1.

Reserve Money (M0): It is also known as High-Powered Money, monetary base,

base money etc.
M0 = Currency in Circulation + Bankers’ Deposits with RBI + Other deposits
with RBI
It is the monetary base of economy.
2. Narrow Money (M1):
M1 = Currency with public + Demand deposits with the Banking system (current
account, saving account) + Other deposits with RBI
3. M2 = M1 + Savings deposits of post office savings banks
4. Broad Money (M3)
M3 = M1 + Time deposits with the banking system
5. M4 = M3 + All deposits with post office savings banks

The liquidity means how fast an instrument can be converted into cash. The liquidity of
these measures are in order M1>M2>M3>M4 i.e. M1 is most liquid and M4 is least
liquid.

What Is the Rule of 70

The rule of 70 is a means of estimating the number of years it takes for an investment or
your money to double. The rule of 70 is a calculation to determine how many years it'll
take for your money to double given a specified rate of return. The rule is commonly used
to compare investments with different annual compound interest rates to quickly
determine how long it would take for an investment to grow. The rule of 70 is also
referred to as doubling time.

The Formula for the Rule of 70 Is

Number of years to double=70/Annual rate of return

How to Calculate the Rule of 70

1. Obtain the annual rate of return or growth rate on the investment or variable.
2. Divide 70 by the annual rate of growth or yield.

Rule of 70 Examples

1. If a country’s GDP is growing at 5% per year, how many years will it take for its GDP
to double? *
5
7
14
28
32
 2. If Maria’s retirement account is doubling roughly every 11 years, what is the
approximate growth rate? *
2.4%
4.8%
6.4%
12.2%
14.8%
3. Suppose Country A and Country B start out with the same GDP. If Country A’s GDP
begins doubling every 5 years and Country B’s GDP begins doubling every 10 years, how
much larger is Country A’s GDP after 30 years? *
2 times larger
4 times larger
6 times larger
8 times larger
Cannot be determined
The Rule of 70

70 / % growth = doubling time

70 / doubling time = % growth

For example, if you hear that the population of your town is growing by 2% per year, that
means it will double in just 35 years! (70/2=35

FIAT ‫وہ کاغذی نوٹ جو کسی سرکار کی جانب سے زر قانونی کے طور پر جاری کیے‬
MONEY ‫گئے ہوں لیکن انھیں سکے میں نہ بدلہ جاسکتا ہو ۔‬

Fiat money or fiat currency is any money that the government declares as legal tender.
Also, this type of money is not backed by a physical commodity such as gold or silver. In
other words, fiat money has no intrinsic value. Market forces determine the value of
fiat money. E.g paper money and much coinage

The diamond-water paradox is the observation that
those things that have the greatest
value in use often have little value
in exchange and those things that
have little value in use often have
the greatest value in exchange.
When an economist talks about utility, she is talking
about
A util is an artificial construct used as a means of
measuring the
Total utility is defined as the
Marginal utility is defined as the
Suppose Will receives 150 utils from consuming one
banana and 250 utils from consuming two bananas.
What is the marginal utility of the second banana?
Suppose you are eating slices of pizza and after
consuming the first slice you receive 14 utils of total
utility, after the second you receive 22 utils of total
utility, and after the third 25 utils of total utility.
Then
Suppose you are eating buffalo wings at a local
happy hour. The total utils from doing so after the
fourth, fifth, sixth, and seventh wings are 30, 50, 65,
72, respectively. In this situation we have
__________ marginal utility, which is generally
__________ in the analysis of consumer choice.
The law of diminishing marginal utility can be stated
as follows
Suppose you just finished your third plateful of
Thanksgiving dinner and it yielded zero units of
additional satisfaction. Should you go back for
more?
Suppose the marginal utility (MU) of paperback
books is 40 utils and each costs $5 while the MU of
DVD rentals is 20 utils and each rents for $4. If you
consume one movie and one book per week, are you
attaining consumer equilibrium?
Suppose for a consumer the marginal utility (MU) of
bread is 20 utils and the MU of milk is 10 utils; the
the satisfaction that results from
the consumption of a good
satisfaction one receives from the
consumption of a good
sum of the amounts of satisfaction
a person receives from consuming
a good
change in total utility a person
derives from the consumption of a
good divided by the change in the
quantity of the good consumed
100 utils
your total utility is 25 utils, and
the marginal utility of the third
slice is 3 utils
diminishing; assumed
B). As the amount of a good
consumed increases, the
additional satisfaction gained
from consuming additional units
tends to decrease
and
D). As the amount of a good
consumed increases, the sum of
satisfaction received tends to
increase but at a diminishing rate
No way. You could get negative
utility from the fourth plateful
No. You need to buy more books
and rent fewer DVDs
more utility per dollar is gained
from consuming milk than bread
price of bread is $3 and the price of milk is $1.
Given this,
If a person is receiving greater marginal utility per not maximizing utility
dollar from consuming one good than another, it
follows that he or she is
In order for an individual to achieve consumer MUA/PA = MUB/PB
equilibrium through the consumption of two goods,
A and B, that individual must fulfill the condition
A consumer is in equilibrium if he or she derives the marginal utility per dollar spent
same on each good consumed
Suppose a consumer is purchasing Coke and pretzels increase; decrease; increase
in quantities such that she is achieving consumer
equilibrium. Then the price of Coke decreases. The
consumer will likely __________ her consumption
of Coke and the marginal utility of Coke will
__________ while the total utility from Coke will
__________.
Joe is currently in consumer equilibrium by decrease; increase; increase;
consuming cheese and crackers, such that the last decrease
cracker consumed yielded 8 utils and the last piece
of cheese consumed yielded 12 utils. Assume the
price of crackers is two cents per cracker and the
price of cheese is three cents per piece. If the price
of crackers increases to four cents, Joe should
__________ his consumption of crackers and his
marginal utility from crackers will __________ and
also __________ his consumption of cheese and his
marginal utility from cheese will __________.
To an economist, utility refers to the satisfaction that results from the
consumption of a good

(Handout) Practice Multiple Choice for

Demand and Supply
Which of the following is likely to result in a D. An increase in taxes on the
movement along the demand curve for iPhones? production of all mobile phones.

A. A rise in the price of other mobile phones.

B. A television advertising campaign for iPhones
C. A fall in people's incomes.
D. An increase in taxes on the production of all
mobile phones.
What would cause the supply curve for carrots to C. The price of farmland falls.
shift to the right?
A. The price of carrots rises.
B. The consumption of carrot bread rises.
C. The price of farmland falls.
D. The price of farm machinery rises.
Which one of the following would be most likely to B. An increase in public transport
cause the demand curve for motor cycles to shift to prices.
the right?

A. A fall in the price of motor cycles.

B. An increase in public transport prices.
C. A rise in the cost of motor insurance.
D. A rise in petrol prices.
Other things being equal, people will consume fewer C. the general price level falls.
inferior goods when

A. incomes fall.
B. income tax rates rise.
C. the general price level falls.
D. the unemployment rate increases.
A hurricane affects the production of sugar in many C. Rises Moves along the
of the main sugar producing areas in the USA and curve to the left
Central America. How would this be shown on a
demand and supply diagram?

Price of sugar Demand for sugar

A. Falls Moves along the
curve to the right
B. Falls The curve shifts to
the right
C. Rises Moves along the
curve to the left
D. Rises The curve shifts
to the left
"The price of a good can fall at the same time as A. true, because a shift in demand
demand increases" this statement is will alter price.
B. true, because some goods are inferior goods.
C. false, because a change in price will alter demand.
D. false, because it contradicts the law of demand.
Which of the following factors would cause the price D. An increase in the cost of
of oranges to rise without a shift in the demand harvesting oranges.
curve?

A. An increase in the popularity of oranges.

A fall in the price of agricultural land.
C. An increase in the real incomes of consumers.
D. An increase in the cost of harvesting oranges.
In the diagram below, 0 is a demand curve. A. $8 to $6
(screen shot question 8)

For which of the following price changes is the

coefficient of demand elasticity the greatest?

A. $8 to $6
B. $6 to $4
C. $4 to $2
D. They are all the same value.
Supply of a product will tend to be more inelastic A. average costs of production
when rise quickly as price changes.

A. average costs of production rise quickly as price

changes.
B. there are few substitutes for the product.
C. the product is a necessity.
D. there is a long time to change the supply.
The diagram below shows the market for beef. B. I and II only
(screen shot question 10)

The shift from S1 to S2 could have been caused by

I. a fall in the cost of raw materials.
II. an increase in government subsidies.
III. an increase in real income levels of consumers.

A. I only
B. I and II only
C. II and III only
D. I, II and Ill
In the diagram below, S1, S2 and S3 are supply D. all three curves is equal.
curves.
(screen shot question 11)

The elasticity of supply of

A. S1 is greater then S2.
B. S2 is greater than S1.
C. S3 is less than S1.
D. all three curves is equal.
Which of the following events would be most likely D. A fall in consumer incomes.
to shift the demand curve for a normal good to the
left?

A. A rise in the price of the good.

B. A rise in the cost of factors of production.
C. A fall in the price of a complementary good.
D. A fall in consumer incomes.
The market equilibrium for a good changes so that B. I and II only
both price and quantity are decreased. This can cause

I. a fall in income
II. an increase in the price of a complement.
III. an increase in production costs.

A. I only
B. I and II only
C. II and III only
D. I, II, and III
14. Refer to the following table. D. 1.25

Price Quantity Supplied

($) (Thousands)
15 9
20 10
25 12
30 15

The above table shows the supply schedule for a

good. The value of its supply elasticity, when price
rises from $25 to $30 is

A. 0.5
B. 0.8
C. 1.0
D. 1.25
As a result of the price of apples falling from 50 C. +0. 5
cents per kilo to 40 cents per kilo, the quantity of
oranges demanded falls from 80 kilos a day to 72
kilos a day. The cross elasticity of demand between
apples and oranges is

A. - 2
B. - 0.5
C. +0. 5
D. +2
If the demand for tourists to visit the Riesenrad is A. increase the amount of revenue
price inelastic, then a policy of increasing the generated by the ride.
entrance price would

A. increase the amount of revenue generated by the

ride.
B. increase demand for the ride.
C. increase the consumer surplus currently enjoyed
by the tourists.
D. increase the demand for people working at the
ticket office.
In the diagram below: D. I, II, and III
(screen shot question 17.)

If the quantity demanded is 5 units, then:

I. marginal revenue is equal to 0.
II. price elasticity of demand is equal to 1.
III. total revenue is maximised.

A. I only
B. I and II only
C. II and Ill only
D. I, II, and III
In the above diagram, the price of magazines B. An increase in production
changes fro P1 to P2 . Which of the following is the costs.
most likely cause?
(screen shot question 18)

A. A fall in demand.
B. An increase in production costs.
C. A fall in incomes.
D. An increase in magazine advertising.
A person's income rises from $50,000 per year to C. income elastic
$60,000 per year. As a result, her spending on
holidays rises from $3000 to $4500 per year. Her
income elasticity of demand for holidays is:

A. income inelastic
B.unit elastic
C. income elastic
D. positively cross elastic
The cross elasticity of demand for good X with A. goods X and Y are substitutes.
respect to good Y is +0.2. The cross elasticity
of/demand for good Y with respect to good X is
+1.5. This indicates that

A. goods X and Y are substitutes.

B. good X is a closer complement to Y than Y is to
X.
C. good X is more of a necessity than good Y.
D. a mistake has been made in the calculation, as
both cross elasticities should be equal.
Any straight line supply curve passing through the C. 1
origin has a price elasticity of supply of

A. 0
B. 0.5
C. 1
D. infinity
A consumer receives an increase in disposable B. 0.75
income from $20,000 per annum to $24,000 per
annum. As a result, the expenditure of the consumer
on foodstuffs increases from $6,000
per annum to $6,900 per annum. The consumer has
an income elasticity of demand for food of

A. 0.30
B. 0.75
C. 1.00
D.1.33
The diagram below shows a supply curve. D. inelastic
(screen shot question 23)

The elasticity of supply at point X is:

A infinity
B elastic
C. 1
D. inelastic
A positive value of cross elasticity of demand C. substitutes for each other
between two goods implies that they are

A. complements to each other. B. both inferior

goods.
C. substitutes for each other.
D. unrelated to each other.
The diagrams show a demand curve (price/quantity) A. an inferior good.
and an Engel curve (income/quantity) for the same
good.
(screen shot question 25)

The diagram suggests that this good is

A. an inferior good.
B. a luxury good.
C. a merit good.
D. a status symbol.
The demand for product A will rise as a result of a C. A and B 'are complements'.
fall in the price of product B when

A. A and B are substitutes.

B. the demand for Y is price inelastic.
C. A and B 'are complements'.
D. B is an inferior good.
The income elasticity of demand for Good X is 0.5. A. $500 to $550
If there is an increase in income from $50, 000 to
$60,000, then expenditure on good X will rise from

A. $500 to $550
B. $500 to $600
C. $500 to $1,000.
D. $500 to $5, 500.
The market demand equation for Good X is given by B. 23

00 = 950 - 30p and the supply equation is Os = 30 +

1 Op, where Oo is quantity demanded and Os is
quantity supplied, and p is the price of X in cents.

What is the equilibrium price for the good in cents?

A. 20
B. 23
C. 26
D. 30
The demand for a product with respect to a change C. it has few substitutes.
in its price will tend to be inelastic if

A. its price is high in relation to income.

B. it is a luxury good.
C. it has few substitutes.
D. it is not a necessity.
The elasticity of supply for a good will be more C. it is difficult for new firms to
inelastic if enter the industry.

A. there is a lot of spare capacity in the industry.

B. there is a lot of time available for change.
C. it is difficult for new firms to enter the industry.
D. average costs of production stay constant as the
industry grows.
Elasticity of Supply
Suppose the price of a good rises from $10 to -1/5; -1/3; use the midpoint method
$20 and quantity demanded falls from 500
to 400. If you calculate the elasticity of demand
WITHOUT using the midpoint method, the
answer would be _____. If you calculate the
elasticity of demand WITH the midpoint method,
the answer would be _____. Economists say
_____ when calculating elasticity.
On October 1, 2009, the Nintendo Wii's Japanese 0.7; inelastic
price dropped from ¥25,000 to
¥20,000. In the three months after the price drop,
Japanese sales of the Wii were approximately
1,040,000. Twelve months earlier, over the same
interval at the high price, sales totaled 890,000.
Using the midpoint method, what is the absolute
value of the price elasticity of demand of a Wii
console? Is it an elastic or inelastic good?
(Figure: Slave Redemption) Refer to the figure. 1,100; 100
Assume the graph illustrates the Sudanese slave
trade. When slave redeemers enter the market,
the total number of freed slaves is ________ and
the net number of freed slaves is ________.
A new per unit tax on yacht production decreases They will fall. (elastic demand = total
the supply of yachts. If yachts are elastically revenue fall with decrease in supply)
demanded, what will happen to total revenues
from yacht production?
The manager of a company notices that the inelastic
company's total revenue would increase if she
raised the price of the company's product.
Accordingly, the manager can assert that the
demand for the company's product is:
If the demand for a good is estimated to be 2.5 (elastic)
_____, then firms producing the good will
experience an increase in total revenue ^ if
prices fall v.
When the demand curve for a good is unit 0 percent.
elastic, raising the price of the good by 25
percent will change the revenue of the firm by:
Which one of the following products would tend crude oil
to have inelastic demand?
If the price of Good Y falls from $10 to $8, and 0.82
the quantity demanded of it rises from 1,000
units to 1,200 units, the price elasticity of
demand expressed in absolute value is:
If the demand for currently illegal recreational Not many more people would become
drugs is highly inelastic and these drugs became drug users.
legal, prices would fall. An economist would
expect which of the following to happen in
response to the lower price?
The elasticity of demand for a good is -0.75. A 4 3 percent decrease in quantity
percent increase in price will cause a: demanded.
Because of aging requirements it takes many It would become more elastic.
years to make good Scotch. If a technology were
invented that made it possible to create good
Scotch literally overnight, how would the short-
run supply of good Scotch change?
A new per unit subsidy for almond production in They will fall.
the United States increases the world supply of
almonds. If almonds are inelastically
demanded, what will happen to total revenues
from almond production?
If the price of Good Y falls from $10 to $8, and 2.25
the quantity supplied of it falls from 1,000 units
to 600 units, the price elasticity of supply is:
Good X and Good Y are related goods. When the -2
price of Good X rises by 20 percent, the quantity
demanded for Good Y falls by 40 percent. What (Change in demand/change in price:
is the cross-price elasticity? -40/20=-2)
Refer to the figure. If price falls from $60 to $40, up by $120; elastic
total revenue goes ________, so demand is
________.
Refer to the figure. If price decreases from $20 increase by $1,500, so the demand
to $10, total revenue will: curve is elastic.
The price of good X increases from $55 to $60, demand curve for good X is more
and quantity demanded decreases from 500 to elastic than the demand curve for
400. The price of good Y increases from $55 to good Y.
$60, and quantity demanded decreases from 500
to 475. Given this information, the:
Istanbul's Dolmabaçe Palace, built near the end It is not perfectly inelastic, but close
of the Ottoman Empire, rests on a to it.
former garden that was created in the eighteenth
century at great expense by filling in a bay. What
does the Dolmabaçe
Palace teach us about the elasticity of supply of
land?
Tonya consumes 40 steaks a year when her 1
yearly income is $40,000. After her income falls
to $35,000 a year, she consumes only 35 steaks a
year. Calculate her income elasticity of demand
for steaks
Assume that demand increases by 1 percent, the 0.5
absolute value of price elasticity of demand is
1.0, and price elasticity of supply is 1.0. What is (1%/1.0+1.0)
the percentage price change in this case?
The table lists the characteristics of three goods. Z; Y
Good ________ is the most inelastic, and Good
________ is the most elastic.
If the price elasticity of demand for a product is a 1.67 percent rise in price
2 in absolute value, and the price elasticity of
supply for the same product is 1, what is the (5%/2+1)
predicted percent change in price from a 5
percent fall in the supply?
The case for drilling oil in ANWR is price of oil is higher.
strengthened when the:
If both the supply of and the demand for a good a large change in quantity.
are highly elastic, a shift of either curve will
always result in
(Figure: Slave Redemption and Elasticity) Refer 400
to the figure. Assume the graph illustrates the
Sudanese slave trade. How many slaves are freed
after the redemption program?
The price of cigars is $10, with a quantity 1.22
demanded of 1,000 per day. If the price increases
to $12, the quantity demanded declines to 800
per day. What is the absolute value of elasticity
of demand?
If the price of cocoa rises by 20 percent, the 0.2
quantity supplied of cocoa rises by 4 percent.
What is the elasticity of supply? (% change in supply/% change in
price) 4/20 = 0.2
If the supply of rental housing increases causing demand for apartments is unit elastic.
its price to fall and apartment dwellers move into
bigger apartments that cost the same as their
old ones, we can infer that the:
Refer to the figure. Assume the graph illustrates the price of slaves to remain
the Sudanese slave trade. If the supply curve is unchanged.
perfectly elastic as it is in the graph, a rise in the
demand for slaves (from D1 to D2) causes:
The elasticity of demand for oil is -0.5 and the It increases by 14 percent.
elasticity of supply is 0.20. If the demand for oil
increases 10 percent, what happens to the price (10%/.5+.20 = 14.28)
of oil?
A 4 percent increase in the price of beer will inelastic
cause a 1 percent decline in the quantity of beer
demanded. The demand for beer is: (-1%/4 = -.25)
< 1 is inelastic
If the price elasticity of demand for a product is a rise in price of 0.5 percent
1 in absolute value, and the price elasticity of
supply of the same product is 1, what is the
predicted percent change in price from a 1
percent increase in demand?
Farmers can produce more milk at lower cost, inelastic
but Americans want to drink only so much milk.
This suggests that the demand curve for milk is:
When the supply curve in the Sudanese slave inelastic; one less slave
trade is perfectly ________, every slave bought
by the redeemers results in/is ________ held in
captivity.
If the price elasticity of supply is 0.75, then when falls by 7.5 percent.
the price of Good Y falls by 10 percent, the
quantity supplied of Good Y:
(.75/-10 x 100 = -7.5)
Which of the following statements about the When the supply curve is perfectly
price elasticity of supply in the Sudanese slave inelastic, every slave bought by the
trade is correct? redeemers is one fewer slave held in
captivity.
A new per unit subsidy for hybrid car production They will rise.
increases the supply of hybrid cars. If hybrid cars
are elastically demanded, what will happen to (Elastic demand: lower price = higher
total revenues from hybrid car production? revenue)
Elasticity of demand = % change in Q/% change in $P
Price ceilings that are artificially low are a shortage
likely to create
Price floors that are artificially high are likely a surplus
to create
The difference between the total surplus prior to dead weight loss
rent control and the total surplus after rent
control is known as the-
Where does demand come from in the labor Employers
market?
Where does the supply come from in labor Individual workers
markets?
If minimum wage is increased from $7.25 an People who were retired or chose to
hour to $9 an hour, what will happen to the labor stay home may decide to reenter the
market? labor market
People who were working part time
will work full time
a student will get a part time job
if minimum wage is increased from 7.25 to 9 an there will be some job loss
hour, what will happen to the job market?
if the equilibrium price for hamburgers is it decreases
3.75,and the government imposes a $1 tax, what
happens to the demand?
If the government set a price floor for corn at $8 consumers
per 100,000 bushels, but the equilibrium price is
$5 per 100,000 bushels, who will pay for the 1.6
million surplus?
1. Gross domestic product is officially measured b. market value of all final goods and
 by adding together the
2. Which of the following items is included in
the calculation of GDP?
3. Which of the following expenditures would
not be included in GDP?
4. Gross domestic product (GDP) includes
5. GDP includes
6. The largest component of GDP is
7. The circular flow of economic activity is a
model of the
8. All final goods and services that make up GDP c. GDP = C + I + G + (X - M).
can be expressed as
9. The expenditure approach for the calculation c. consumption, gross private
of GDP includes spending on
10. Which of the following is a shortcoming of
GDP?
11. National income (NI) is calculated by
adjusting GDP for
12. Which of the following is included in
personal income but not in national income?
13. Which national income account should be
examined to discover trends in the after-tax
income that people have to save and spend?
14. The equation for determining real GDP for
year X is
15. The most broadly based price index is the
16. Which of the following would be counted as a. a piece of glass bought this year by
a final good for inclusion in GDP?
17. Based on the circular flow model, money
flows from households to businesses in
services produced within the borders
of a nation.
e. None of the answers above would
be included
b. purchase of a silver cup previously
sold new in 1950
d. only final goods and services.
c. the cleanup expenses associated
with pollution.
a. personal consumption
expenditures.
a. flow of goods, resources,
payments, and expenditures between
the sectors of the economy.
domestic investment, government
spending for goods and services, and
net exports.
c. GDP excludes nonmarket
transactions.
a. depreciation.
d. Social Security payments
d. disposable personal income (DI)
c. nominal GDP for year X x 100.
GDP chain price index for year X
d. GDP chain price index.
a consumer to fix a broken window
b. product markets.

Blanchard Chapter 5

1) The IS curve represents D) the combinations of output and the

A) the single level of output where the goods market is in interest rate where the goods market
equilibrium. is in equilibrium.
B) the single level of output where financial markets are
in equilibrium.
C) the combinations of output and the interest rate where
the money market is in equilibrium.
D) the combinations of output and the interest rate where
the goods market is in equilibrium.
E) none of the above
2) The IS curve will shift to the right when which of the B) an increase in government
following occurs? spending
A) an increase in the money supply
B) an increase in government spending
C) a reduction in the interest rate
D) all of the above
E) none of the above
3) Which of the following occurs as the economy moves A) an increase in the interest rate
leftward along a given IS curve? causes investment spending to
A) an increase in the interest rate causes investment decrease
spending to decrease
B) an increase in the interest rate causes money demand
to increase
C) an increase in the interest rate causes a reduction in
the money supply
D) a reduction in government spending causes a
reduction in demand for goods
E) an increase in taxes causes a reduction in demand for
goods
4) For each interest rate, the LM curve illustrates the C) money supply equals money
level of output where demand.
A) the goods market is in equilibrium.
B) inventory investment equals zero.
C) money supply equals money demand.
D) all of the above
E) none of the above
5) The LM curve shifts down (or, equivalently, to the E) none of the above
right) when which of the following occurs?
A) an increase in taxes
B) an increase in output
C) an open market sale of bonds by the central bank
D) an increase in consumer confidence
E) none of the above
6) Which of the following statements is consistent with a E) an increase in output causes an
given (i.e., fixed) LM curve? increase in money demand
A) a reduction in the interest rate causes investment
spending to increase
B) a reduction in the interest rate causes money demand
to decrease
C) a reduction in the interest rate causes an increase in
the money supply
D) an increase in output causes an increase in demand for
goods
E) an increase in output causes an increase in money
demand
7) Suppose the economy is currently operating on both E) all of the above
the LM curve and the IS curve. Which of the following is
true for this economy?
A) Production equals demand.
B) The quantity supplied of bonds equals the quantity
demanded of bonds.
C) The money supply equals money demand.
D) Financial markets are in equilibrium.
E) all of the above
8) Suppose the economy is operating on the LM curve B) the money market and bond
but not on the IS curve. Given this information, we know markets are in equilibrium and the
that goods market is not in equilibrium.
A) the goods market is in equilibrium and the money
market is not in equilibrium.
B) the money market and bond markets are in
equilibrium and the goods market is not in equilibrium.
C) the money market and goods market are in
equilibrium and the bond market is not in equilibrium.
D) the money, bond and goods markets are all in
equilibrium.
E) neither the money, bond, nor goods markets are in
equilibrium.
9) Suppose the current level of output and the interest E) all of the above
rate are such that the economy is operating on neither the
IS nor LM curve. Which of the following is true for this
economy?
A) production does not equal demand.
B) the money supply does not equal money demand.
C) the quantity supplied of bonds does not equal the
quantity demanded of bonds.
D) financial markets are not in equilibrium.
E) all of the above
10) During 2008 in the United States, consumer D) the IS curve will shift leftward.
confidence fell significantly. Which of the following will
occur as a result of this reduction in consumer
confidence?
A) the LM curve will shift up.
B) the LM curve will shift down.
C) the IS curve will shift rightward.
D) the IS curve will shift leftward.
E) the IS curve will shift rightward, and the LM curve
will shift up.
11) Suppose policy makers decide to reduce taxes. This B) the IS curve shifts and the
fiscal policy action will cause which of the following to economy moves along the LM curve.
occur?
A) the LM curve shifts and the economy moves along the
IS curve.
B) the IS curve shifts and the economy moves along the
LM curve.
C) both the IS and LM curves shift.
D) neither the IS nor the LM curve shifts.
E) output will change causing a change in money
demand and a shift of the LM curve.
12) In late 2007 and early 2008, the U.S. Federal Reserve A) the LM curve shifts down.
pursued expansionary monetary policy. Which of the
following will occur as a result of this monetary policy
action?
A) the LM curve shifts down.
B) the LM curve shifts up.
C) the IS curve shifts rightward as the interest rate falls.
D) the IS curve shifts leftward as the interest rate
increases.
E) none of the above
13) Suppose fiscal policy makers implement a policy to D) investment spending may increase,
reduce the size of a budget deficit. Based on the IS-LM decrease, or not change.
model, we know with certainty that the following will
occur as a result of this fiscal policy action.
A) investment spending will decrease.
B) investment spending will increase.
C) there will be no change in investment spending.
D) investment spending may increase, decrease, or not
change.
E) none of the above
14) For this question, assume that investment spending B) will cause investment to increase.
depends only on the interest rate and no longer depends
on output. Given this information, a reduction in
government spending
A) will cause investment to decrease.
B) will cause investment to increase.
C) may cause investment to increase or to decrease.
D) will have no effect on output.
E) will cause a reduction in output and have no effect on
the interest rate.
15) Suppose investment spending is NOT very sensitive B) the IS curve should be relatively
to the interest rate. Given this information, we steep.
know that
A) the IS curve should be relatively flat.
B) the IS curve should be relatively steep.
C) the LM curve should be relatively flat.
D) the LM curve should be relatively steep.
E) neither the IS nor the LM curve will be affected.
16) Suppose the demand for money is NOT very D) the LM curve should be relatively
sensitive to the interest rate. Given this information, we steep.
know that
A) the IS curve should be relatively flat.
B) the IS curve should be relatively steep.
C) the LM curve should be relatively flat.
D) the LM curve should be relatively steep.
E) neither the IS nor the LM curve will be affected
17) Which of the following is the definition for the real A) the stock of money measured in
supply of money? terms of goods, not dollars.
A) the stock of money measured in terms of goods, not
dollars.
B) the stock of high powered money only.
C) the real value of currency in circulation only.
D) the actual quantity of money, rather than the officially
reported quantity.
E) the ratio of the real GDP to the nominal money
supply.
18) An increase in the money supply will cause an D) all of the above
increase in which of the following variables?
A) output
B) investment
C) consumption
D) all of the above
E) none of the above
19) Suppose there is an increase in consumer confidence. E) consumption, output and the
Which of the following represents the complete list of interest rate
variables that must increase in response to this increase
in consumer confidence?
A) consumption
B) consumption and investment
C) consumption, investment and output
D) consumption and output
E) consumption, output and the interest rate
20) Suppose there is a fiscal contraction. Which of the C) consumption and output
following is a complete list of the variables that must
decrease?
A) consumption
B) consumption and investment
C) consumption and output
D) consumption, output and the interest rate
E) consumption, output and investment
21) Suppose there is a simultaneous fiscal expansion and A) output will increase.
monetary expansion. We know with certainty that
A) output will increase.
B) output will decrease.
C) the interest rate will increase.
D) the interest rate will decrease.
E) both output and the interest rate will increase.
22) Suppose there is a simultaneous fiscal expansion and C) the interest rate will increase.
monetary contraction. We know with certainty that
A) output will increase.
B) output will decrease.
C) the interest rate will increase.
D) the interest rate will decrease.
E) both output and the interest rate will increase.
23) For this question, assume that investment spending B) will cause investment to increase.
depends only on output and no longer depends on the
interest rate. Given this information, an increase in
government spending
A) will cause investment to decrease.
B) will cause investment to increase.
C) may cause investment to increase or to decrease.
D) will have no effect on output.
E) will cause an increase in output and have no effect on
the interest rate
24) A reasonable dynamic assumption for the IS-LM C) the economy is always on the LM
model is that curve, but moves only slowly to the
A) the economy is always on both the IS and LM curves. IS curve.
B) the economy is always on the IS curve, but moves
only slowly to the LM curve.
C) the economy is always on the LM curve, but moves
only slowly to the IS curve.
D) the money market is quick to adjust, but the bond
market adjusts more slowly.
E) adjustment to the new IS-LM equilibrium is
instantaneous after an LM shift, but not after an IS shift.
25) Under the reasonable dynamic assumptions discussed B) an immediate rise in the interest
in the text, a monetary contraction should result in rate, and then a fall in the interest rate
A) an immediate rise in the interest rate, and no further over time.
interest rate changes.
B) an immediate rise in the interest rate, and then a fall in
the interest rate over time.
C) an immediate rise in the interest rate, and then a
further rise over time.
D) a very gradual but steady rise in the interest rate to its
new equilibrium level.
E) no change in the interest rate initially, and then a
sudden rise to its new equilibrium value.
26) For this question, assume that investment spending A) will cause investment to decrease.
depends only on the interest rate and no longer depends
on output. Given this information, a reduction in the
money supply
A) will cause investment to decrease.
B) will cause investment to increase.
C) may cause investment to increase or to decrease.
D) will have no effect on output.
E) will cause a reduction in output and have no effect on
the interest rate.
27) Suppose there is a Fed purchase of bonds and C) an increase in output (Y)
simultaneous tax cut. We know with certainty that this
combination of policies must cause
A) an increase in the interest rate (i).
B) a reduction in i.
C) an increase in output (Y).
D) a reduction in Y.
28) Suppose there is a simultaneous Fed sale of bonds A) an increase in the interest rate (i).
and increase in consumer confidence. We know with
certainty that these two simultaneous events will cause
A) an increase in the interest rate (i).
B) a reduction in i.
C) an increase in output (Y).
D) a reduction in Y.
29) Suppose there is a simultaneous central bank B) a reduction in i.
purchase of bonds and increase in taxes. We know with
certainty that this combination of policies must cause
A) an increase in the interest rate (i).
B) a reduction in i.
C) an increase in output (Y).
D) a reduction in Y.
30) Suppose there is a simultaneous central bank sale of D) a reduction in Y.
bonds and tax increase. We know with certainty that this
combination of policies must cause
A) an increase in the interest rate (i).
B) a reduction in i.
C) an increase in output (Y).
D) a reduction in Y.
31) We know with certainty that a tax increase must D) none of the above
cause which of the following?
A) an increase in investment
B) a reduction in investment
C) no change in investment
D) none of the above
32) A fiscal contraction will tend to cause which of the C) a reduction in the interest rate and
following to occur? an ambiguous effect on investment
A) a reduction in the interest rate and a reduction in
investment
B) a reduction in the interest rate and an upward shift in
the LM curve
C) a reduction in the interest rate and an ambiguous
effect on investment
D) no change in output if the Fed simultaneously pursues
contractionary monetary policy
33) An increase in the money supply must cause which E) no change in output if investment
of the following? is independent of the interest rate
A) a leftward shift in the IS curve
B) a reduction in the interest rate and ambiguous effects
on investment
C) an increase in investment and a rightward shift in the
IS curve
D) no change in the interest rate if investment is
independent of the interest rate
E) no change in output if investment is independent of
the interest rate
34) An increase in consumer confidence will tend to A) a rightward shift in the IS curve
cause which of the following to occur?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
35) Assume that investment does NOT depend on the E) none of the above
interest rate. A reduction in government spending will
cause which of the following for this economy?
A) no change in the interest rate
B) no change in output
C) no change in investment
D) an increase in investment
E) none of the above
36) Assume that investment does NOT depend on the B) no change in output
interest rate. A reduction in the money supply will cause
which of the following for this economy?
A) no change in the interest rate
B) no change in output
C) a reduction in investment
D) an increase in investment
37) For this question, assume that investment spending C) will cause a reduction in the
depends only on output and no longer depends on the interest rate.
interest rate. Given this information, an increase in the
money supply
A) will cause investment to decrease.
B) will cause investment to increase.
C) will cause a reduction in the interest rate.
D) will have no effect on output or the interest rate.
E) will cause an increase in output and have no effect on
the interest rate.
38) A reduction in consumer confidence will likely have B) a leftward shift in the IS curve
which of the following effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
39) An increase in the reserve deposit ratio, θ, will most C) an upward shift in the LM curve
likely have which of the following effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
40) A Fed purchase of securities will most likely have D) a downward shift in the LM curve
which of the following effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
41) A reduction in the aggregate price level, P, will most D) a downward shift in the LM curve
likely have which of the following effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
42) An increase in the aggregate price level, P, will most C) an upward shift in the LM curve
likely have which of the following effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
43) The IS curve will NOT shift when which of the B) a reduction in the interest rate.
following occurs?
A) a reduction in government spending.
B) a reduction in the interest rate.
C) a reduction in consumer confidence.
D) all of the above
E) none of the above
44) Which of the following best defines the IS curve? A) the combinations of i and Y that
A) the combinations of i and Y that maintain equilibrium maintain equilibrium in the goods
in the goods market market
B) illustrates the effects of changes in i on investment
C) illustrates the effects of changes in i on desired money
holdings by individuals
D) the combinations of i and Y that maintain equilibrium
in financial markets
45) Which of the following best defines the LM curve? D) the combinations of i and Y that
A) the combinations of i and Y that maintain equilibrium maintain equilibrium in financial
in the goods market markets
B) illustrates the effects of changes in i on investment
C) illustrates the effects of changes in i on desired money
holdings by individuals
D) the combinations of i and Y that maintain equilibrium
in financial markets
46) Based on our understanding of the IS-LM model that B) an immediate increase in i and no
takes into account dynamics, we know that a reduction in initial change in Y.
the money supply will cause
A) an immediate drop in Y and immediate increase in i.
B) an immediate increase in i and no initial change in Y.
C) a gradual increase in i and gradual reduction in Y.
D) none of the above
47) Based on our understanding of the IS-LM model that C) a gradual reduction in i and
takes into account dynamics, we know that a reduction in gradual reduction in Y.
government spending will cause
A) an immediate drop in Y and immediate increase in i.
B) an immediate reduction in i and no initial change in Y.
C) a gradual reduction in i and gradual reduction in Y.
D) a gradual reduction in i and an immediate reduction in
Y.
48) Based on our understanding of the IS-LM model that B) an immediate decrease in i and no
takes into account dynamics, we know that an initial change in Y.
increase in the money supply will cause
A) an immediate increase in i and no initial change in Y.
B) an immediate decrease in i and no initial change in Y.
C) a gradual decrease in i and gradual increase in Y.
D) none of the above
49) Based on our understanding of the IS-LM model that A) a gradual increase in i and gradual
takes into account dynamics, we know that an increase in Y.
increase in government spending will cause
A) a gradual increase in i and gradual increase in Y.
B) an immediate increase in Y and immediate drop in i.
C) an immediate increase in i and no initial change in Y.
D) a gradual increase in i and an immediate increase in Y.
50) An increase in government spending will likely have A) a rightward shift in the IS curve
which of the following effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
51) A reduction in the reserve deposit ratio, θ, will most D) a downward shift in the LM curve
likely have which of the following effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
52) If government spending and taxes increase by the C) the IS curve shifts rightward
same amount,
A) the IS curve does not shift
B) the IS curve shift leftward
C) the IS curve shifts rightward
D) the LM curve shifts downward
53) If government spending and taxes decrease by the B) the IS curve shift leftward.
same amount,
A) the IS curve does not shift.
B) the IS curve shift leftward.
C) the IS curve shifts rightward.
D) the LM curve shifts downward.
54) Which of the following triggered the U.S. recession A) decline in investment demand
of 2001?
A) decline in investment demand
B) decline in consumption demand
C) increase in budget deficit
D) increase in trade deficit
55) The IS curve will shift to the left when which of the B) a reduction in government
following occurs? spending
A) a reduction in the money supply
B) a reduction in government spending
C) an increase in the interest rate
D) all of the above
E) none of the above
56) Which of the following occurs as the economy A) a reduction in the interest rate
moves rightward along a given IS curve? causes investment spending to
A) a reduction in the interest rate causes investment decrease.
spending to decrease.
B) a reduction in the interest rate causes money demand
to increase.
C) a reduction in the interest rate causes a reduction in
the money supply.
D) an increase in government spending causes a
reduction in demand for goods.
E) a reduction in taxes causes a reduction in demand for
goods.
The amount today that would be needed at prevailing interest present value
rates to produce a particular sum in the future is known as
If a depositor puts $100 in a bank account that earns 4 $121.67
percent interest compounded annually how much will be in
the account after five years?
An increase in the prevailing interest rate decreases the present value of
future returns from investment
and decreases investment
If two countries start with the same real GDP per person, and the standard of living in the
one country grows at 2% while the other f=grows at 4% country growing at 4% will start
to accelerate away from the
slower growing country due to
compound growth.
Using the rule of 70, if your income grows at 10% per year, 7
your income will double in approximate how many years?
Using the rule of 70, if your parents place $10,000 in a $80,000
deposit for you on the day you are born, approximately how
much will be in the account when you retire at 70 years old if
the deposit earns 3% per year?
What helps reduce risk that people face? buying insurance and diversifying
your portfolio
What is an example of moral hazard after Joe buys fire insurance he
begins to smoke in his bed
Firm specific risk is the uncertainty associated with
specific companies
Diversification of your portfolio can reduce firm specific risk
Compared to a portfolio composed entirely of stock, a lower return and lower level of
portfolio that is 50% gov't bonds and 50% stock will have a risk
The study of a company's accounting statements and future fundamental analysis
prospects to determine its value is known as
If the efficient markets hypothesis is true then the stock market is
informationally efficient, so stock
prices should follow a random
walk
What causes the price of a share stock to rise a reduction in market risk, an
increase in expected dividends
and/or a reduction in the interest
rate
Speculative bubbles may occur in the stock market because rational people may buy
an overvalued stock if they think
they can sell it to someone for
even more at a later date
Stock prices will follow a random walk if markets reflect all available
information in a rational way
It is difficult for an actively managed mutual fund to actively managed funds trade
outperform an index fund because more often and charge fees for
their alleged expertise