Chap 27

1. If the interest rate is zero, then $100 to be paid in 10 years has a present value that is

a. less than $100.

b. exactly $100.

c. more than $100.

d. indeterminate.

2. If the interest rate is 10 percent, then the future value in 2 years of $100 today is

a. $80.

b. $83.

c. $120.

d. $121.

3. If the interest rate is 10 percent, then the present value of $100 to be paid in 2 years is

a. $80.

b. $83.

c. $120.

d. $121.

4. The ability of insurance to spread risk is limited by

a. risk aversion and moral hazard.

b. risk aversion and adverse selection.

c. moral hazard and adverse selection.

d. risk aversion only.

5. The benefit of diversification when constructing a portfolio is that it can eliminate

a. speculative bubbles.

b. risk aversion.

c. firm-specific risk. (risk that affects only a single company)

d. market risk. (risk that affects all companies in the stock market)

6. According to the efficient markets hypothesis,

a. changes in stock prices are impossible to predict from public information.

b. excessive diversification can reduce an investor’s expected portfolio returns.

c. the stock market moves based on the changing animal spirits of investors.

d. actively managed mutual funds should give higher returns than index funds.

Chap 28
1. The population of Ectenia is 100 people: 40 work fulltime, 20 work half-time but would prefer to
work fulltime, 10 are looking for a job, 10 would like to work but are so discouraged they have given
up looking, 10 are not interested in working because they are fulltime students, and 10 are retired.
What is the number of unemployed?

a. 10

b. 20

c. 30

d. 40

2. Using the numbers in the preceding question, what is the size of Ectenia’s labor force?

a. 50

b. 60

c. 70

d. 80

3. The main policy goal of the unemployment insurance system is to reduce the

a. search effort of the unemployed.

b. income uncertainty that workers face.

c. role of unions in wage setting.

d. amount of frictional unemployment.

4. According to the most recent data, among workers who are paid at an hourly rate, about
_________ percent have jobs that pay at or below the minimum wage.

a. 2

b. 5

Of those workers paid an hourly rate, about 4 percent of men and 6 percent of women reported wages
at or below the prevailing federal minimum

c. 15

d. 40
5. Unionized workers are paid about _________ percent more than similar nonunion workers.

a. 2

b. 5

c. 15

d. 40

6. According to the theory of efficiency wages,

a. firms may find it profitable to pay above equilibrium wages.

b. an excess supply of labor puts downward pressure on wages.

c. sectoral shifts are the main source of frictional unemployment.

d. right-to-work laws reduce the bargaining power of unions.

Chap 30
1. The classical principle of monetary neutrality states that changes in the money supply do not
influence _________ variables and is thought most applicable in the _________ run.

a. nominal, short

b. nominal, long

c. real, short

d. real, long

2. If nominal GDP is $400, real GDP is $200, and the money supply is $100, then M x V = P x Y

a. the price level is ½, and velocity is 2.

b. the price level is ½, and velocity is 4.

c. the price level is 2, and velocity is 2.

d. the price level is 2, and velocity is 4.

3. According to the quantity theory of money, which variable in the quantity equation is most stable
over long periods of time?

a. money

b. velocity

c. price level

d. output
4. Hyperinflations occur when the government runs a large budget _________, which the central bank
finances with a substantial monetary _________.

a. deficit, contraction

b. deficit, expansion

c. surplus, contraction

d. surplus, expansion

5. According to the quantity theory of money and the Fisher effect, if the central bank increases the
rate of money growth,

a. inflation and the nominal interest rate both increase. (real interest rate unchanged)

b. inflation and the real interest rate both increase.

c. the nominal interest rate and the real interest rate both increase.

d. inflation, the real interest rate, and the nominal interest rate all increase.

6. If an economy always has inflation of 10 percent per year, which of the following costs of inflation
will it NOT suffer?

a. shoeleather costs from reduced holdings of money

b. menu costs from more frequent price adjustment

c. distortions from the taxation of nominal capital gains

d. arbitrary redistributions between debtors and creditors (unexpected inflation )

Chap 31
1. Comparing the U.S. economy today to that of 1950, one finds that today, as a percentage of GDP,

a. exports and imports are both higher.

b. exports and imports are both lower.

c. exports are higher, and imports are lower.

d. exports are lower, and imports are higher.

2. In an open economy, national saving equals domestic investment ( S = I + NCO )

a. plus the net outflow of capital abroad.

b. minus the net exports of goods and services.

c. plus the government’s budget deficit.

d. minus foreign portfolio investment.

3. If the value of a nation’s imports exceeds the value of its exports, which of the following is NOT
true?

a. Net exports are negative.

b. GDP is less than the sum of consumption, investment, and government purchases.

c. Domestic investment is greater than national saving.

d. The nation is experiencing a net outflow of capital.

4. If a nation’s currency doubles in value on foreign exchange markets, the currency is said to
_________, reflecting a change in the _________ exchange rate.

a. appreciate, nominal

b. appreciate, real

c. depreciate, nominal

d. depreciate, real

5. If a cup of coffee costs 2 euros in Paris and $6 in New York and purchasing-power parity holds, what
is the exchange rate?

a. 1 /4 euro per dollar

b. 1 /3 euro per dollar

c. 3 euros per dollar

d. 4 euros per dollar

6. The theory of purchasing-power parity says that higher inflation in a nation causes the nation’s
currency to _________, leaving the _________ exchange rate unchanged.

a. appreciate, nominal

b. appreciate, real

c. depreciate, nominal

d. depreciate, real

Chap 32
1. Holding other things constant, an increase in a nation’s interest rate reduces

a. national saving and domestic investment.

b. national saving and the net capital outflow.

c. domestic investment and the net capital outflow.

d. national saving only.

2. Holding other things constant, an appreciation of a nation’s currency causes

a. exports to rise and imports to fall.

b. exports to fall and imports to rise.

c. both exports and imports to rise.

d. both exports and imports to fall.

3. The government in an open economy cuts spending to reduce the budget deficit. As a result, the
interest rate __________, leading to a capital __________ and a real exchange rate __________.

a. falls, outflow, appreciation

b. falls, outflow, depreciation

c. falls, inflow, appreciation

d. rises, inflow, appreciation

4. The nation of Ectenia has long banned the export of its highly prized puka shells. A newly elected
president, however, removes the export ban. This change in policy will cause the nation’s currency to
__________, making the goods Ectenia imports __________ expensive.

a. appreciate, less

b. appreciate, more

c. depreciate, less

d. depreciate, more

5. A civil war abroad causes foreign investors to seek a safe haven for their funds in the United States,
leading to __________ U.S. interest rates and a __________ U.S. dollar.

a. higher, weaker

b. higher, stronger

c. lower, weaker

d. lower, stronger

6. If business leaders in Great Britain become more confident in their economy, their optimism will
induce them to increase investment, causing the British pound to __________ and pushing the British
trade balance toward __________.

a. appreciate, deficit

b. appreciate, surplus

c. depreciate, deficit

d. depreciate, surplus
 Chap 33
1. When the economy goes into a recession, real GDP _________ and unemployment _________.

a. rises, rises

b. rises, falls

c. falls, rises

d. falls, falls

2. A sudden crash in the stock market shifts

a. the aggregate-demand curve.

b. the short-run aggregate-supply curve, but not the long-run aggregate-supply curve.

c. the long-run aggregate-supply curve, but not the short-run aggregate-supply curve.

d. both the short-run and the long-run aggregate supply curves.

3. A change in the expected price level shifts

a. the aggregate-demand curve.

b. the short-run aggregate-supply curve, but not the long-run aggregate-supply curve.

c. the long-run aggregate-supply curve, but not the short-run aggregate-supply curve.

d. both the short-run and the long-run aggregatesupply curves.

4. An increase in the aggregate demand for goods and services has a larger impact on output
_________ and a larger impact on the price level _________.

a. in the short run, in the long run

b. in the long run, in the short run

c. in the short run, also in the short run

d. in the long run, also in the long run

5. Stagflation is caused by

a. a leftward shift in the aggregate-demand curve.

b. a rightward shift in the aggregate-demand curve.

c. a leftward shift in the aggregate-supply curve.

d. a rightward shift in the aggregate-supply curve.

6. The idea that economic downturns result from an inadequate aggregate demand for goods and
services is derived from the work of which economist?

a. Adam Smith

b. David Hume

c. David Ricardo

d. John Maynard Keynes