports will fall.
b. as the money supply is decreased, the interest rate will increase, and the price of UK exports will fall and
the price of UK imports will rise.
c. as the money supply is decreased, the interest rate will increase, and the price of both UK exports and UK
imports will rise.
d. as the money supply is decreased, the interest rate will increase, and the price of UK exports and UK
imports will fall.
193. Expansionary monetary policy:
a. usually has no effect on a currency's exchange value.
b. tends to lead to an appreciation of a nation's currency.
c. tends to lead to a depreciation of the currencies of other nations.
194. A fiscal expansion in the UK:
a. tends to appreciate the pound sterling.
b. does not affect the price of the pound sterling.
c. tends to depreciate the pound sterling.
d. has no predictable effect on the price of the pound sterling.
195. The fall in value of one currency relative to another is:
a. a floating of the currency.
b. a strengthening of a currency.
c. a depreciation of a currency.
d. an appreciation of a currency.
196. The rise in value of one currency relative to another is:
a. a depreciation of the currency.
b. an appreciation of the currency.
c. a weakening of the currency.
d. a debasement of the currency.
197. The theory of international exchange that holds that exchange rates adjust to offset differences in countries' inflation
rates is the:
a. J-curve theory.
b. trade feedback theory.
c. purchasing-power-parity theory.
d. price feedback theory.
198. Under a system of floating exchange rates, there is a general tendency for:
a. the currencies of relatively high-inflation countries to appreciate.
b. the currencies of relatively low-inflation countries to depreciate.
c. the currencies of relatively high-inflation countries to depreciate.
d. exchange rates to be insensitive to the differential rates of inflation between countries.
199. If a nation's interest rates are relatively low compared to those of other countries, then the exchange value of its currency
will tend to:
a. appreciate under a system of floating exchange rates.
b. appreciate under a system of fixed exchange rates.
c. depreciate under a system of floating exchange rates.
d. depreciate under a system of fixed exchange rates.
200. The J-curve effect refers to the observation that:
a. GDP usually decreases before it increases after a currency depreciation.
b. the trade balance usually gets better before it gets worse after a currency appreciation.
c. GDP usually decreases before it increases after a currency appreciation.
d. the trade balance usually gets worse before it improves after a currency depreciation.
ANSWER
Introduction of Macroeconomics
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government.
20. Which one of the following is a normative statement?
Inequality in the distribution of income is a more serious problem than
National Income Accounting
21. Macroeconomics is the branch of economics that deals with:
the economy as a whole.
22. The diagram that shows the income received and payments made by each sector of the economy is the:
circular flow diagram.
23. Macroeconomic theory that emphasised the theories of Keynes and de-emphasised the classical theory developed as the
result of the failure of:
the classical model to explain the prolonged existence of high unemployment during the Great Depression.
24. The percentage of the labour force that is unemployed is the:
unemployment rate.
25. The index used most often to measure inflation is the:
consumer price index.
26. An index of prices of all domestically produced goods in the economy is the:
GDP deflator.
27. It has become conventional to classify a recession as a period where national output falls for ______ or more.
six months
28. The length of a business cycle would be measured from:
peak to peak.
29. Indicate below what is NOT a main macroeconomic goal.
Increasing North Sea oil production.
30. Aggregate demand includes only:
consumer expenditure, investment, government expenditure, and exports less imports.
31. Total withdrawals from the circular flow of income include:
savings, taxes and imports
32. Total injections are made up of:
Investment + government expenditure + exports (Total injections (J) = investment (I) + government
expenditure (G) + exports (X))
33. Equilibrium in the circular flow of income occurs when:
Injections < withdrawals
34. There are three ways to measure GDP.
True
35. Real GDP is nominal GDP measured in constant:
prices.
36. The underground economy consists of:
legal transactions not declared for tax and illegal activities.
37. Purchasing power parity exchange rates are used to:
compare living standards of different countries.
38. Two of the major factors contributing to growth are:
resources and efficiency.
39. According to the classical economists, the only gainers from growth would be:
landlords.
40. Aggregate supply is the total amount:
of goods and services produced in an economy.
Macroeconomics Issues & Analysis
41. The percentage of the labour force that is unemployed is the:
unemployment rate.
42. The labour force can be defined as:
those of working age who are seeking work and are available to for work at current wage rates.
43. Since 1998 the UK government has defined unemployment using:
the ILO/OECD standardized unemployment measurement.
44. An individual who is not working and who has given up looking for work is classified as:
a discouraged worker.
45. Classifying discouraged workers as unemployed would:
increase the unemployment rate.
46. Cyclical unemployment is the:
unemployment that occurs during recessions and depressions.
47. Aggregate demand is the total demand for all goods and services in an economy from:
all sectors of the economy including the rest of the world.
48. Aggregate supply is the total amount:
of goods and services produced in an economy.
49. Unemployment resulting from real wages being above their equilibrium level is called ______ unemployment.
disequilibrium
50. Unemployment resulting from imperfect information in the labour market is called ______ unemployment.
frictional
51. Unemployment resulting from changes in the pattern of demand or supply in the economy is called ______
unemployment.
structural
52. The demand for ice-cream is lower outside of summer causing lower demand for ice-cream salesmen. If they cannot find
other work, this is called ____________ unemployment
seasonal
53. The natural rate of unemployment is generally thought of as the:
sum of frictional unemployment and structural unemployment.
54. As prices rise, people will want to keep more money as cash and in bank accounts. This is called:
real balance effect.
55. As prices rise, there will be costs of constantly changing price-tags and reprinting price-lists. This is called:
menu costs of inflation.
56. Government policies that focus on increasing production rather than demand are called:
supply-side policies.
57. Government policies that focus on changing taxes and government spending are called:
fiscal policies.
58. Government policies that focus on changing interest rates are called:
monetary policies.
59. If interest rates rise, then costs are likely to ______ and demand is likely to ______.
rise; fall
60. If VAT rates rise, then costs are likely to ______ and demand is likely to ______.
rise; fall
61. An economy that trades with and has financial dealings with other countries is called a/an ______ economy.
open
62. The visible trade balance.
balance of payments.
63. The record of a country's imports and exports of goods and services is called its:
balance of trade.
64. The record of a country's imports and exports of goods and services plus net investment incomes and current transfers of
money to and from abroad, is called its:
balance of payments on current account.
65. The record of a country's transfers of shareholdings, property and bank deposits to and from abroad is called its:
financial account of the balance of payments.
66. The record of a country's transfers of land, inter-government payments and money sent by migrants to and from abroad is
called its:
capital account of the balance of payments.
67. The situation when a country imports more than it exports is:
a trade deficit.
68. The price of one country's currency in terms of another country's currency is the:
exchange rate.
69. If the exchange rate between the UK and Japan changes from 1 = 100 yen to 1 = 150 yen, then, ceteris paribus, the
price of UK goods in Japan:
will increase.
70. If a nation's interest rates are relatively low compared to those of other countries, then the exchange value of its currency
will tend to:
depreciate.
71. If the UK receives larger than expected revenues from exports, then the exchange value of its currency will tend to:
appreciate.
72. If the UK takes part in a war in the Middle East, then the exchange value of its currency will tend to:
depreciate.
73. If currency dealers expect the value of the pound to fall, then the exchange value will tend to:
depreciate.
74. If UK incomes rise faster than those in most other countries, then the exchange value will tend to:
depreciate.
75. If the US economy is forecast to come out of recession because military expenditure has increased, then the exchange
value of the UK pound will tend to:
appreciate.
76. If a large car importer in the UK wants to import many cars, then the exchange value of the UK pound will tend to:
depreciate.
77. If the economy is in the expansionary phase of the business cycle, aggregate demand ______, unemployment ______,
inflation ______ and the current account of the balance of payments is likely to move towards ______.
rises; falls; rises; deficit
78. If the economy is at the peak of the business cycle, aggregate demand ______, unemployment ______, inflation _______
and the current account of the balance of payments is likely to move towards ______.
is static; low; rises; deficit
79. If the economy is in the recessionary phase of the business cycle, aggregate demand ______, unemployment ______,
inflation ______ and the current account of the balance of payments is likely to move towards ______.
falls; rises; falls; surplus
80. If the economy is in the trough phase of the business cycle, aggregate demand ______, unemployment ______, inflation
______ and the current account of the balance of payments is likely to move towards ______.
falls; falls; falls; surplus
The Roots of Modern Macroeconomics
81. Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded are:
sticky prices.
82. The economists who emphasised wage-flexibility as a solution for unemployment were:
classical economists.
83. According to the classical economists, the economy:
is self correcting.
84. According to classical models, the level of employment is determined primarily by:
prices and wages.
85. Keynesian economics became popular because it was able to explain:
the prolonged existence of high unemployment during the Great Depression.
86. According to Keynes, the level of employment is determined by:
the level of aggregate demand for goods and services.
87. The government increases government spending to try to reduce unemployment. This is an example of:
fine tuning.
88. The notion that the government can stabilize the macroeconomics is known as:
fine tuning.
89. Rapid increases in the price level during periods of recession or high unemployment are known as:
stagflation.
90. The hypothesis that people know the 'true model' of the economy and that they use this model to form their expectations
of the future is the:
rational-expectations hypothesis.
91. The rational-expectations hypothesis suggests that the forecasts that people make concerning future inflation rates:
are correct on average, but are subject to errors that are distributed randomly.
92. People are said to have rational expectations if they:
use all available information in forming their expectations.
93. The persistence of a phenomenon such as unemployment, even when its causes have been removed, is called:
hysteresis.
94. The quantity theory of money implies that a given percentage change in the money supply will cause:
an equal percentage change in nominal GDP.
95. If the demand for money depends on the interest rate, the velocity of circulation is:
not constant and the quantity theory of money does not hold.
96. It is difficult to determine if the velocity of money is constant over time because:
whether velocity is constant or not may depend on how the money supply is measured.
97. New classical theories were an attempt to explain:
the stagflation of the 1970s.
98. The key question regarding the new classical macroeconomics is how realistic is the assumption:
Of rational expectations.
99. A group of modern economists who believe that markets clear very rapidly and that expanding the money supply will
always increase prices rather than employment are the:
New classical school
100. A group of modern economists who believe that institutional factors and confidence strongly influence business
behaviour and that expanding demand will usually increase output rather than prices are the:
Post-Keynesians.
Macroeconomics Equilibrium
101. The total quantity of goods and services produced (or supplied) in an economy in a given period is:
aggregate output.
102. A variable whose value is determined by the model of which it is a part is termed:
endogenouse.
103. In the equation C = a + bY, which describes the aggregate consumption function, 'b' stands for?
The marginal propensity to consume.
104. The fraction of a change in income that is consumed or spent is called:
the marginal propensity to consume.
105. Disposable income is the part of households' income left after the deduction of:
taxes and the addition of benefits.
106. Keynes suggested that decisions to consume and save were based on:
absolute income.
107. The marginal propensity to save (MPS) is:
the fraction of a change in income that is saved.
108. As the MPS increases, the multiplier will:
decrease.
109. The proportion of an increase in national income paid in tax is:
the marginal tax propensity.
110. The marginal propensity to withdraw is:
MPS + MPT + MPM
111. In macroeconomics, equilibrium is defined as that point at which:
planned aggregate expenditure equals aggregate output.
112. The ratio of the change in the equilibrium level of output to a change in some autonomous variable is the:
multiplier.
113. Assuming there is no government or foreign sector, if the MPC is .8, the multiplier is:
5.0
114. Assuming there is no government or foreign sector, the formula for the multiplier is:
1/(1 + MPC)
115. Assuming there is no government or foreign sector, if the multiplier is 2.5, the MPC is:
0.6
116. Assume there is no government or foreign sector. If the MPC is .75, a 20 million decrease in planned investment will
cause aggregate output to decrease by:
80 million.
117. According to the 'paradox of thrift,' increased efforts to save will cause:
a decrease in income and an overall decrease in saving.
118. If injections are less than withdrawals at the full-employment level of national income, there is:
a deflationary gap.
119. The accelerator theory of investment says that induced investment is determined by:
the rate of change of national income.
120. In which phase of the business cycle do firms try to cut stocks in order to save costs?
The recession.
Money & Interest Rate
121. Government securities with terms of more than one year are called:
government bonds.
122. Money is:
anything that is generally accepted as a medium of exchange.
123. An item designated as money that is intrinsically worthless is:
a. fiat money.
124. Money that a government has required to be accepted in settlement of debts is:
legal tender.
125. Which of the following is included in broad money, but not included in narrow money?
Savings accounts.
126. A checking deposit in a bank is considered __________ of that bank.
a liability
127. Which of the following activities is one of the responsibilities of the Bank of England to the banking system?
Assisting banks that are in a difficult financial position.
128. The difference between a bank's actual reserves and its required reserves is its:
excess reserves.
129. As the required reserve ratio is decreased, the money multiplier:
increases.
130. A bank has excess reserves to lend but is unable to find anyone to borrow the money. This will __________ the size of
the money multiplier.
reduce
131. Assume that commercial banks are holding excess reserves because business firms and consumers are not willing to
borrow money. A decrease in the discount rate is likely to:
not change the money supply because banks already have excess reserves they cannot lend
132. If the quantity of money demanded exceeds the quantity of money supplied, then the interest rate will:
rise.
133. When economists speak of the 'demand for money', which of the following questions are they asking?
What proportion of your financial assets do you want to hold in non-interest bearing forms?
134. Which of the following events will lead to an increase in the demand for money?
An increase in the level of aggregate output.
135. Which of the following events will lead to a decrease in the equilibrium interest rate?
A decrease in the price level.
136. The main reason that people hold money - 'to buy things' - is referred to as the:
transactions motive.
137. The motive for holding money that encourages investors to hold bonds when interest rates are low, with the hope of
selling them when interest rates are high, is the:
speculation motive.
138. The opportunity cost of holding money is determined by:
the interest rate.
139. The demand for money represents the idea that there is:
a negative relationship between the interest rate and the quantity of money demanded.
140. In terms of the demand for money, the interest rate represents:
the opportunity cost of holding money.
The Relationship between the Money and Goods Markets
141. The chain of events that results from an expansionary monetary policy is:
money demand increases, the interest rate decreases, planned investment increases, aggregate output
increases, and money demand increases.
142. The equilibrium level of aggregate output is determined in:
the goods markets.
143. The interest rate is determined in:
the money market.
144. An increase in the money supply aimed at increasing aggregate output is referred to as:
expansionary monetary policy.
145. An example of an expansionary monetary policy is:
the Central bank buying government securities in the open market.
146. The interest rate:
is determined in the money market and influences the level of planned investment and thus the goods
market.
147. If the investment demand curve is vertical:
monetary policy is ineffective, but fiscal policy is effective.
148. For the Central bank to keep the interest rate unchanged as the government increases spending, the Central Bank must
continue to:
increase the money supply.
149. If the Central bank tries to keep the interest rate constant when the economy is operating on the steep part of the AS
curve, ________ will occur.
a hyperinflation
150. According to the 'simple' Keynesian view, the aggregate supply curve is:
horizontal until it reaches full capacity and then becomes vertical.
151. The idea that government spending causes a reduction in private investment is called:
crowding-out.
152. The way in which government spending is supposed to reduce investment is by increasing:
interest rates.
153. If the central bank increases the money supply at the same time as the government increases spending, it is suggested
that investment will:
not be reduced as much as it would have been.
154. If planned investment becomes more sensitive to interest rate changes, the crowding-out effect will:
be increased.
155. Each point on the IS curve represents the equilibrium point in the:
goods market for the given interest rate.
156. The curve that illustrates the negative relationship between the equilibrium values of aggregate output and the interest
rate in the goods market is the:
IS curve.
157. The curve that illustrates the positive relationship between the equilibrium values of aggregate output and the interest
rate in the money market is the:
LM curve.
158. When the money supply increases:
the LM curve shifts to the right.
159. Each point on the LM curve represents the equilibrium point in the:
money market for different combinations of interest rates and output.
160. Keynesians and monetarists differ over how steep the IS and LM curves actually are. Monetarists claim that the IS curve
must be ___________ and the LM curve must be ____________.
flat; steep
Fiscal & Moneytary Policy
161. Fiscal policy refers to:
the spending and taxing policies used by the government to influence the economy.
162. Net taxes are:
taxes paid by firms and households to the government minus the transfer payments made to firms and
households.
163. Automatic stabilisers act to__________ government expenditures and __________ government revenues during
recessions.
increase; decrease
164. Automatic stabilisers act to __________ government expenditures and __________ government revenues during an
expansionary period.
decrease; increase
165. The negative effect on the economy that occurs when average tax rates increase because taxpayers have moved into
higher income brackets during an expansion is:
fiscal drag.
166. The budget deficit tends to decrease when:
GDP increases.
167. Time lags which often erode effectiveness of monetary and fiscal policy measures represent:
delays in the response of the economy to stabilisation policy.
168. The implementation lag for monetary policy is generally:
much shorter than it is for fiscal policy.
169. The response lag of stabilisation policy represents:
the time that it takes for the economy to adjust to the new conditions after a new policy has been
implemented.
170. The parable of 'Riding a Switchback' suggests that stabilizing policy:
is stimulating or contracting the economy at the wrong times.
171. The multiple by which total deposits can increase for every pound increase in reserves is the:
money multiplier.
172. As the required reserve ratio is decreased, the money multiplier:
increases.
173. Following the work of _________________ in the 1960s, and the controversy associated with these views in the 1970s,
there was a revival of interest by economists and government in monetary policy.
a. Milton Friedman
174. The idea that the money supply should change to accommodate changes in aggregate demand is associated with the
ideas of:
John Maynard Keynes.
175. Goodhart's Law suggests that:
controlling one part of the money supply will merely result in that item becoming less important.
176. By 'financial crowding out' economists mean:
government borrowing drives up interest rates.
177. If the Bank of England wished to pursue a 'tight' monetary policy it would:
sell government securities on the open market.
178. If the Bank of England wished to pursue an expansionary monetary policy it would:
buy government securities on the open market.
179. Over-funding is when the Bank of England:
sells more government bonds than are required to finance the PSBR.
180. By 'controlling the monetary base' economists mean:
making banks keep a certain % of their assets as M0.
The Balance of Payments & Exchange Rates
181. The record of a country's transactions in goods, services, and assets with the rest of the world is its:
balance of payments.
182. The difference between a country's merchandise exports and its merchandise imports is the:
balance of trade.
183. The balance of payments is divided into two major accounts, the:
current account and the capital account.
184. Which of the following statements is correct?
The overall sum of all the entries in the balance of payments must be zero.