Question 1

Refer to the first exchange rate graph. If the exchange rate is set above the equilibrium rate (e.g., above 120 ¥/$), what will happen in the foreign exchange market?

Accepted Answer

There will be a surplus of dollars, causing the dollar to depreciate.

Question 2

Which of the following best describes the effect of an appreciation of the U.S. dollar on net exports?

Accepted Answer

Net exports will decrease because U.S. goods become more expensive abroad and imports become cheaper.

Question 3

According to the Quantity Theory of Money, if the money supply ($$M) $$increases while velocity ($$V) $$and real output ($$Y) $$remain constant, what happens to the price level ($$P$$)?

$$M 	imes V = P 	imes Y$$

Accepted Answer

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

Question 4

Which of the following is NOT a goal of the Federal Reserve’s monetary policy?

Accepted Answer

Maximizing government tax revenue

Question 5

If the Federal Reserve lowers the federal funds rate, which of the following is most likely to occur?

Accepted Answer

Aggregate demand will increase, leading to higher real GDP.

Question 6

Which of the following is an example of an automatic stabilizer in fiscal policy?

Accepted Answer

Unemployment insurance payments that increase during a recession

Question 7

Refer to the third FRED graph showing the federal debt. If the federal debt is $$36$$ trillion and GDP is $$30$$ trillion, what is the debt-to-GDP ratio?

Accepted Answer

$$\frac{36}{30} = 1.2 or$$ $$120\%$$

Question 8

What is the primary effect of contractionary fiscal policy?

Accepted Answer

It decreases aggregate demand and lowers inflation.

Question 9

If the U.S. runs a net export deficit, what is a positive consequence mentioned in the study materials?

Accepted Answer

It finances foreign purchases of U.S. securities, helping to reduce U.S. interest rates and boost stock prices.

Question 10

Which of the following best describes the Purchasing Power Parity (PPP) theory?

Accepted Answer

Exchange rates move to equalize the purchasing power of different currencies in the long run.

Question 11

During the Great Recession and the Covid lockdown, the Fed used quantitative easing. What was the main purpose of this policy?

Accepted Answer

To reduce long-term interest rates by buying long-term bonds.

Question 12

If the exchange rate is below equilibrium, as shown in the second exchange rate graph, what is the likely outcome?

Accepted Answer

There will be a shortage of dollars, causing the dollar to appreciate.

Question 13

Which of the following is included in the narrowest definition of money, M1?

Accepted Answer

Currency, checking accounts, and other liquid deposits

Question 14

What is the main challenge for the Fed when facing stagflation?

Accepted Answer

The correct policy response is unclear because both inflation and unemployment are rising.

Question 15

Which of the following is a direct effect of lower U.S. interest rates on net exports?

Accepted Answer

Net exports increase because the dollar depreciates.

Question 16

If the government enacts expansionary fiscal policy, which of the following is most likely to occur?

Accepted Answer

Aggregate demand will increase, leading to lower unemployment.

Question 17

Which of the following is a plausible reason why the PPP theory does not hold exactly in practice?

Accepted Answer

Not all goods, such as Big Macs, are traded internationally.

Question 18

What is the effect of a strong U.S. dollar on inflation and asset prices?

Accepted Answer

It limits inflation and attracts foreign capital, supporting asset prices.

Question 19

Which of the following is a component of aggregate demand that is directly affected by government purchases?

Accepted Answer

G (Government purchases)

Question 20

If the velocity of money ($$V) is $$unstable, what does this imply about the relationship between money supply growth and short-term economic activity?

$$M 	imes V = P 	imes Y$$

Accepted Answer

The instability of $$V$$ discredits the view that money supply growth is linked to short-term fluctuations in economic activity.

Macroeconomics Study Guide: Exchange Rates, Monetary and Fiscal Policy, and U.S. Economic Indicators

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