1. When most consumers and firms reduce spending only because they expect other consumers and firms to reduce spending, and a recession results, A. a real-business-downturn has occurred. B. a self-correction has occurred. C. a coordination failure has occurred. D. an adverse aggregate supply shock has occurred.
2. A government may be able to reduce the international value of its currency by A. selling foreign currencies in the foreign exchange market. B. selling its currency in the foreign exchange market. C. buying its currency in the foreign exchange market. D. increasing its domestic interest rates.
3. In terms of aggregate supply, a period in which nominal wages and other resource prices are fully responsive to price-level changes is called the A. short run. B. long run. C. immediate market period. D. very long run.
4. Monetarists believe the private economy is inherently A. stable and that the government sector should be small. B. unstable and the public sector should be small. C. unstable and the public sector should be large. D. stable, but that the public sector should be large.
5. The “brain drain” problem in the developing countries refers to the fact the best-educated workers A. often emigrate to industrialized countries. B. are reluctant to become entrepreneurs. C. are reluctant to work in the public sector. D. are concentrated in rural areas where their skills are underutilized.
6. Which one of the following statements about capital flight is correct? A. Capital flight refers to the high international mobility of speculative funds caused by variations in exchange rates. B. Capital flight refers to the tendency of large corporations of industrially advanced countries to build new plants in the developing countries because labor is cheaper. C. Capital flight refers to developing countries’ citizens accumulating or investing their savings in the industrially advanced countries. D. Capital flight refers to the tendency of developing countries to overinvest in commercial aircraft.
7. If a nation’s goods exports are $55 billion, while its goods imports are $50 billion, we can conclude with certainty that this nation has a A. balance of payments surplus. B. positive balance on current account. C. balance of trade (goods) surplus. D. positive balance on goods and services.
8. A major difficulty with the argument that trade barriers are necessary because foreign workers are paid low wages is that A. wage rates and labor productivity are directly related. B. there’s no discernible relationship between wage rates and labor productivity. C. wage rates and labor productivity are inversely related. D. labor costs and product prices are not related.
9. The equation of exchange suggests that, if the supply and velocity of money remain unchanged, an increase in the physical volume of goods and services produced will cause A. a decline in the price level. B. the unemployment rate to rise. C. an automatic budget deficit. D. the Federal Reserve Banks to sell securities in the open market.
10. The Laffer Curve is a central concept in A. welfare economics. B. monetarism. C. supply-side economics. D. Keynesianism.
11. If government uses its stabilization policies to maintain full employment under conditions of cost-push inflation, A. stagflation is likely to occur. B. an inflationary spiral is likely to occur. C. the Phillips Curve is likely to shift inward. D. a deflationary spiral is likely to occur.
12. Rational expectations theory is based on the assumption that A. both product and resource markets are very competitive.B. both product and resource markets are monopolistic. C. wages and prices are flexible upward, but inflexible downward. D. product markets are competitive, but resource markets are monopolistic.
13. In terms of aggregate supply, a period in which nominal wages and other resource prices are unresponsive to price-level changes is called the A. long run. B. short run. C. very long run. D. immediate market period.
14. Which one of the following statements about the velocity of money is correct? A. The velocity of money is the number of times per year the average dollar is spent on final goods and services. B. The velocity of money is the price level divided by aggregate supply. C. The velocity of money is the relationship between the money supply and the price level. D. The velocity of money is the relationship between asset and transactions demands for money.
15. Which one of the following statements about disinflation is correct? A. Disinflation occurs when investment plans exceed saving. B. Disinflation occurs when the price level is falling. C. Disinflation occurs when the inflation rate is declining. D. Disinflation occurs when a speculative investment “bubble” is bursting.
16. In the U.S. balance of payments, U.S. purchases of assets abroad are a(n) A. U.S. dollar outflow. B. current account item. C. U.S. dollar inflow. D. inpayment.
17. The international agency that lends money to developing countries for economic development projects is the A. World Trade Organization (WTO). B. World Credit Union. C. World Bank. D. International Monetary Fund (IMF).
18. Which one of the following is typically not a problem for low-income developing countries? A. Capital flight B. High saving rates C. “Brain drains” D. Poor infrastructure
19. The very poorest low-income developing countries typically have relatively A. low rates of both population growth and economic growth. B. high rates of economic growth and relatively low rates of population growth. C. high rates of both population growth and economic growth. D. low rates of economic growth and relatively high rates of population growth.
20. Inflation accompanied by falling real output and employment is known as A. Okun’s law. B. Laffer’s law. C. the Phillips Curve. D. stagflation.