Macro Tut 1

Macro Tut 1: Measuring a nation’s income
MULTIPLE CHOICE: Identify the choice that best completes the statement or answers the question.
1. Which of the following questions is more likely to be studied by a microeconomist than a macroeconomist?
a. Why do prices in general rise by more in some countries than in others?
b. Why do wages differ across industries?
c. Why do production and income increase in some periods and not in others?
d. How rapidly is GDP currently increasing?
2. For an economy as a whole,

a. wages must equal profit.
b. consumption must equal saving.
c. income must equal expenditure.
d. the number of buyers must equal the number of sellers.
3. In a simple circular-flow diagram, firms use the money they get from a sale to
a. pay wages to workers.
b. pay rent to landlords.
c. pay profit to the firms’ owners.
d. All of the above are correct.
4. Suppose an apartment complex converts to a condominium, so that the former renters are now owners of their
housing units. Suppose further that a current estimate of the value of the condominium owners' housing services is the
same as the rent they previously paid. What happens to GDP as a result of this conversion?
a. GDP necessarily increases.
b. GDP necessarily decreases.
c. GDP is unaffected because neither the rent nor the estimate of the value of housing services is included in GDP.
d. GDP is unaffected because previously the rent payments were included in GDP and now the rent payments are replaced
in GDP by the estimate of the value of housing services.
5. Darla, a Canadian citizen, works only in the United States. The value of the output she produces is
a. included in both U.S. GDP and U.S. GNP.
b. included in U.S. GDP, but it is not included in U.S. GNP.
c. included in U.S. GNP, but it is not included in U.S. GDP.
d. included in neither U.S. GDP nor U.S. GNP.
6. Household spending on education is included in

a. consumption, although it might be argued that it would fit better in investment.
b. investment, although it might be argued that it would fit better in consumption.
c. government spending, based on the fact that most higher-education students attend publicly-supported colleges and universities.
d. None of the above is correct; in general, household spending on services is not included in any component of GDP.
7. During the current quarter, a firm produces consumer goods and adds some of those goods to its inventory
rather than selling them. The value of the goods added to inventory is
a. not included in the current quarter GDP.
b. included in the current quarter GDP as investment.
c. included in the current quarter GDP as consumption.
d. included in the current quarter GDP as a statistical discrepancy.
8. If net exports is a negative number for a particular year, then

a. the value of firms’ inventories declined over the course of the year.
b. consumption exceeded the sum of investment and government purchases during the year.
c. the value of goods sold to foreigners exceeded the value of foreign goods purchased during the year.
d. the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.
9. In the economy of Wrexington in 2008, exports were $500, GDP was $6400, government purchases were $1500, imports
$600, and investment was $2000. What was Wrexington’s consumption in 2008?
a. $1800
b. $2800
c. $3000
d. $4000
10. In the economy of Wrexington in 2008, consumption was $200, exports were $50, GDP was $325, government
purchases were $100, imports were $125, and investment was $100. What were Wrexington’s net exports in 2008?
a. -$75
b. -$50
c. $50
d. $75
11. In the economy of Wrexington in 2008, consumption was $3000, GDP was $5500, government purchases were $1000,
imports were $2000, and investment was $1000. What were Wrexington’s exports in 2008?
a. -$1500
b. $500
c. $1500
d. $2500
12. In the economy of Wrexington in 2008, consumption was $2000, exports were $800, GDP was $4800, government
purchases were $840, and investment was $1400. What were Wrexington’s imports in 2008?
a. -$560
b. -$240
c. $240
d. $560
13. In the economy of Wrexington in 2008, nominal GDP was $18 billion and the GDP deflator was 120. What was
Wrexington’s real GDP in 2008?
a. $6.7 billion
b. $15 billion
c. $21.6 billion
d. $38 billion
14. In the economy of Wrexington in 2008, nominal GDP was $10 trillion and real GDP was $4 trillion. What was
Wrexington’s GDP deflator in 2008?
a. 25
b. 40
c. 250
d. 400
15. In the economy of Wrexington in 2008, nominal GDP was $28 trillion and real GDP was $32 trillion. What was
Wrexington’s GDP deflator in 2008?
a. 87.5
b. 114.3
c. 400
d. 896
Table 23-6
The table below contains data for the country of Togogo. The base year is 1974.
Year Nominal GDP GDP Deflator

1974 $2000 100
1975 $3000 120
1976 $3750 150
1977 $6000 200
16. Refer to Table 23-6. Which of the following is not correct?

a. This economy experienced growth from 1974 to 1975.
b. This economy experienced growth from 1975 to 1976.
c. This economy experienced growth from 1976 to 1977.
d. This economy experienced inflation from 1974 to 1975, from 1975 to 1976, and from 1976 to 1977.
17. Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities, and
desirable moral attributes of the population, are not measured as part of GDP. It follows that
a. GDP is not a useful measure of society's welfare.
b. GDP is still a useful measure of society's welfare because providing these other attributes is the responsibility of
government.
c. GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that can
be used to help produce the things that contribute to welfare.
d. GDP is still the best measure of society's welfare because these other values cannot actually be measured.
EXERCISES AND PROBLEMS
Exercise 1: Fill the blank with NO MORE THAN 4 WORDS:

1. The GDP measures Measures the on the ……………………………………… economy’s output of goods and
services
2. In the circular flow diagram, households buy goods and services from firms, and the firms use their revenue from
sales to pay back ………………………………………….. on the market for factors of production.
3. Government spending includes spending on goods and services by local and federal governments but exclude
……………………………..
4. Nominal GDP measures production of goods and services valued ………………………..
5. For the economy as a whole, …………………….. must equal expenditure
6. If net exports is a positive number for a particular year, then the value of foreign goods purchased
……………………….the value of goods sold to foreigners during the year.
7. If real GDP doubles and the GDP deflator doubles, then nominal GDP ……………..
8. A …………….. economics textbook from the bookstore is excluded from the GDP this year.
9. A chocolate bar purchased at a convenience store is included in the GDP and ………………… increases.
10. A book publisher buys paper that will be used to print books. Paper is consider an ………………… to the publisher.
Exercise 2: Find the underlined parts that are incorrect in these statements and correct them:
11. New harvesting equipment for the farm is bought, hence GDP increases in consumption.
A B C
12. To calculate nominal GDP, multiply the price of each good in current year times the quantity
A B C
produced of that good and then multiply together these products.
D
Problem 1
Suppose that an economy produces only three types of products: rice, milk and sugar. Quantity and price data for these three
products for two different years are shown in the table below:
Year Quantity of rice Price of rice Quantity of milk Price of milk Quantity of sugar Price of sugar
2008 2,000 $2 700 $1 600 $1
2009 1,800 $3 800 $9 500 $5
Calculate nominal GDP for each year of this economy

Year Calculation Nominal GDP
2008
2009
Calculate the real GDP for each year (base year 2008)
Year Calculation Real GDP
2008
2009
Calculate the GDP deflator for each year (base year 2008)
Year Calculation GDP deflator
2008
2009
Calculate the percentage change of nominal GDP and real in 2009?
Calculation Growth rate
Nominal GDP
Real GDP
Did economic well-being rise or fall in 2009? If it falled, why we still see nominal GDP rising in that year?
Problem 2
Identify the immediate effect of each of the following events on U.S. GDP and its components.
a. James receives a Social Security check.
b. John buys an Italian sports car.
c. Henry buys domestically produced tools for his construction company.
Problem 3
A farmer grows wheat, which he sells to a miller for $100. The miller turns the wheat into flour, which she sells to a baker
for $150. The baker turns the wheat into bread, which she sells to consumers for $180. Consumers eat the bread.
a. What is GDP in this economy?
b. Value added is defined as the value of a producer’s output minus the value of the intermediate goods that the producer
buys to make the output. Assuming there are no intermediate goods beyond those described above, calculate the value added of
each of the three producers.
c. What us total value added of the three producers in this economy? How does it compare to the economy’s GDP?
Does this example suggest another way of calculating GDP?
Macro Tut 2: Production and Growth
MULTIPLE CHOICE: Identify the choice that best completes the statement or answers the question.
1. As of 2006, using real GDP per person as a measure, we would classify

a. the United States and Mexico as advanced economies and Bangladesh as a middle-income country.
b. Canada as an advanced economy, Mexico as a middle-income country, and Mali as a poor country.
c. Japan and India as advanced economies and Mexico as a poor country.
d. Japan as an advanced economy, the United Kingdom as a middle-income country, and Argentina as a poor country.
2. In some East Asian countries, average income, as measured by real GDP per person, has recently grown at an average
annual rate that implies output will double about every
a. 10 years.
b. 15 years.
c. 20 years.
d. 25 years.
3. Which of the following is correct?
a. Over the last 100 years Japan had a higher average growth rate than the United States. It follows that, today, the standard
of living in Japan is higher than in the United States.
b. The typical person in Bangladesh today has about twice the real income of a typical American 100 years ago.
c. The typical citizen of China today has about one-half as much real income as the typical citizen of America today.
d. None of the above is correct.
4. Last year Panglossia had real GDP of 27.0 billion. This year it had real GDP of 31.5 billion. Which of the following
changes in population is consistent with a 5 percent growth rate of real GDP per person over the last year?
a. The population decreased from 88 million to 84 million.
b. The population decreased from 75 million to 73 million.
c. The population increased from 45 million to 50 million.
d. The population increased from 60 million to 62 million.
5. Productivity is defined as
a. the amount of difficulty that is involved in producing a given quantity of goods and services.
b. the quantity of labor that is required to produce one unit of goods and services.
c. the quantity of goods and services produced from each unit of labor input.
d. the quantity of goods and services produced over a given amount of time.
6. Cedar Valley Furniture uses 5 workers, each working 8 hours, to produce 80 rocking chairs. What is the productivity
of these workers?
a. 2 chairs per hour
b. 10 chairs per hour
c. 1 hour per chair
d. 80 chairs
7. In a market economy, we know that a resource has become scarcer when

a. its price rises relative to other prices.
b. it is non-renewable and some of it is used.
c. people search for substitutes.
8. Which of the following best states economists' understanding of the facts concerning the relationship between natural
resources and economic growth?
a. A country with no or few domestic natural resources is destined to be poor.
b. Differences in natural resources have virtually no role in explaining differences in standards of living.
c. Some countries can be rich mostly because of their natural resources and countries without natural resources need
not be poor, but can never have very high standards of living.
d. Abundant domestic natural resources may help make a country rich, but even countries with few natural resources
can have high standards of living.
9. Suppose that over the last ten years productivity grew faster in Oceania than in Freedonia and the population of both
countries was unchanged.
a. It follows that real GDP per person must be higher in Oceania than in Freedonia.
b. It follows that real GDP per person grew faster in Oceania than in Freedonia.
c. It follows that the standard of living must be higher in Oceania than in Freedonia.
10. Which of the following would, by itself, reveal the most about a country’s standard of living?
a. its level of capital
b. the number of hours worked
c. its availability of natural resources
d. its productivity
11. Suppose a country imposes new restrictions on how many hours people can work. If these restrictions reduce the
total number of hours worked in the economy, but all other factors that determine output are held fixed, then
a. productivity and output both rise.
b. productivity rises and output falls.
c. productivity falls and output rises.
d. productivity and output fall.
12. If a country's saving rate increases, then in the long run

a. both productivity growth and income growth increase.
b. only productivity growth increases.
c. only income growth increases.
d. neither productivity growth nor income growth increase.
13. The traditional view that the production process has diminishing returns implies that
a. the increase in output growth from an increase in the saving rate rises over time, and that, other things the same,
rich countries should grow faster than poor ones.
b. the increase in output growth from an increase in the saving rate falls over time, and that, other things the same,
rich countries should grow faster than poor ones.
c. the increase in output growth from an increase in the saving rate rises over time, and that, other things the same,
poor countries should grow faster than rich ones.
d. the increase in output growth from an increase in the saving rate falls over time, and that, other things the same,
poor countries should grow faster than rich ones.
14. Suppose U.S.-based Intel Corporation builds and operates a new computer chip factory in Honduras. Future
production from such an investment would
a. increase Honduran GDP more than it would increase Honduran GNP.
b. increase Honduran GNP more than it would increase Honduran GDP.
c. not affect Honduran GNP, but would increase Honduran GDP.
d. have no affect on either Honduran GDP or GNP.
15. Which of the following statements is correct?

a. In an economy-wide sense, property rights are an important prerequisite for the price system to work.
b. Property rights give people the ability to exercise authority over the resources they own.
c. Based on the available evidence, the existence of well-established and well-enforced property rights appears to be
associated with an enhanced standard of living.
16. Inward-oriented policies

a. are generally supported by economists.
b. are primarily concerned with the development of human capital.
c. in some ways are like prohibiting the use of certain technologies.
17. Outward-oriented policies

a. allow countries to take advantage of gains from trade.
b. have generally led to high growth for the countries that pursued them.
c. receive widespread support from economists.
18. Which of the following countries achieved higher economic growth, in part by mandating a reduction in population
growth?
a. Great Britain
b. China
c. Australia
d. France
19. Some poor countries appear to be falling behind rather than catching up with rich countries. Which of the following
could explain the failure of a poor country to catch up?
a. The poor country has outward-oriented trade policies.
b. The poor country allows foreign direct investment.
c. The poor country has poorly developed property rights.
EXERCISES AND PROBLEMS:
1. Economists define …………………. as human-made resources such as buildings and machines. Physical capital makes
workers more productive.
2. ……………. refers to the improvement in labor created by the education and knowledge embodied in the workforce.
3. Workers today are able to produce more than those in the past, even with ………….. amount of physical and human
capital, because technology has advanced over time.
4. In analyzing historical economic growth, economists have discovered a crucial fact about the estimated aggregate
production function: it exhibits ……………. to physical capital.
5. It’s important to realize that diminishing returns to physical capital is an “other things equal” phenomenon: additional
amounts of physical capital are ….. productive when the amount of human capital and the technology are held fixed.
6. An economy’s physical capital is created mainly through investment spending by individuals and private companies.
Much of an economy’s human capital, in contrast, is the result of government spending on …...
7. Research and development is spending to …. new technologies.
8. Although some infrastructure is provided by …………...., much of it is either provided by the government or requires a
great deal of government regulation and support.
9. A country’s investment spending can be either more or less than its domestic savings because of ………………………..
10. The …………………………shows how real GDP per worker depends on three factors: physical, human, natural per
worker
11. Levels of real GDP per capita vary greatly around the world: more than half the world’s
A B C
population lives in countries that are still richer than the United States was in 1900.
D
12. The world economy contains examples of success and failure in the effort to achieve a
A
long-run economic growth. East Asian economies have done many things right and achieved
B C
low growth rates.
C
13. These are firm’s policies and institutions that increase savings and investment spending,
A B
foreign investment, infrastructure, research and development.
C D
14. The key to long-run growth is rising labor productivity, which is capital per worker.
A B C D
Problem 1
Suppose that in 1998, an economy has 1,000 workers, each has 1,900 working-hours per year. The value of goods and
services produced by one worker in an hour is $3.
Calculate real GDP of this economy in 1998
If in 1999 real GDP increase to $19 million while the number of workers and their working-hours per year stay the same,
what is the growth rate of the workers’ productivity? Without calculation can you guess the economic growth rate in 1999?
What are determinants of productivity? What can policy-makers do to increase human capital per worker?
Problem 2
Some data that at first might seem puzzling: The share of GDP devoted to investment was similar for the United States and
South Korea from 1960-1991. However, during these same years South Korea had a 6 percent growth rate of average
annual income per person, while the United States had only a 2 percent growth rate. If the saving rates were the same, why
were the growth rates so different?
Macro Tut 3 - Unemployment
Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. The Bureau of Labor Statistics counts a member of a surveyed household as an adult if that person is at least
a. 14 years old.
b. 16 years old.
c. 18 years old.
d. 21 years old.
2. Who of the following would be included in the Bureau of Labor Statistics’ “unemployed” category?
a. Tuuli, who is waiting for her new job to start
b. Jyri, who worked only 15 hours last week
c. Panu, who neither has a job nor is looking for one
3. The sum of which of the following must be equal to the adult population?
a. employed, unemployed
b. employed, unemployed, labor force
c. employed, unemployed, not in the labor force
d. employed, unemployed, labor force, not in the labor force
Table 28-1
Labor Data for Wrexington
Year 2004 2005 2006

Adult population 2000 3000 3200
Number of employed 1400 1300 1600
Number of unemployed 200 600 200
4. Refer to Table 28-1. The number of adults not in the labor force of Wrexington in 2006 was
a. 200.
b. 1400.
c. 1600.
d. 3000.
5. Refer to Table 28-1. The number of adults not in the labor force of Wrexington
a. increased from 2004 to 2005 and increased from 2005 to 2006.
b. increased from 2004 to 2005 and decreased from 2005 to 2006.
c. decreased from 2004 to 2005 and increased from 2005 to 2006.
d. decreased from 2004 to 2005 and decreased from 2005 to 2006.
Table 28-2
2009 Labor Data for Wrexington
Number of adults 20,000

Number of adults who are paid employees 8,000
Number of adults who work in their own businesses 1,600
Number of adults who are unpaid workers in a family member’s business 1,000
Number of adults who were temporarily absent from their jobs because of an earthquake 400
Number of adults who were waiting to be recalled to a job from which they had been laid off 200
Number of adults who do not have a job, are available for work, and have tried to find a job within the past four weeks 1,400
Number of adults who do not have a job, are available for work, but have not tried to find a job within the past four weeks 780
Number of adults who are full-time students 3,000
Number of adults who are homemakers or retirees 3,620
6. Refer to Table 28-2. What was Wrexington’s labor-force participation rate in 2009?
a. 55 percent
b. 63 percent
c. 66.9 percent
d. 87.3 percent
7. In 2004, based on concepts similar to those used to estimate U.S. employment figures, the Japanese adult
non-institutionalized population was 109.684 million, the labor force was 65.760 million, and the number of people
employed was 62.630 million. According to these numbers, the Japanese labor-force participation rate and
unemployment rate were about
a. 57.1% and 2.9%.
b. 57.1% and 4.8%.
c. 60% and 2.9%.
d. 60% and 4.8%.
8. Suppose some country had an adult population of about 46 million, a labor-force participation rate of 75 percent, and
an unemployment rate of 8 percent. How many people were unemployed?
a. 2.54 million
b. 2.76 million
c. 3.68 million
d. 8 million
Table 28-3
2003 Labor Data for Adults (age 16 and older) in Meditor
Males not in labor force 45 million
Females not in labor force 35 million
Males unemployed 5 million
Females unemployed 5 million
Males employed 85 million
Females employed 65 million
9. Refer to Table 28-3. What is the adult male labor force in Meditor?
a. 50 million
b. 85 million
c. 90 million
d. 130 million
10. Refer to Table 28-3. What is the adult female population in Meditor?
a. 40 million
b. 70 million
c. 100 million
d. 105 million
11. Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and
skills is called
a. the natural rate of unemployment.
b. cyclical unemployment.
c. structural unemployment.
d. frictional unemployment.
12. Consumers decide to buy more computers and fewer typewriters. As a result, computer companies expand production
while typewriter companies lay-off workers. This is an example of
a. frictional unemployment created by efficiency wages.
b. frictional unemployment created by sectoral shifts.
c. structural unemployment created by efficiency wages.
d. structural unemployment created by sectoral shifts.
13. Which of the following does not help reduce frictional unemployment?
a. government-run employment agencies
b. public training programs
c. unemployment insurance
d. All of the above help reduce frictional unemployment.
14. Minimum-wage laws can keep wages

a. above equilibrium and cause a surplus of labor.
b. above equilibrium and cause a shortage of labor.
c. below equilibrium and cause a surplus of labor.
d. below equilibrium and cause a shortage of labor.
15. Which of the following is not correct?

a. A union is a worker association that bargains with employers over wages, benefits, and working conditions.
b. Unions play a much larger role in the U.S. labor market now than they did in the past.
c. Unions play a large role in many European countries.
d. A union is a type of cartel.
16. Unions
a. do not affect the natural rate of unemployment.
b. lower the wages of unionized workers.
c. raise the profits of unionized firms.
d. lower the wages of nonunionized workers.
17. Which of the following is not a reason that paying efficiency wages may increase a firm's profit?
a. Efficiency wages increase worker health and therefore increase worker productivity.
b. Efficiency wages decrease worker turnover and therefore decrease hiring and training costs.
c. Efficiency wages decrease worker shirking and therefore increase worker productivity.
d. Efficiency wages decrease a country's natural rate of unemployment and therefore increase its standard of living.

Exercise 1: Fill the blanks with NO MORE THAN 3 WORDS
1. The natural rate of unemployment is the normal rate of unemployment around which the
……………………………… fluctuates.
2. ……………….. is the deviation of unemployment from its natural rate and is associated with business cycles
3. Structural unemployment occurs when the …………………… supplied exceeds the quantity demanded.
4. Causes of structural unemployment are unions, minimum-wage laws and ……………..
5. Frictional unemployment is ……………….. for most workers.
6. Someone is considered unemployed if they are not working, looking for a work during past 4 weeks, or waiting to be
called back to laid-off, or start a new job and ………………..
7. If a country has a working-age population of 200 million, 135 million people with jobs, and 15 million people
unemployed and seeking employment, the labor force participation rate is …………..
8. With the same information as in question 7, the unemployment rate is …………….
Exercise 2: Find the mistakes in the underlined parts of the follow statements and correct them:
9. A construction worker who has a part-time job and would prefer to have a
A B
full-time job. This is an example of frictional unemployment.
C D
10. A teacher who stays one school district to search for a job at a school closer
A B C
to her home. This is an example of frictional unemployment.
D
The following questions refer to the following graph:
11. In the graph above, when the wage is at m1 there is a shortage of labor,
A B C
which causes unemployment.
D
12. The unemployment is greater at the quantity of labor of m2 than m1.
A B C D
13. A short-order cook who loses his job when a new restaurant opens is likely
A
to find another job fairly quickly, perhaps even at the new restaurant, and
B C
thus he will probably have only a long spell of unemployment.
D
14. When an auto company goes bankrupt and lays off its workers, who
A
immediately start looking for new jobs, this increases the labor force and the
B
number of people unemployed, decreases the number of people employed,
and keeps the adult population unchanged. Unemployment rate decreases

C
and the employment population decreases.
D
15. If more people enter the labor market for architects, then the wage rate will
A
increases and the employment level will increase
B C D
Problem 1
Answer the questions below based on the following information about an economy. All figures are in milions:
Total population: 77.6
Adult population: 40
Employed: 37.6
The percentage of total population in the labor force: 49.6%
1. Calculate the labor force, the unemployment rate and the labor force participation in the economy
2. If the natural rate of unemployment is 1%, what is the cyclical unemployment rate in this economy?
Macro Tut 4 - Saving, Investment and the Financial System
Multiple Choice: Identify the choice that best completes the statement or answers the question.
1. At the broadest level, the financial system moves the economy’s scarce resources from
a. the rich to the poor.
b. financial institutions to business firms and government.
c. households to financial institutions.
d. savers to borrowers.
2. A perpetuity is distinguished from other bonds in that it

a. pays continuously compounded interest.
b. pays interest only when it matures.
c. never matures.
d. will be used to purchase another bond when it matures unless the owner specifies otherwise.
3. The prices of stock traded on exchanges are determined by

a. the Corporate Stock Administration.
b. the administrators of NASDAQ.
c. the supply of, and demand for, the stock.
4. A high demand for a company’s stock is an indication that

a. the company is in need of funds.
b. the company has recently sold a large quantity of bonds.
c. people are optimistic about the company’s future.
d. people are pessimistic about the company’s future.
5. Which of the following statements is correct?

a. Stocks, bonds, and deposits are all similar in that each provides a common
medium of exchange.
b. Most buyers of stocks and bonds prefer those issued by large and familiar companies.
c. Banks charge borrowers a slightly lower interest rate than they pay to depositors.
6. Which of the following are financial intermediaries?

a. both banks and mutual funds
b. banks but not mutual funds
c. mutual funds but not banks
d. neither banks or mutual funds
7. Which of the following equations will always represent GDP in an open economy?
a. S = I - G
b. I = Y - C + G
c. Y = C + I + G (closed)
d. Y = C + I + G + NX (open economy)
8. In a closed economy, national saving is

a. usually greater than investment.
b. equal to investment.
c. usually less than investment because of the leakage of taxes.
d. always less than investment.
9. The country of Hykenia does not trade with any other country. Its GDP is $20 billion. Its government collects $4
billion in taxes and pays out $3 billion to households in the form of transfer payments. Consumption equals $15 billion
and investment equals $2 billion. What is public saving in Hykenia, and what is the value of the goods and services
purchased by the government of Hykenia?
a. -$2 billion and $3 billion
b. $1 billion and $3 billion
c. -$1 billion and $4 billion
d. There is not enough information to answer the question.
10. In a closed economy, public saving is the

a. amount of income that households have left after paying for taxes and consumption.
b. amount of income that businesses have left after paying for the factors of production.
c. amount of tax revenue that the government has left after paying for its spending. (T – G spending)
d. sum of A, B, and C.
11. A budget surplus is created if

a. the government sells more bonds than it buys back.
b. the government spends more than it receives in tax revenue. (G > T => budget deficit)
c. private saving is greater than zero.
12. The slope of the demand for loanable funds curve represents the
a. positive relation between the real interest rate and investment.
b. negative relation between the real interest rate and investment.
c. positive relation between the real interest rate and saving.
d. negative relation between the real interest rate and saving.
13. In the loanable funds model, an increase in an investment tax credit would create a
a. shortage at the former equilibrium interest rate. This shortage would lead to a rise in the interest rate.
b. shortage at the former equilibrium interest rate. This shortage would lead to a fall in the interest rate.
c. surplus at the former equilibrium interest rate. This surplus would lead to a rise in the interest rate.
d. surplus at the former equilibrium interest rate. This surplus would lead to a fall in the interest rate.
14. An increase in the budget deficit

a. makes investment spending fall.
b. makes investment spending rise.
c. does not affect investment spending.
d. may increase, decrease, or not affect investment spending.
15. Bolivia had a smaller budget deficit in 2003 than in 2002. Other things the same, we would expect this reduction in
the budget deficit to have
a. increased both interest rates and investment.
b. increased interest rates and decreased investment.
c. decreased interest rates and increased investment.
d. decreased both interest rates and investment.
16. If the government instituted an investment tax credit, then which of the following would be higher in equilibrium?
a. saving and the interest rate
b. saving but not the interest rate
c. the interest rate but not saving
d. neither saving nor the interest rate
Figure 26-1. The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves.
S1 S2
Demand
17. Refer to Figure 26-1. Which of the following events would shift the supply curve from S1 to S2?
a. In response to tax reform, firms are encouraged to invest more than they
previously invested.
b. In response to tax reform, households are encouraged to save more than they
previously saved.
c. Government goes from running a balanced budget to running a budget deficit.
d. Any of the above events would shift the supply curve from S1 to S2.

1. The budget balance is the difference between …………….. and government spending.
2. …………………………, the sum of private savings and the budget balance, is the total amount of savings generated
within the economy.
3. The loanable funds market is a hypothetical market that examines the …………………… of the demand for funds
generated by borrowers and the supply of funds provided by lenders.
4. ……………………. is the price, calculated as a percentage of the amount borrowed, charged by the lender to a borrower
for the use of their savings for one year.
5. Crowding out is the …………… effect of budget deficits on private investment.
6. A household’s wealth is the value of its………………………...
7. The ………………………….. shows how loans from savers are allocated among borrowers with investment spending
projects.
8. According to the savings–investment spending identity, savings and investment spending are always …………. for the
economy as a whole.
9. …………. is a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those
funds to finance the illiquid investments or investment spending needs of borrowers.
10. Investors typically wish to reduce their risk by engaging in diversification, owning a narrow
A B C
range of assets whose returns are based on unrelated, or independent, events.
D
11. The budget deficit is the difference between tax revenue and government spending when
A B C
tax revenue exceeds government spending.
D
12. A liability is an option to pay income in the future.
A B C D
13. A loan is a lending agreement between government and a particular borrower.
A B C D
14. Shareowners are able to enjoy the lower returns over time that stocks generally offer in
A B C
comparison to bonds.
D
Problem 1:
Identify each of the following acts as representing either saving or investment.
a. Lan uses some of his income to buy government bonds => saving
b. Minh takes some of his income and buys mutual funds => saving
c. Linh purchases a new truck for his delivery business using borrowed funds. => investment
d. Peter uses some of his income to buy stock in a major corporation => saving
e. Dave hires a builder to construct a new home using borrowed funds. => investment
Problem 2:
Suppose GDP equals $10 trillion, consumption equals $6.5 trillion, the government spends $2 trillion and has a budget deficit of
$300 billion.
a. Find public saving, taxes, private saving, national saving, and investment.
b. Suppose now that the government cuts taxes by $200 billion. In each of the following two scenarios, determine what happens to
public saving, private saving, national saving, and investment.
1. Consumers save the full proceeds of the tax cut.
2. Consumers save 1/4 of the tax cut and spend the other 3/4
Problem 3:
Graphically show the impact on the loanable fund in each of the following scenario
a. The economy is in a recession and buinesses begin to expect it will continue indefinitely.
b. Technological advancements increase productivity for firms who make new investements
c. The Government increases taxes by $100 million and decreases spending by $100 million.
d. Hyper inflation increase the incentive for consumers to spend
e. There is a significant increase in business confidence
f. The government increases spending by $1 trillion to fund infrastructure projects like roads, bridges and upgrades to the electrical
grid.
Macro Tut 5: The Monetary System
1. Consider the following traders who meet.
Bob has an apple wants an orange

Ted has an orange wants a peach
Mary has a pear wants an apple
Alice has a peach wants an orange
Which, if any, pairs of traders has a double coincidence of wants?

a. Bob with Alice
b. Ted with Alice
c. Bob with Mary, Ted with Bob, and Ted with Alice
d. None of the pairs above has a double coincidence of wants.
2. Money is
a. the most liquid asset and a perfect store of value.
b. the most liquid asset but an imperfect store of value.
c. the least liquid asset but a perfect store of value.
d. the least liquid asset and an imperfect store of value.
3. Which of the following best illustrates the concept of a store of value?

a. You are a precious-metals dealer, and you are always aware of how many ounces of platinum trade for an ounce of gold.
b. You sell items on eBay, and your prices are stated in terms of dollars.
c. You keep 6 ounces of gold in your safe-deposit box at the bank for emergencies.
4. Travelers checks are included in
a. M1 but not M2.
b. M2 but not M1.
c. M1 and M2.
d. neither M1 nor M2.
5. Savings deposits are included in

a. M1 but not M2.
b. M2 but not M1.
c. M1 and M2.
d. neither M1 nor M2.
6. At the Federal Reserve,

a. the nation’s monetary policy is made by the Federal Open Market Committee, which meets twice a year.
b. the nation’s monetary and fiscal policies are made by the Federal Open Market Committee, which meets twice a year.
c. the nation’s monetary policy is made by the Federal Open Market Committee, which meets about every six weeks.
d. the nation’s monetary and fiscal policies are made by the Federal Open Market Committee, which meets about every six weeks.
7. When the Federal Reserve sells assets from its portfolio to the public with the intent of changing the money supply,
a. those assets are government bonds and the Fed’s reason for selling them is to increase the money supply.
b. those assets are government bonds and the Fed’s reason for selling them is to decrease the money supply.
c. those assets are items that are included in M2 and the Fed’s reason for selling them is to increase the money supply.
d. those assets are items that are included in M2 and the Fed’s reason for selling them is to decrease the money supply.
8. Which of the following entities actually executes open-market operations?

a. the Board of Governors
b. the New York Federal Reserve Bank
c. the Federal Open Market Committee
d. the Open Market Committees of the regional Federal Reserve Banks
Table 29-2. An economy starts with $10,000 in currency. All of this currency is deposited into a single bank, and the bank then
makes loans totaling $9,250. The T-account of the bank is shown below.
Assets Liabilities
Reserves $750 Deposits $10,000
Loans 9,250
9. Refer to Table 29-2. If all banks in the economy have the same reserve ratio as this bank, then an increase in reserves
of $150 for this bank has the potential to increase deposits for all banks by
a. $866.67.
b. $1,666.67.
c. $2,000.00.
d. an infinite amount.
Table 29-3.
The First Bank of Johnson City
Assets Liabilities
Reserves $2,000 Deposits $10,000
Loans 8,000
10. Refer to Table 29-3. If $1,000 is deposited into the First Bank of Johnson City, and the bank takes no other actions, its
a. reserves will increase by $200.
b. liabilities will decrease by $1,000.
c. assets will increase by $1,000.
d. reserves will increase by $800.
Table 29-4.
The First Bank of Wahooton
Assets Liabilities
Loans 125,000
11. Refer to Table 29-4. Suppose the bank faces a reserve requirement of 10 percent. Starting from the situation as
depicted by the T-account, a customer deposits an additional $50,000 into his account at the bank. If the bank takes no
other action it will
a. have $65,000 in excess reserves.
b. have $55,000 in excess reserves.
c. need to raise an additional $5,000 of reserves to meet the reserve requirement
Table 29-6.
Bank of Springfield
Assets Liabilities
Loans 228,000
12. Refer to Table 29-6. If the Bank of Springfield has lent out all the money it can given its level of deposits, then
what is the reserve requirement?
a. 5.00 percent
b. 8.00 percent
c. 8.42 percent
d. 95.00 percent
13. If $300 of new reserves generates $800 of new money in the economy, then the reserve ratio is
a. 2.7 percent.
b. 12.5 percent.
c. 37.5 percent.
d. 40 percent.
14. When the Fed buys government bonds,

a. the money supply increases and the federal funds rate increases.
b. the money supply increases and the federal funds rate decreases.
c. the money supply decreases and the federal funds rate increases.
d. the money supply decreases and the federal funds rate decreases.
15. A bank’s liabilities include

a. both its reserves and the deposits of its customers.
b. neither its reserves nor the deposits of its customers.
c. its reserves, but not the deposits of its customers.
d. the deposits of its customers, but not its reserves.
16. In Hugoland, the money supply is $8 million and reserves are $1 million. Assuming that people hold only deposits
and no currency, and that banks hold no excess reserves, then the reserve requirement is
a. 14 percent.
b. 12.5 percent.
c. 8 percent.
Scenario 29-1.
The monetary policy of Salidiva is determined by the Salidivian Central Bank. The local currency is the salido. Salidivian banks
collectively hold 100 million salidos of required reserves, 25 million salidos of excess reserves, 250 million salidos of Salidivian
Treasury Bonds, and their customers hold 1,000 million salidos of deposits. Salidivians prefer to use only demand deposits and
so the money supply consists of demand deposits.
17. Refer to Scenario 29-1. Suppose the Central Bank of Salidiva loaned the banks of Salidiva 5 million salidos. Suppose
also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how
much would the money supply of Salidiva change?
a. 60 million salidos
b. 50 million salidos
c. 40 million salidos
18. The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and
no currency, and the reserve requirement is 4 percent. If the Fed raises the reserve requirement to 10 percent and at
the same time buys $50 billion of bonds, then by how much does the money supply change?
a. It rises by $600 billion.
b. It rises by $125 billion.
c. It falls by $2,500 billion.
19. During a bank run, depositors decide to hold more currency relative to deposits and banks decide to hold more excess
reserves relative to deposits.
a. Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would make
the money supply increase.
b. Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would
make the money supply decrease.
c. The decision to hold relatively more currency would make the money supply increase. The decision to hold
relatively more excess reserves would make the money supply decrease.
d. The decision to hold relatively more currency would make the money supply increase. The decision to hold
relatively more excess reserves would make the money supply decrease.
20. When the Fed conducts open-market purchases,

a. it buys Treasury securities, which increases the money supply.
b. it buys Treasury securities, which decreases the money supply.
c. it borrows money from member banks, which increases the money supply.
d. it lends money to member banks, which decreases the money supply.
Exercise 1: Fill in the blank with NO MORE THAN 4 WORDS

1. Money serves as a …………………because money is the most commonly accepted asset when a buyer purchases
goods and services from a seller.
2. Money serves as a ………………….because money is the yardstick with which people post prices and record debts.
3. Money serves as a …………………..because people can use money to transfer purchasing power from the present to
the future.
4. Money can be divided into two fundamental types-…………. And……………..
5. Fiat money is money without…………….
6. ……………..is the amount of money the banking system generates from each dollar of reserves
7. …………….. is a banking system in which banks hold only a fraction of deposits as reserves
8. ………………is the balances in bank accounts that can be accessed on demand by check
9. The Fed primarily changes the money supply with…………………, which are the purchase and sale of U.S.
government bonds by the Fed in the open market for debt
10. ………………. Is the interest rate the Fed charges on loans to banks
Excercise 2: Find the underlined parts that are incorrect in these statements and correct them:
11. Money has three functions: It acts as a medium of exchange, a unit of account, and a
A B C
hedge against inflation.
D
12. Credit cards are part of the M2 money supply and are valued at the maximum credit
A B C
limit of the cardholder.
13. An increase in the reserve requirement decreases the money multiplier and increases
A B C
the money supply.
D
14. When you are willing to go to sleep tonight with $100 in your wallet and you have complete confidence that you can
spend it tomorrow and receive the same amount of
A
goods as you would have received had you spent it today, money has demonstrated its
B
function as a medium of exchange.
C
15. Money and wealth are the same thing
A B C
Problem 1:
Assume that the banking system has total reserves of $100 billion. Assume also that required reserves are 10 percent of
checking deposits and that banks hold no excess reserves and households hold no currency.
1. a. What is the money multiplier? What is the money supply?
2. b. If the Fed now raises required reserves to 20 percent of deposits, what are the changes in reserves and in the
money supply?
Problem 2:
Assume that the reserve requirement is 20 percent. Also assume that banks do not hold excess reserves and there is no cash held
by the public. The Federal Reserve decides that it wants to expand the money supply by $40 million dollars.
1. a. If the Fed is using open-market operations, will it buy or sell bonds?
2. b. What quantity of bonds does the Fed need to buy or sell to accomplish the goal? Explain your reasoning.
Problem 3:
Suppose that First National Bank acquires $600,000 in new deposits and initially uses part of this to make new loans of $400,000.
The T-account of First National Bank, showing changes in its assets and liabilities, is as follows:
a) Suppose that the Fed requires banks to hold 10 percent of deposits as reserves, and that prior to the changes shown above the
First National Bank was satisfying that requirement exactly. How much in excess reserves does First National now hold, as a
result of the changes listed above?
b) Assume that all other banks hold only the required amount of reserves and that the public holds no cash. If First National now
decides to reduce its reserves to only the required amount, by how much will the economy’s money supply increase?
Macro Tut 6: The Money Growth & Inflation
1. The price level rises if either

a. money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a rise in
the value of money.
b. money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a fall in
the value of money.
c. money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a rise in
the value of money.
d. money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a fall in
the value of money.
2. If velocity = 5, the price level = 1.5, and the real value of output is 2,500, then the quantity of money is
a. 333.33.
b. 750.00.
c. 1,050.00.
d. 8,333.33.
3. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply
causes the equilibrium value of money
a. and equilibrium quantity of money to increase.
b. and equilibrium quantity of money to decrease.
c. to increase, while the equilibrium quantity of money decreases.
d. to decrease, while the equilibrium quantity of money increases.
4. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply
creates an excess
a. supply of money, causing people to spend more.
b. supply of money, causing people to spend less.
c. demand for money, causing people to spend more.
d. demand for money, causing people to spend less.
Figure 30-2. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are
measured along the axes.
1.125
MS
1
0.875
0.75
0.625
0.5
0.375
MD2
0.25 MD1
0.125
5,000
5. Refer to Figure 30-2. If the relevant money-demand curve is the one labeled MD 1, then the equilibrium value of
money is
a. 0.5 and the equilibrium price level is 2.
b. 2 and the equilibrium price level is 0.5.
c. 0.5 and the equilibrium price level cannot be determined from the graph.
d. 2 and the equilibrium price level cannot be determined from the graph.
Figure 30-3. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are
measured along the axes.
MS1 MS2
0.5
0.33
MD
10,000 15,000
6. Refer to Figure 30-3. What quantity is measured along the vertical axis?
a. the price level
b. the velocity of money
c. the value of money
d. the quantity of money
7. According to the classical dichotomy, which of the following is influenced by monetary factors?
a. real GDP
b. unemployment
c. nominal interest rates
8. According to the classical dichotomy, which of the following is not influenced by monetary factors?
a. nominal GDP and nominal interest rates
b. real wages and real GDP
c. the price level and nominal GDP
9. Velocity is computed as
a. (P Y)/M.
b. (P M)/Y.
c. (Y M)/P.
d. (Y M)/V.
10. If Y and M are constant, and V doubles, the quantity equation implies that the price level
a. falls to half it’s original level.
b. doubles.
c. more than doubles.
d. does not change.
11. Suppose over some period of time the money supply tripled, velocity fell by half, and real GDP doubled. According
to the quantity equation the price level is now
a. 6 times its old value.
b. 3 times its old value.
c. 1.5 times its old value.
d. 0.75 times its old value.
12. Suppose that when the money supply changes, real output and velocity do not change. Then a 2 percent increase in
the money supply
a. decreases the price level by 2 percent.
b. decreases the price level by less than 2 percent.
c. increases the price level by less than 2 percent.
d. increases the price level by 2 percent.
13. If money is neutral and velocity is stable, an increase in the money supply creates a proportional increase in
a. real output only.
b. nominal output only.
c. the price level only.
d. both the price level and nominal output.
14. In the U.S., people are required to pay taxes on

a. nominal interest earnings, irrespective of their real interest earnings.
b. real interest earnings, irrespective of their nominal interest earnings.
c. real capital gains, irrespective of their nominal capital gains.
15. You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the
price level. Before taxes, you experienced
a. both a nominal gain and a real gain, and you paid taxes on the nominal gain.
b. both a nominal gain and a real gain, and you paid taxes only on the real gain.
c. a nominal gain, but no real gain, and you paid taxes on the nominal gain.
d. a nominal gain, but no real gain, and you paid no taxes on the transaction.
16. You put money into an account and earn an after-tax real interest rate of 2.5 percent. If the nominal interest rate
on the account is 8 percent and the inflation rate is 2 percent, then what is the tax rate?
a. 28.00 percent
b. 36.25 percent
c. 43.75 percent
d. 67.50 percent
17. For a given real interest rate, a decrease in the inflation rate would
a. decrease the after-tax real interest rate and so decrease saving.
b. decrease the after-tax real interest rate and so increase saving.
c. increase the after-tax real interest rate and so decrease saving.
d. increase the after-tax real interest rate and so increase saving.

Exercise 1: Fill in the blank with NO MORE THAN 4 WORDS
1. ……………..is an increase in the overall level of prices
2. Deflation is a …………….in the overall level of prices
3. Hyperinflation is ………………………inflation
4. Inflation is more about the value of ……..than about the value of ……..
5. Demand-Pull Inflation occurs when …………grows up quickly and runs ahead of …………….for goods and services
6. Cost-push Inflation occurs when there is a rise in ……………….
7. …………….is a number of goods and services bought by each dollar
8. Money Supply (MS) determined by the …………and the ………..
9. According to The Quantity Theory of Money, the primary cause of inflation is the …………………………
10. ………………. is the point at which the quantity of money demanded balances the quantity of money supplied
Excercise 2: Find the underlined parts that are incorrect in these statements and correct them:
11. The quantity theory of money suggests that an increase in the money supply increases
A B
real output proportionately.
C
12. In the long run, an increase in the money supply tends to have an effect on real
A B
variables but no effect on nominal variables.
C D
13. Inflation tends to stimulate saving because it raises the after-tax real return to saving.
A B C
14. If inflation turns out to be higher than people expected, wealth is redistributed to
A B
lenders from borrowers.
C
15. Monetary neutrality means that a change in the money supply doesn't cause a change
A B C
in anything at all
D
Problem 1:
If the tax rate is 40 percent, compute the before tax real interest rate and the after-tax real interest rate in each of the following
cases.a. The nominal interest rate is 10 percent, and the inflation rate is 5 percent.b. The nominal interest rate is 6 percent, and
the inflation rate is 2 percent.c. The nominal interest rate is 4 percent, and the inflation is 1 percent.
Problem 2:
Assume that the quantity theory of money holds and that velocity is constant at 5. Output is fixed at its full-employment value
of 10,000, and the price level is 2.
a- Determine the Money Demand
b- In this same economy the government fixes the money supply at 5000. With output fixed at its full-employment level and
with the assumption that prices are flexible, what will be the new price level? What happens to the price level if the money
supply rises to 6000?
Macro Tut 7: Aggregate Demand and Aggregate Supply

1. When we say that economic fluctuations are “irregular and unpredictable,” we mean that
a. the relationship between output and unemployment is erratic and difficult to characterize.
b. when one macroeconomic variable that measures income or spending is falling, other macroeconomic variables that measure i
spending are likely to be rising.
c. recessions do not occur at regular intervals.
2. Real GDP
a. is the current dollar value of all goods produced by the citizens of an economy within a given time.
b. measures economic activity and income.
c. is used primarily to measure long-run changes rather than short-run fluctuations.
3. As recessions begin, production

a. and unemployment both rise.
b. rises and unemployment falls.
c. falls and unemployment rises.
d. and unemployment both fall.
4. The classical model is appropriate for analysis of the economy in the
a. long run, since evidence indicates that money is not neutral in the long run.
b. long run, since real and nominal variables are essentially determined separately in the long run.
c. short run, provided money is not neutral.
d. short run, provided real and nominal variables are highly intertwined.
5. Most economists believe that money neutrality holds
a. in the short run but not the long run.
b. in the long run but not the short run.
c. in both the short run and the long run.
d. in neither the short run nor the long run.
6. The aggregate demand and aggregate supply graph has
a. the price level on the horizontal axis. The price level can be measured by the GDP deflator.
b. the price level on the horizontal axis. The price level can be measured by real GDP.
c. the price level on the vertical axis. The price level can be measured by the GDP deflator.
d. the price level on the vertical axis. The price level can be measured by GDP.
7. The model of aggregate demand and aggregate supply explains the relationship between
a. the price and quantity of a particular good.
b. unemployment and output.
c. wages and employment.
d. real GDP and the price level.
8. The curve that shows the quantity of goods and services that firms produce and sell
a. as it relates to the quantity of goods and services that buyers want to buy is called the aggregate-demand curve.
b. as it relates to the quantity of goods and services that buyers want to buy is called the aggregate-supply curve.
c. as it relates to the overall price level is called the aggregate-demand curve.
d. as it relates to the overall price level is called the aggregate-supply curve.
9. When the price level falls the quantity of
a. consumption goods demanded rises, while the quantity of net exports demanded falls.
b. consumption goods demanded and the quantity of net exports demanded both rise.
c. consumption goods demanded and the quantity of net exports demanded both fall.
d. consumption goods demanded falls, while the quantity of net exports demand rises.
10. The effect of an increase in the price level on the aggregate-demand curve is represented by a
a. shift to the right of the aggregate-demand curve.
b. shift to the left of the aggregate-demand curve.
c. movement to the left along a given aggregate-demand curve.
d. movement to the right along a given aggregate-demand curve.
11. Other things the same, an increase in the price level makes consumers feel
a. less wealthy, so the quantity of goods and services demanded falls.
b. less wealthy, so the quantity of goods and services demanded rises.
c. more wealthy, so the quantity of goods and services demanded rises.
d. more wealthy, so the quantity of goods and services demanded falls.
12. Other things the same, an increase in the price level induces people to hold
a. less money, so they lend less, and the interest rate rises.
b. less money, so they lend more, and the interest rate falls.
c. more money, so they lend more, and the interest rate falls.
d. more money, so they lend less, and the interest rate rises.
13. Other things the same, when the price level falls, interest rates
a. rise, which means consumers will want to spend more on homebuilding.
b. rise, which means consumers will want to spend less on homebuilding.
c. fall, which means consumers will want to spend more on homebuilding.
d. fall, which means consumers will want to spend less on homebuilding.
14. Other things the same, as the price level falls, which of the following increases?
a. lending and investment spending
b. lending, but not investment spending
c. investment spending, but not lending
d. neither investment spending nor lending
15. Other things the same, as the price level rises, the real value of a dollar
a. rises, and interest rates rise.
b. rises, and interest rates fall.
c. falls, and interest rates rise.
d. falls, and interest rates fall.
16. Other things the same, the aggregate quantity of goods demanded in the U.S. increases if
a. real wealth falls.
b. the interest rate rises.
c. the dollar depreciates.
17. Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to desire
a. decreased consumption, shown as a movement to the left along a given aggregate-demand curve.
b. increase consumption, shown as a movement to the right along a given aggregate-demand curve.
c. decreased consumption, shifting the aggregate-demand curve to the left.
d. increased consumption, shifting the aggregate-demand curve to the right.
18. When taxes decrease, consumption
a. decreases as shown by a movement to the left along a given aggregate-demand curve.
b. decreases as shown by a shift of the aggregate demand curve to the left.
c. increases as shown by a movement to the right along a given aggregate-demand curve.
d. increases as shown by a shift of the aggregate demand curve to the right.
19. Other things the same, an increase in the amount of capital firms wish to purchase would initially shift
a. aggregate demand right.
b. aggregate demand left.

c. aggregate supply right.
d. aggregate supply left.
20. The Central Bank of Wiknam increases the money supply at the same time the Parliament of Wiknam passes a
new investment tax credit. Which of these policies shift aggregate demand to the right?
a. both the money supply increase and the investment tax credit
b. the money supply increase but not the investment tax credit
c. the investment tax credit but not the money supply increase
d. neither the investment tax credit nor the money supply increase

13. Recessions do not occur at ………………intervals
14. As recessions begin, production ………… and…………… rises
15. The model of Aggregate Demand and Aggregate Supply explains the relationship between the price level and
………………………………………
16. A fall in stock prices induces people to …………….. consumption, shifting the aggregate-demand curve to the
…………….
17. Other things the same, the aggregate quantity of goods demanded in the U.S. increases if the dollar
……………………………..
18. Other things the same, an increase in the price level induces people to hold …………… money, so they lend
……………., and the interest rate ………….
19. Most economists believe that ……………. holds in the long run but not the short run
20. Technological progress shifts the short-run AS and the long-run AS curve to the left
A B C D
21. Increased pessimism about the future leads to rising prices and falling unemployment in the
A B C
short run.
D
22. A decrease in the money demand causes the interest rate to rise so that investment falls.
A B C D
23. Stagflation results from continued decreases in aggregate demand.

A B C D
24. A change in the money supply changes only nominal variables in the short run.
A B C D
Problem 1:
Draw an AD-AS graph showing long-run macroeconomic equilibrium. Label AD, SRAS, LRAS, potential output,
equilibrium aggregate price level, and output
Problem 2:
For each of the following, describe the effect on the AD, SRAS, and LRAS curves, identify whether the effect causes a shift
of or a movement along the curve, and identify the direction of the shift/movement.
a. An increase in the money supply causes interest rates to fall.
b. The price of commodities increases by 10% this year.
c. The price of oil falls.

d. Labor unions successfully negotiate an increase in nominal wages for their workers.
e. The supply of unsold houses in an economy increases by 20%.
f. There is an increase in labor productivity due to increases in human capital.

g. The government increases spending in order to finance a war.
Problem 3:
Consider an economy in long-run equilibrium. Draw a graph of the AD-AS model to show the effect of each of the following
(ceteris paribus) changes.
a. The economy’s central bank decreases the money supply.
b. Productivity decreases in the economy.
For both a and b, answer the following sub-questions:

i. What happens to the aggregate output and price level?
ii. Does this economy face a short-run recessionary gap or an inflationary gap?
iii. What active stabilization policy can offset this particular shock?
iv. What would happen in the long run to the aggregate price and output levels without an active
stabilization policy?
Macro Tut 8: Monetary and Fiscal Policy
1. Fiscal policy refers to the idea that aggregate demand is affected by changes in
a. the money supply.
b. government spending and taxes.
c. trade policy.
2. In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is
3. It follows that, when income is $101, consumer spending is
a. $60.60.
b. $60.67.
c. $61.33.
d. $63.00.
Scenario 34-1. Take the following information as given for a small, imaginary economy:
•When income is $10,000, consumption spending is $6,500.
•When income is $11,000, consumption spending is $7,300.
3. Refer to Scenario 34-1. For this economy, an initial increase of $500 in net exports translates into a
a. $2,000 increase in aggregate demand when the crowding-out effect is taken into account.
b. $2,500 increase in aggregate demand when the crowding-out effect is taken into account.
c. $2,000 increase in aggregate demand in the absence of the crowding-out effect.
d. $2,500 increase in aggregate demand in the absence of the crowding-out effect.
4. A decrease in government spending
a. increases the interest rate and so investment spending increases.
b. increases the interest rate and so decreases investment spending decreases.
c. decreases the interest rate and so investment spending increases.
d. decreases the interest rate and so investment spending decreases.
5. If the marginal propensity to consume is 5/6, and there is no investment accelerator or crowding out, a $20 billion
increase in government expenditures would shift the aggregate demand curve right by
a. $60 billion, but the effect would be larger if there were an investment accelerator.
b. $60 billion, but the effect would be smaller if there were an investment accelerator.
c. $120 billion, but the effect would be larger if there were an investment accelerator.
d. $120 billion, but the effect would be smaller if there were an investment accelerator.
6. Assume the MPC is 0.75. The multiplier is
a. 0.75.
b. 1.25.
c. 4.00.
d. 6.25.
7. Assume the MPC is 0.75. Assume there is a multiplier effect and that the total crowding-out effect is $6 billion. An
increase in government purchases of $10 billion will shift aggregate demand to the
a. left by $24 billion.
b. left by $36 billion.
c. right by $34 billion.
d. right by $36 billion.
8. If a $1,000 increase in income leads to a $750 increase in consumption expenditures, then the marginal propensity to
consume is
a. 0.75 and the multiplier is 1 1/3.
b. 0.75 and the multiplier is 4.
c. 0.25 and the multiplier is 1 1/3.
d. 0.25 and the multiplier is 4.
9. As income rises
a. money demand rises, so the interest rate rises.
b. money demand rises, so the interest rate falls
c. money demand falls, so the interest rate rises.
d. money demand falls, so the interest rate falls.
10. Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $80 billion to the left. The
government wants to change spending to offset this decrease in demand. The MPC is 0.75. Suppose the effect on
aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure. There is no
crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in real GDP?
a. Raise both taxes and expenditures by $80 billion dollars.
b. Raise both taxes and expenditures by $10 billion dollars.
c. Reduce both taxes and expenditures by $80 billion dollars.
d. Reduce both taxes and expenditures by $10 billion dollars.
11. Suppose the MPC is 0.75. There are no crowding out or investment accelerator effects. If the government increases its
expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases
taxes by $200 billion, then by how far does aggregate demand shift to the right?
a. $800 billion and $800 billion
b. $800 billion and $600 billion
c. $600 billion and $600 billion
d. $600 billion and $450 billion
12. A tax cut shifts aggregate demand
a. by more than the amount of the tax cut.
b. by the same amount as the tax cut.
c. by less than the tax cut.
d. None of the above is necessarily correct.
13. An increase in government spending on goods to build or repair infrastructure
a. shifts the aggregate demand curve to the right.
b. has a multiplier effect.
c. shifts the aggregate supply curve to the right, but this effect is likely more important in the
long run.
14. In the early 1960s, the Kennedy administration made considerable use of
a. fiscal policy to stimulate the economy.
b. fiscal policy to slow down the economy.
c. monetary policy to stimulate the economy.
d. monetary policy to slow down the economy.
For the following questions, use the diagram below:
Figure 34-6.
15. Refer to Figure 34-6. Which of the following is correct?

a. A wave of optimism could move the economy from point a to point b.
b. If aggregate demand moves from AD1 to AD2, the economy will stay at point b in both the
short run and long run.
c. It is possible that either fiscal or monetary policy might have caused the shift from AD1 to
AD2.
16. When the Fed lowers the growth rate of the money supply, it must take into account
a. only the short-run effect on production.
b. only the short-run effects on inflation and production.
c. only the long-run effect on inflation.
d. the long-run effect on inflation as well as the short-run effect on production.
17. Which of the following is not an automatic stabilizer?
a. the minimum wage
b. the unemployment compensation system
c. the federal income tax
d. the welfare system

1. Both monetary policy and fiscal policy affect …………………
2. Stock prices often ……………….. when the Fed raises interest rates
3. If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the
demand for goods and services by ………………….
4. Both the multiplier effect and the …………………… tend to make the aggregate-demand curve shift further than it
does due to an initial increase in government expenditures.
5. If the inflation rate is zero, then the ………………………….. and …………………… are equal
6. An increase in the money supply decreases the equilibrium ………………………… and shifts the aggregate-demand
curve to the right
7. In principle, the government could increase the money supply or increase tax to try to offset the
A B C
effects of a wave of pessimism about the future of the economy.
D
8. Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money
A B C
supply or increasing the exchange rate.
D
9. In liquidity preference theory, an increase in the interest rate, other things the same, decreases
A
the quantity of money supplied, but does not shift the money demand curve.
B C D
10. When the Fed increases the money demand, the interest rate decreases. This decrease in the
A
interest rate increases consumption and investment demand, so the aggregate-demand curve
B C
shifts to the right.
D
11. During economic boom, unemployment insurance payments tend to rise.
A B C D
Problem 1:
For each of the following scenarios, identify whether it is an example of expansionary discretionary fiscal policy, contractionary
discretionary fiscal policy, or an automatic stabilizer.
a. During 2006, tax revenue for Macrovia falls as the economy enters a recession.
b. During 2006, in light of projected deficiencies in AD, Macrovia’s legislation authorizes an expenditure of $200
million to build a new hydroelectric dam.
c. In 2009, fearing a too rapidly expanding economy, Macrovia adopts a budget that calls for 10% spending cuts in
all government departments for the following fiscal year.
d. In 2008, unemployment benefits rise 5% in response to rising unemployment in Macrovia.
Problem 2:
Suppose you are given the following information about Macroland, a small, closed economy. Assume that government spending
is currently $0, taxes are constant at $50, and the aggregate price level is originally fixed at $100.
Year Real GDP Taxes Consumption Spending Planned Investment
Spending
1 $100 $50 $40 $50
2 150 50 80 50
3 300 50 200 50
a. Fill in the following table, using the information given above.
Year Disposable Income

1
2
3
b. What is the MPC for this economy?
c. What is the value of the spending multiplier for this economy?
Macro Tut 9: Open-Economy Macroeconomics
1. The production possibilities frontier illustrates

A. the combinations of output that an economy should produce.
B. the combinations of output that an economy should consume.
C. the combinations of output that an economy can produce.
D. All of the above are correct.
2. A production possibilities frontier is bowed outward when

A. the more resources the economy uses to produce one good, the fewer resources it has
available to produce the other good.
B. an economy is self-sufficient instead of interdependent and engaged in trade.
C. the rate of tradeoff between the two goods being produced is constant.
D. the rate of tradeoff between the two goods being produced depends on how much of each
good is being produced.
3. When each person specializes in producing the good in which he or she has a comparative advantage, total
production in the economy
A. falls.
B. stays the same.
C. rises.
D. may fall, rise, or stay the same.
Table 3-2
Assume that Aruba and Iceland can switch between producing coolers and producing radios at a constant rate.
Labor Hours
Needed to Make 1
Cooler Radio
Aruba 2 5
Iceland 1 4
4. Refer to Table 3-2. Suppose Aruba decides to increase its production of radios by 10. What is the opportunity cost
of this decision?
A. 0.25 coolers
B. 2.5 coolers
C. 4 coolers
D. 25 coolers
5. Refer to Table 3-2. Iceland should export

A. coolers and import radios.
B. radios and import coolers.
C. both goods and import neither good.
D. neither good and import both goods.
Table 3-3
Assume that Zimbabwe and Portugal can switch between producing toothbrushes and producing hairbrushes at a
constant rate.
Machine Minutes
Needed to Make 1
Toothbrush Hairbrush
Zimbabwe 3 10
Portugal 5 6
6. Refer to Table 3-3. Portugal has an absolute advantage in the production of

A. toothbrushes and a comparative advantage in the production of toothbrushes.
B. toothbrushes and a comparative advantage in the production of hairbrushes.
C. hairbrushes and a comparative advantage in the production of toothbrushes.
D. hairbrushes and a comparative advantage in the production of hairbrushes.
Table 3-7
Assume that Japan and Korea can switch between producing cars and producing airplanes at a constant rate.
Hours Needed Quantity Produced

to Make 1 in 2400 Hours
Car Airplane Cars Airplanes
Japan 30 150 80 16
Korea 50 150 48 16
7. Refer to Table 3-7. Without trade, Japan produced and consumed 50 cars and 6 airplanes and Korea produced and
consumed 27 cars and 7 airplanes. Then, each country agreed to specialize in the production of the good in which it
has a comparative advantage and trade 28 cars for 8 airplanes. As a result, Japan gained
A. 0 cars and 2 airplanes and Korea gained 1 car and 1 airplane.
B. 2 cars and 2 airplanes and Korea gained 1 car and 1 airplane.
C. 28 cars and 8 airplanes and Korea gained 28 cars and 8 airplanes.
D. 52 cars and 8 airplanes and Korea gained 28 cars and 8 airplanes.
Table 3-9
Barb and Jim run a business that sets up and tests computers. Assume that Barb and Jim can switch between setting
up and testing computers at a constant rate. The following table applies.
Minutes Needed to Number of Computers

Set Up or Tested in a
40-Hour Week
Set Up 1 Test 1 Computers Computers
Computer Computer Set Up Tested
Barb 48 ? 50 40
Jim 30 40 80 60
8. Refer to Table 3-9. Barb’s opportunity cost of testing one computer is setting up
A. 4/5 computer and Jim’s opportunity cost of testing one computer is setting up 3/4 computer.
B. 4/5 computer and Jim’s opportunity cost of testing one computer is setting up 4/3 computers.
C. 5/4 computers and Jim’s opportunity cost of testing one computer is setting up 3/4 computer.
D. 5/4 computers and Jim’s opportunity cost of testing one computer is setting up 4/3 computers.
Table 3-10
Juanita and Shantala run a business that programs and tests cellular phones. Assume that Juanita and Shantala can
switch between programming and testing cellular phones at a constant rate. The following table applies.
Minutes Needed to Number of Cellular Phones

Programmed or Tested in a
40-Hour Week
Program 1 Test 1 Cellular Phones Cellular Phones
Cellular Phone Cellular Phone Programmed Tested
Juanita ? 2 160 1200
Shantala 10 4 240 600
9. Refer to Table 3-10. The number of minutes needed by Juanita to program a cellular phone is
A. 4.
B. 5.
C. 7.5.
D. 15.
10. Refer to Table 3-10. Which of the following points would be on Juanita's production possibilities frontier, based
on a 40-hour week?
A. (120 cellular phones programmed, 295 cellular phones tested)
B. (130 cellular phones programmed, 225 cellular phones tested)
C. (140 cellular phones programmed, 155 cellular phones tested)
D. Both (a) and (b) would be on Juanita’s production possibilities frontier.
Figure 3-6
Maxine’s Production Possibilities Frontier Daisy’s Production Possibilities Frontier
tarts tarts
20 20
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
3 6 9 12 15 18 21 24 27 30 pies 3 6 9 12 15 18 21 24 27 30 pies
11. Refer to Figure 3-6. Suppose Daisy is willing to trade 3/4 tart to Maxine for each pie that Maxine makes and sends
to Daisy. Which of the following combinations of pies and tarts could Maxine not then consume, assuming Maxine
specializes in making pies and Daisy specializes in making tarts?
A. 4 pies and 6 tarts
B. 6 pies and 5 tarts
C. 8 pies and 3 tarts
D. 10 pies and 1.5 tarts
Figure 3-7
Bintu’s Production Possibilities Frontier Juba’s Production Possibilities Frontier
cups cups
10 10
9 9
8 8
7 7
6 6
5 5
4 4
3 3
2 2
1 1
1 2 3 4 5 6 7 8 bowls 1 2 3 4 5 6 7 8 bowls
12. Refer to Figure 3-7. The opportunity cost of 1 cup for Juba is
A. 1/6 bowl.
B. 2/3 bowl.
C. 3/2 bowls.
D. 6 bowls.
13. Refer to Figure 3-7. Bintu has a comparative advantage in the production of
A. bowls and Juba has a comparative advantage in the production of cups.
B. cups and Juba has a comparative advantage in the production of bowls.
C. both goods and Juba has a comparative advantage in the production of neither gooD.
D. neither good and Juba has a comparative advantage in the production of both goods.
Figure 3-8
Belgium’s Production Possibilities Frontier Latvia’s Production Possibilities Frontier
pancakes pancakes
20 20
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
2 4 6 8 10 12 14 16 18 20 waffles 2 4 6 8 10 12 14 16 18 20 waffles
14. Refer to Figure 3-8. If Belgium and Latvia each spends all its time producing the good in which it has a
comparative advantage and the countries agree to trade 7 waffles for 5 pancakes, then Belgium will consume
A. 7 waffles and 7 pancakes and Latvia will consume 5 waffles and 5 pancakes.
B. 7 waffles and 7 pancakes and Latvia will consume 5 waffles and 11 pancakes.
C. 23 waffles and 7 pancakes and Latvia will consume 5 waffles and 5 pancakes.
D. 23 waffles and 7 pancakes and Latvia will consume 5 waffles and 11 pancakes.
15. Refer to Figure 3-8. Latvia should specialize in the production of

A. waffles and import pancakes.
B. pancakes and import waffles.
C. both goods and import neither gooD.
D. neither good and import both goods.
Exercise 1: Fill in the blanks with no more than two words

1. Rancher and Farmer can both benefit because trade allows each of them to (1) ------ in doing what they do best
(2) ------ is the ability to produce a good using fewer inputs than another producer
(3) ------ is the ability to produce a good at a lower opportunity cost than another producer
The principle of comparative advantage establishes that there are gains from specialization and trade, but it leaves open a
couple of related questions: What determines the price at which trade takes place? How are the gains from trade shared
between the trading parties? For both parties to gain from trade, the price at which they trade must lie between the two (4)
------.
2. Suppose Argentina can produce one kilogram of beef for $2.50 and Brazil can produce one kilogram of beef for $2.90.
Argentina is said to have a(n) (5) ------ in beef production over Brazil.
3. It is possible for a country to have a comparative advantage in some good and a(n) (6) ------ in none.
If all countries specialize in the production of goods for which they have a comparative advantage, then the world output will
(7) ------. If opportunity costs are the same in all countries, there is no (8) ------ and no possibility of (9) ------.
Exercise 2: Indicate whether the statement is true or false.
1. Interdependence among individuals and interdependence among nations are both based on the gains from trade.
2. If a person chooses self-sufficiency, then she can only consume what she produces.
3. If Wrex can produce more math problems per hour and more book reports per hour than Maxine can, then Wrex cannot gain
from trading math problems and book reports with Maxine.
4. It is possible for the U.S. to gain from trade with Germany even if it takes U.S. workers fewer hours to produce every good
than it takes German workers.
5. A production possibilities frontier is a graph that shows the combination of outputs that an economy should produce.
6. Production possibilities frontiers cannot be used to illustrate tradeoffs.
Problem 1:
American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a
year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has
100 million workers.
a. For this situation, construct a Production Opportunities table.
b. Graph the production possibilities frontier of the American and Japanese economies.
c. For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of
grain? Put this information in the following Opportunity Cost table.
Opportunity cost of
1 unit of Car 1 ton of Grain
United States
Japan
d. Which country has an absolute advantage in producing cars? In producing grain?

e. Which country has a comparative advantage in producing cars? In producing grain?
f. Without trade, half of each country’s workers produce cars and half produce grain. What quantities of cars and grain does
each country produce?
g. Starting from a position without trade, give an example in which trade makes each country better off
Problem 2:
The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers.
a. Assume that each country decides to use half of its resources in the production of each good. Show these points on
the graphs for each country as point A.
b. If these countries choose not to trade, what would be the total world production of popcorn and peanuts?
c. Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By
specializing, what is the total world production of each product now?
d. If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each
country would receive from trade. Label these points B.

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Macro Tut 1: Measuring a nation’s income

2. For an economy as a whole,

6. Household spending on education is included in

8. If net exports is a negative number for a particular year, then

Year Nominal GDP GDP Deflator

16. Refer to Table 23-6. Which of the following is not correct?

EXERCISES AND PROBLEMS

Exercise 1: Fill the blank with NO MORE THAN 4 WORDS:

2008 2,000 $2 700 $1 600 $1

2009 1,800 $3 800 $9 500 $5

Calculate nominal GDP for each year of this economy

Year Calculation Real GDP

Year Calculation GDP deflator

Calculate the percentage change of nominal GDP and real in 2009?

Calculation Growth rate

a. James receives a Social Security check.

b. John buys an Italian sports car.

c. Henry buys domestically produced tools for his construction company.

Macro Tut 2: Production and Growth

1. As of 2006, using real GDP per person as a measure, we would classify

7. In a market economy, we know that a resource has become scarcer when

12. If a country's saving rate increases, then in the long run

15. Which of the following statements is correct?

16. Inward-oriented policies

17. Outward-oriented policies

EXERCISES AND PROBLEMS:

Exercise 1: Fill the blank with NO MORE THAN 4 WORDS:

Year 2004 2005 2006

Number of adults 20,000

14. Minimum-wage laws can keep wages

15. Which of the following is not correct?

EXERCISES AND PROBLEMS

and keeps the adult population unchanged. Unemployment rate decreases

2. A perpetuity is distinguished from other bonds in that it

3. The prices of stock traded on exchanges are determined by

4. A high demand for a company’s stock is an indication that

5. Which of the following statements is correct?

6. Which of the following are financial intermediaries?

8. In a closed economy, national saving is

10. In a closed economy, public saving is the

11. A budget surplus is created if

14. An increase in the budget deficit

EXERCISES AND PROBLEMS

Exercise 1: Fill the blank with NO MORE THAN 4 WORDS:

Bob has an apple wants an orange

Which, if any, pairs of traders has a double coincidence of wants?

3. Which of the following best illustrates the concept of a store of value?

5. Savings deposits are included in

6. At the Federal Reserve,

8. Which of the following entities actually executes open-market operations?

The First Bank of Johnson City

The First Bank of Wahooton

14. When the Fed buys government bonds,

15. A bank’s liabilities include

20. When the Fed conducts open-market purchases,

EXERCISES AND PROBLEMS

Exercise 1: Fill in the blank with NO MORE THAN 4 WORDS

1. a. What is the money multiplier? What is the money supply?

1. a. If the Fed is using open-market operations, will it buy or sell bonds?