Question 1

Suppose the U.S. experiences a trade deficit and a capital inflow surplus at the same time. Which of the following best explains this situation?

Accepted Answer

The U.S. imports more goods than it exports, and foreign investors are buying U.S. assets.

Question 2

Which of the following transactions would be recorded in the U.S. current account?

Accepted Answer

A U.S. resident receives dividend income from shares in a Japanese company.

Question 3

If the government increases spending without raising taxes during a recession, which of the following is most likely to occur in the short run?

Accepted Answer

Aggregate demand shifts right, output rises, and unemployment falls.

Question 4

Which of the following best describes the process of demand-pull inflation from the short run to the long run?

Accepted Answer

Aggregate demand increases, output and prices rise in the short run; in the long run, wages rise, SRAS shifts left, output returns to potential GDP, and the price level remains higher.

Question 5

A government deficit is most likely to increase during a recession because:

Accepted Answer

Tax revenues fall and government spending on aid rises.

Question 6

Which of the following is an example of partial crowding out?

Accepted Answer

Government spending increases GDP, but some private investment falls.

Question 7

Suppose the Federal Reserve wants to fight a recession. Which monetary policy action is most appropriate, and what is its effect on the AD/AS graph?

Accepted Answer

Increase the money supply, shifting AD right.

Question 8

Which of the following best explains why nominal wages are 'sticky' in the short run?

Accepted Answer

Long-term labor contracts, minimum wage laws, efficiency wages, and concerns about worker morale and fairness.

Question 9

A negative supply shock, such as a sudden increase in oil prices, is most likely to cause which of the following?

Accepted Answer

Stagflation: high inflation and high unemployment.

Question 10

If the Federal Reserve accommodates a cost shock by increasing aggregate demand, what is the likely result?

Accepted Answer

Output returns to potential GDP, but inflation becomes even higher.

Question 11

Which of the following best describes the recognition, decision, and implementation lags faced by policymakers?

Accepted Answer

Recognition lag affects both policies; decision lag is usually longer for fiscal policy; implementation lag is usually shorter for monetary policy.

Question 12

Suppose the supply of savings increases in the Market for Loanable Funds. What happens to real interest rates and investment?

Accepted Answer

Real interest rates fall and investment rises.

Question 13

If government debt increases, what is the likely effect in the Market for Loanable Funds?

Accepted Answer

Demand for loanable funds increases, real interest rates rise, and private investment falls.

Question 14

Which of the following is the central equation in the Quantity Theory of Money?

Accepted Answer

$$MV = PY$$

Question 15

According to the Quantity Theory of Money, if velocity ($$V) $$and output ($$Y) $$are stable, what is the main effect of increasing the money supply ($$M$$)?

Accepted Answer

It mainly causes inflation.

Question 16

Which of the following policies would a Keynesian economist most likely recommend during an economic boom?

Accepted Answer

Contractionary policy, such as raising taxes or reducing government spending.

Question 17

Which of the following best describes diminishing returns in the context of the aggregate production function?

Accepted Answer

Adding more of one input eventually increases output by smaller and smaller amounts.

Question 18

If the labor supply increases while capital and technology remain constant, what happens to labor productivity?

Accepted Answer

Labor productivity decreases.

Question 19

Which of the following is a policy favored by supply-side economists, and what is its intended effect?

Accepted Answer

Lower taxes to increase long-run aggregate supply and economic growth.

Question 20

Suppose the central bank increases the money supply rapidly, but output ($$Y) $$and velocity ($$V) $$remain constant. According to the equation $$MV = PY$$, what happens to the price level ($$P$$)?

Accepted Answer

The price level ($$P) $$increases.

Macroeconomics Study Notes: Balance of Payments, Fiscal & Monetary Policy, Labor Markets, Growth, and Monetarism

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