Question 1

If the economy is at the natural unemployment rate,

Accepted Answer

When the economy is at the natural unemployment rate, it means that the labor market is in equilibrium with no cyclical unemployment. At this point, the economy is producing at its potential level, which means that real GDP is equal to potential GDP. Therefore, choice A is the best answer.

Question 2

In the foreign exchange market, if the supply of dollars ________and simultaneously the demand for dollars ________, then the exchange rate definitely________ .

Accepted Answer

If the supply of dollars increases and the demand for dollars decreases, there is an excess supply of dollars, leading to a depreciation of the dollar's exchange rate.

Question 3

If the Fed makes an open market of securities, in the quantity theory M and V________

Accepted Answer

When the Fed sells securities, it decreases the money supply (M) as it takes money out of circulation, while the velocity of money (V) typically does not change immediately as it is more influenced by broader economic factors.

Question 4

The level of potential GDP

Accepted Answer

The level of potential GDP represents the maximum sustainable output that can be produced in an economy in the long run, given its available resources and technology. Thus, it determines the location of the long-run aggregate supply (LRAS) curve, which represents the potential output of an economy in the long run. Movements in the business cycle or changes in inflation rates or cyclical unemployment can affect the actual output of an economy in the short run, but they do not affect the level of potential GDP.

Question 5

The velocity of circulation is

Accepted Answer

The velocity of circulation is defined as the average number of times a dollar bill is used in a year to buy goods and services in GDP. Therefore, the correct choice is D. Choices A and B are incorrect because they are not related to the definition of velocity of circulation. Choice C is incorrect because lowering the required reserve ratio may increase the money supply, but it does not necessarily affect the velocity of circulation.

Question 6

The major component of the capital and finance account is

Accepted Answer

The major component of the capital and finance account is investment both abroad and domestically. This includes foreign direct investment, portfolio investment, and other types of investment flows. The official settlements account is a subcomponent of the capital and finance account that tracks government transactions, while net exports and imports of services are part of the current account.

Question 7

If two currencies allow for the equal value of money so that the same bundle of goods cost the same in two countries, there is

Accepted Answer

This scenario describes purchasing power parity, which occurs when the exchange rate between two currencies is such that the same basket of goods costs the same in both countries. This means that there is no advantage to buying goods in one country over the other based purely on price, as the value of the currencies are equal. Interest rate parity refers to the equalization of returns on investments in different currencies, tariff application parity is not a commonly used term, and trade equalization parity is not a recognized economic concept.

Question 8

When money is accepted as payment in a market transaction, it is functioning as

Accepted Answer

Money serves as a medium of exchange, meaning it is accepted as payment in exchange for goods and services. The other choices are not relevant to the role of money in market transactions.

Question 9

The main component of the current account is

Accepted Answer

The current account includes the balance of trade (exports minus imports), net income from abroad (such as interest and dividends), and net transfer payments (such as foreign aid and remittances). The main component of the current account is net exports, which represents the difference between a country's exports and imports of goods and services.

Question 10

Business cycles result when

Accepted Answer

Business cycles occur due to fluctuations in economic activity, often caused by changes in aggregate supply and aggregate demand that do not align perfectly, leading to periods of expansion and contraction.

Question 11

Japanʹs population increased by 3 percent in 2010. As a result, which of the following occurred?
i. an increase in potential GDP
ii. a rightward shift in the long-run aggregate supply curve
iii. a rightward shift in the short-run aggregate supply curve.

Accepted Answer

An increase in population can lead to an increase in potential GDP due to a larger labor force. This also causes a rightward shift in both the long-run and short-run aggregate supply curves as more resources become available for production.

Question 12

Long-run macroeconomic equilibrium occurs when

Accepted Answer

In long-run macroeconomic equilibrium, real GDP is equal to potential GDP, which means that the economy is producing at its full capacity level without putting pressure on prices. This is because, in the long run, all resources are fully utilized, the economy fully adapts to any changes in policy, and there is no cyclical unemployment, which leads to a stable price level. Therefore, option C is the correct answer. Option A is incorrect because a point along the short-run aggregate supply curve could be above or below potential GDP. Option B is incorrect because zero unemployment is not a realistic goal or necessary condition for the long-run macroeconomic equilibrium. Option D is incorrect because all able-bodied adults having jobs is not a sufficient or necessary condition for the long-run macroeconomic equilibrium.

Question 13

If the U.S. interest rate differential ________, the demand for dollars and the U.S. exchange rate________.

Accepted Answer

When the U.S. interest rate differential increases, it makes U.S. assets more attractive to investors, leading to an increased demand for dollars and causing the U.S. exchange rate to appreciate.

Question 14

The ________growth theory assumes that population growth is not driven by real GDP per person and the________ growth theory predicts that differences in the economic growth rate can last indefinitely.

Accepted Answer

The neoclassical growth theory assumes that population growth is not driven by real GDP per person, while the new growth theory predicts that differences in the economic growth rate can last indefinitely. Therefore, the best choice is A, which includes both theories.

Question 15

Keynesian economists believe that

Accepted Answer

Keynesian economists believe that government intervention is necessary to stabilize the economy during times of recession or inflation. They argue that the free market may not always automatically lead to full employment and that government spending (fiscal policy) and manipulation of interest rates (monetary policy) are necessary to keep the economy on track.

Question 16

If the Fed hikes the U.S. interest rate relative to interest rates in other countries, in the foreign exchange market the demand for dollars will________ , the supply of dollars will ________, and the exchange rate will________ .

Accepted Answer

If the Fed hikes the U.S. interest rate relative to interest rates in other countries, it will increase the demand for dollars as investors will seek higher returns. This will lead to an increase in the value of the dollar and the exchange rate. However, it will also decrease the supply of dollars as investors are less willing to sell their dollars for other currencies. Therefore, the most accurate choice is B, which states that the demand for dollars will increase, the supply of dollars will decrease, and the exchange rate will rise.

Question 17

At potential GDP

Accepted Answer

At potential GDP, the economy is operating at full capacity, meaning unemployment is at its natural rate, which includes frictional and structural unemployment but not cyclical unemployment.

Question 18

If productivity constantly increases, then the real wage rate________ and employment________ .

Accepted Answer

When productivity increases, it typically leads to higher real wages because workers are producing more value. Additionally, higher productivity can lead to increased demand for labor, thus increasing employment.

Question 19

According to the quantity theory of money,

Accepted Answer

According to the quantity theory of money, there is a direct relationship between the quantity of money in circulation and the price level. Therefore, a decrease in the quantity of money will lead to a decrease in the price level. The other options are not directly related to the quantity theory of money.

Question 20

The opportunity cost of holding money is the

Accepted Answer

The opportunity cost of holding money is the nominal interest rate because it represents the foregone interest that could have been earned if the money were invested instead of being held as cash.

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