Practice Test 4
ECON 2101
1. Investment contributes to economic growth.
A) True
B) False
2. During the Great Depression, capital stock in the United States was reduced by keeping
A) gross private investment negative.
B) gross investment above depreciation.
C) gross investment below depreciation.
D) gross investment equal to depreciation.
3. The purchase of a bond is
A) not considered capital but rather an alternative to adding capital.
B) equivalent to adding capital to a firm's capital stock.
C) equivalent to undertaking investment.
D) a more attractive form of investment (compared to capital) when interest rates are
high.
4. A decrease in investment demand would most likely be caused by a
A) decrease in the market interest rate.
B) decrease in corporate income tax rates.
C) decrease in the cost of new capital goods.
D) decrease in the expected demand for output.
5. A decrease in the interest rate will cause a(n)
A) increase in the investment demand curve.
B) decrease in the investment demand curve.
C) movement up along the investment demand curve.
D) movement down along the investment demand curve.
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Use the following to answer question 6:
Figure 14-1
6. Refer to Figure 14-1. Suppose the economy is operating at point m on curve A. The
decision to move to point p
I. requires a sacrifice of current consumption.
II. requires a sacrifice of future consumption.
III. adds to the economy's capital stock assuming depreciation remains at a level corresponding
to point m.
IV. enables the economy to increase both its consumption and investment in the future.
A) I and II only
B) I and III only
C) I, III, and IV only
D) I, II, III, and IV
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Use the following to answer question 7:
Figure 14-6
7. Refer to Figure 14-6. If the money supply is decreased in Panel (a) from MS1 to MS2,
then in Panel (b),
A) there is a movement along the investment demand curve from D to C.
B) there is a movement along the investment demand curve from C to D.
C) the investment demand curve shifts to the right.
D) the investment demand curve shifts to the left.
8. All other things unchanged, a recession in Japan
A) increases U.S. net exports and shifts the U.S. aggregate demand curve to the right.
B) decreases U.S. net exports and shifts the U.S. aggregate demand curve to the right.
C) increases U.S. net exports and shifts the U.S. aggregate demand curve to the left.
D) decreases U.S. net exports and shifts the U.S. aggregate demand curve to the left.
9. Which of the following has contributed most to the significant increase in world trade
since 1960?
A) removal of trade barriers
B) increase in world population
C) increases in income levels
D) increase in the quantity of natural resources
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10. Japan's current account balance equals
A) spending flowing from Japan to the rest of the world on current account less
spending flowing into Japan from the rest of the world on current account.
B) spending flowing into Japan from the rest of the world on current account less
spending flowing from Japan to the rest of the world on current account.
C) spending flowing into Japan from the rest of the world on current account plus
spending flowing from Japan to the rest of the world on current account.
D) the amount the rest of the world owes Japan for purchases of Japanese products and
assets.
11. Consider the market for U.S. dollars. Which of the following is true in equilibrium?
I. The quantity demanded of U.S. dollars equals the U.S. money supply.
II. U.S. exports + foreign purchases of U.S. assets equal U.S. imports + purchases of foreign
III. The quantity demanded of U.S. dollars equals the quantity supplied of U.S. dollars.
IV. The quantity supplied of U.S. dollars by U.S. nationals equals the quantity demanded of
U.S.
A) I and II.
B) II and III.
C) II and IV.
D) III only.
12. The purchase of U.S. goods by foreigners generated a demand for U.S. dollars in the
foreign currency market.
A) True
B) False
13. In the recovery phase of the inflation-unemployment cycle, a falling inflation rate means
that the price level is rising by smaller and smaller percentages.
A) True
B) False
14. In the graph of the inflation-unemployment cycle, the variable on the horizontal axis is
_____ and the variable on the vertical axis is _______.
A) real GDP; price level
B) price level; unemployment rate
C) unemployment rate; inflation rate
D) inflation rate; unemployment rate
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15. The inflation rate can be measured as
A) the change in the average price level from one year to the next.
B) the change in the implicit price deflator from one year to the next.
C) the annual percentage change in the implicit price deflator from one year to the
next.
D) the change in the consumer price index from one year to the next.
16. The notion that there is a tradeoff between inflation and unemployment is expressed as a
A) Phillips curve.
B) Keynes curve.
C) Schumpeter curve.
D) Friedman curve.
Use the following to answer question 17:
Figure 16-2
17. Refer to Figure 16-2. Consider an economy that experiences an inflationary gap.
Which of the points in the diagram is consistent with this situation?
A) point X
B) point Y
C) either point X or point Y
D) neither of the two points
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18. In general, economists believe that the Phillips curve is
A) downward sloping with a steeper slope in the long run than in the short run.
B) downward sloping with a steeper slope in the short run than in the long run.
C) downward sloping in the short run but vertical in the long run.
D) could be horizontal in the short run but always vertical in the long run.
19. Suppose that rising productivity increases potential output in each period by 4%. What
kind of monetary policy would be needed to maintain a zero rate of inflation at full
employment?
A) It should keep money supply constant.
B) It should increase money supply by 4% per period.
C) It should increase money supply by 4% in the first period and thereafter, hold
money supply constant.
D) It should decrease money supply by 4% each period.
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