Question 1

Suppose the Federal Reserve implements a quantitative easing policy by purchasing assets from banks. According to the money market model, what is the immediate effect on the short-term interest rate?

Accepted Answer

The short-term interest rate decreases because the money supply increases.

Question 2

If the Federal Reserve buys bonds in the open market, what happens to the price of bonds and the interest rate, and why?

Accepted Answer

The price of bonds increases and the interest rate decreases because bond demand rises.

Question 3

During the Great Depression, President Roosevelt increased taxes to balance the federal budget. Using the Aggregate Demand/Aggregate Supply (AD/AS) framework, what was the likely effect on output and the price level?

Accepted Answer

Aggregate demand shifted left, causing both output and the price level to decrease.

Question 4

Given the following market data: At a price of $400, quantity demanded is 40 and quantity supplied is 60. What market condition exists at this price, and by how much?

Accepted Answer

There is a surplus of 20 units.

Question 5

If the required reserve ratio is 20%, a bank has $$100,000 in checkable deposits and 30$$,000 in reserves, what is the maximum amount of loans the bank can create?

Accepted Answer

$10,000

Question 6

Suppose investment increases by $$50$$ billion at each price level and the multiplier is $$1.5. $$What is the total change in real GDP demanded?

Accepted Answer

$$75$$ billion

Question 7

If the cost of a market basket is $$200 in 2020 $$and $$230 in 2021$$, using 2020 as the base year, what is the price index for 2021?

Accepted Answer

$$1.15$$

Question 8

A country’s GDP grows at $$4\%$$ per year. If current output is $$100,000$$ units, how many years will it take for GDP to reach $$400,000$$ units? (Use the rule of 70.)

Accepted Answer

35 years

Question 9

If the demand for U.S. dollars decreases in the foreign exchange market, what happens to the exchange rate and U.S. net exports?

Accepted Answer

The exchange rate decreases and U.S. net exports increase.

Question 10

Which of the following best describes the relationship between bond prices and interest rates?

Accepted Answer

As the price of a bond falls, the interest rate rises.

Question 11

If the Federal Reserve sells bonds in the open market, what is the expected effect on bond prices and interest rates?

Accepted Answer

Bond prices fall and interest rates rise.

Question 12

Suppose the U.S. exchange rate increases relative to other currencies. What is the likely effect on U.S. imports and exports?

Accepted Answer

Imports increase and exports decrease.

Question 13

Which of the following is included in gross private domestic investment in GDP accounting?

Accepted Answer

An increase in business inventories.

Question 14

If the government increases taxes while keeping government expenditures constant, what is the direct effect on the government budget?

Accepted Answer

The budget moves toward a surplus or a smaller deficit.

Question 15

Which of the following equations correctly represents GDP using the expenditure approach?

Accepted Answer

$$GDP = C + I + G + X_n$$

Question 16

If the price of apples falls, what is the likely effect in the market for apple pies, assuming apples are a key input?

Accepted Answer

The equilibrium price falls and the equilibrium quantity rises.

Question 17

A newspaper article states that of 45.06 million college-educated people over age 16, 36.21 million are in the labor force and 35.44 million are employed. What is the unemployment rate for this group?

Accepted Answer

$$\frac{36.21 - 35.44}{36.21} 	imes 100 \approx 2.13\%$$

Question 18

Which of the following is a direct source of frictional unemployment?

Accepted Answer

The time it takes to search for jobs that best match one’s skills.

Question 19

If the Federal Reserve wants to close a recessionary gap using monetary policy, which of the following actions is most appropriate?

Accepted Answer

Decrease interest rates and increase bond prices by buying bonds.

Question 20

Suppose the demand and supply equations for a market are $$P = 80 - 10Q ($$demand) and $$P = 10Q + 200 ($$supply). What is the equilibrium price and quantity?

Accepted Answer

Price = $$300$$, Quantity = $$50$$

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