Question 1

Which of the following best describes the role of the resource market in the circular flow model of income?

Accepted Answer

It coordinates actions of businesses demanding resources and households supplying them in exchange for income.

Question 2

Suppose the general price level in an economy falls from $$P_1 to$$ $$P_2. $$According to the aggregate demand curve, what is the most likely outcome?

Accepted Answer

The quantity of goods and services purchased will increase from $$Y_1 to$$ $$Y_2.$$

Question 3

Why does the aggregate demand curve slope downward?

Accepted Answer

Because lower price levels increase the wealth of people holding money, lower interest rates, and make domestic goods cheaper relative to foreign goods.

Question 4

Which of the following is true about the short-run aggregate supply (SRAS) curve?

Accepted Answer

It shows that as the price level increases, firms will expand output due to temporarily fixed costs.

Question 5

In the long run, why is the aggregate supply curve vertical?

Accepted Answer

Because resource markets and costs adjust, removing the incentive for firms to supply more output at higher prices.

Question 6

If the actual price level is below the equilibrium price level in the goods and services market, what will happen?

Accepted Answer

There will be excess demand, causing prices to rise.

Question 7

Which equation correctly relates the nominal interest rate ($$i$$), real interest rate ($$r$$), and expected inflation ($$\pi^e$$)?

Accepted Answer

$$i = r + \pi^e$$

Question 8

Suppose the real interest rate is 4% and expected inflation is 3%. What is the nominal interest rate?

Accepted Answer

$$i = r + \pi^e = 4\% + 3\% = 7\%$$

Question 9

In the loanable funds market, what happens when the demand for loanable funds increases?

Accepted Answer

The real interest rate increases and capital inflow occurs.

Question 10

Which of the following best describes the function of the foreign exchange market?

Accepted Answer

It brings the quantity of foreign currency demanded into equality with the quantity supplied, balancing imports plus capital outflow with exports plus capital inflow.

Question 11

If the U.S. experiences a trade deficit, what does this imply about capital flows?

Accepted Answer

There is a net inflow of capital to the U.S.

Question 12

Which of the following is a potential negative consequence of financing a trade deficit with borrowing used for current consumption?

Accepted Answer

It reduces the rate of capital formation and slows economic growth.

Question 13

In the resource market, what happens to the quantity of resources supplied as the resource price increases?

Accepted Answer

The quantity supplied increases.

Question 14

Which of the following would cause the aggregate demand curve to shift to the right?

Accepted Answer

An increase in government spending.

Question 15

If the economy is in long-run equilibrium, which of the following must be true?

Accepted Answer

The actual price level equals the anticipated price level, and output equals potential GDP.

Question 16

Suppose the nominal interest rate is 8% and expected inflation is 2%. What is the real interest rate?

Accepted Answer

$$6\%$$

Question 17

Which of the following scenarios best illustrates the effect of an appreciation of the domestic currency in the foreign exchange market?

Accepted Answer

Exports become more expensive for foreigners, and imports become cheaper for domestic consumers.

Question 18

If the government increases its borrowing, what is the likely effect in the loanable funds market?

Accepted Answer

The demand for loanable funds increases, raising the real interest rate.

Question 19

Which of the following is NOT a factor that determines the economy’s full employment rate of output (potential GDP)?

Accepted Answer

The general price level.

An Introduction to Basic Macroeconomic Markets: Circular Flow, Aggregate Demand and Supply, and Key Markets

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