Question 1

A reduction in real interest rates will cause the demand for new homes to

Accepted Answer

A) increase, which results in an increase in investment expenditures. 
B) increase, which results in an increase in consumption expenditures. 
C) decrease, which results in a decrease in investment expenditures. 
D) decrease, which results in a decrease in consumption expenditures. 
E) increase, which will result in an increase in business fixed investment. 
A) increase, which results in an increase in investment expenditures. 
B) increase, which results in an increase in consumption expenditures. 
C) decrease, which results in a decrease in investment expenditures. 
D) decrease, which results in a decrease in consumption expenditures. 
E) increase, which will result in an increase in business fixed investment.

Question 2

Exhibit 24-1
  
-According to the data in Exhibit 24-1, the rate of inflation for 2009 was

Accepted Answer

A) 8.1 percent. 
B) 1.8 percent. 
C) 0.8 percent. 
D) -0.8 percent. 
E) -2.3percent. 
A) 8.1 percent. 
B) 1.8 percent. 
C) 0.8 percent. 
D) -0.8 percent. 
E) -2.3percent.

Question 3

Consumption expenditures are sensitive to interest rates mainly because the decision to purchase a new home depends on the mortgage rate.

Accepted Answer

A) True 
 B)False

Question 4

When the rate of inflation rises, the central bank should

Accepted Answer

A) raise the real rate of interest. 
B) raise the nominal rate of interest. 
C) lower the nominal rate of interest. 
D) increase aggregate expenditures. 
E) lower the real rate of interest. 
A) raise the real rate of interest. 
B) raise the nominal rate of interest. 
C) lower the nominal rate of interest. 
D) increase aggregate expenditures. 
E) lower the real rate of interest.

Question 5

If interest rates increase, savings will increase, and the marginal propensity to consume will decrease.

Accepted Answer

A) True 
 B)False

Question 6

There is an inverse relationship between real GDP and inflation because

Accepted Answer

A) an increase in inflation leads to a higher interest rate, which leads to an increase in real GDP. 
B) an increase in inflation leads to a higher interest rate, which leads to a decrease in potential GDP that causes real GDP to decline. 
C) an increase in inflation leads to a higher interest rate, which leads to a decrease in real GDP. 
D) an increase in inflation leads to a lower interest rate, which leads to a decrease in real GDP. 
E) a decrease in inflation leads to a higher interest rate, which leads to a decrease in real GDP. 
A) an increase in inflation leads to a higher interest rate, which leads to an increase in real GDP. 
B) an increase in inflation leads to a higher interest rate, which leads to a decrease in potential GDP that causes real GDP to decline. 
C) an increase in inflation leads to a higher interest rate, which leads to a decrease in real GDP. 
D) an increase in inflation leads to a lower interest rate, which leads to a decrease in real GDP. 
E) a decrease in inflation leads to a higher interest rate, which leads to a decrease in real GDP.

Question 7

If firms and workers expect prices to rise significantly, they are likely to raise wages and prices by a large amount to keep pace with the expected inflation.

Accepted Answer

A) True 
 B)False

Question 8

In order for the aggregate demand (AD) curve to be downward-sloping,

Accepted Answer

A) there has to be an inverse relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate. 
B) there has to be a positive relationship between the real interest rate and real GDP and a negative relationship between inflation and the real interest rate. 
C) there has to be an inverse relationship between the real interest rate and real GDP and an inverse relationship between inflation and the real interest rate. 
D) there has to be a positive relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate. 
E) there has to be an inverse relationship between the real interest rate and real GDP but there cannot be a relationship between inflation and the real interest rate. 
A) there has to be an inverse relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate. 
B) there has to be a positive relationship between the real interest rate and real GDP and a negative relationship between inflation and the real interest rate. 
C) there has to be an inverse relationship between the real interest rate and real GDP and an inverse relationship between inflation and the real interest rate. 
D) there has to be a positive relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate. 
E) there has to be an inverse relationship between the real interest rate and real GDP but there cannot be a relationship between inflation and the real interest rate.

Question 9

According to the monetary policy rule, the Fed raises interest rates only when

Accepted Answer

A) inflation is high. 
B) the rate of inflation is above its target inflation rate. 
C) the interest rate is below its target rate of interest. 
D) the rate of inflation is rising. 
E) real GDP is greater than potential GDP. 
A) inflation is high. 
B) the rate of inflation is above its target inflation rate. 
C) the interest rate is below its target rate of interest. 
D) the rate of inflation is rising. 
E) real GDP is greater than potential GDP.

Question 10

Since inflation tends to rise when the percentage deviation of real GDP from potential GDP is positive, the aggregate demand curve must be upward-sloping.

Accepted Answer

A) True 
 B)False

Question 11

An increase in real interest rates leads to

Accepted Answer

A) a decrease in exports and an increase in imports. 
B) an increase in both exports and imports. 
C) a decrease in both exports and imports. 
D) an increase in exports and a decrease in imports. 
E) no change in either exports or imports. 
A) a decrease in exports and an increase in imports. 
B) an increase in both exports and imports. 
C) a decrease in both exports and imports. 
D) an increase in exports and a decrease in imports. 
E) no change in either exports or imports.

Question 12

The positive correlation between real interest rates and inflation is best explained by examining

Accepted Answer

A) the behavior of the government. 
B) forces of supply and demand. 
C) the behavior of the market. 
D) the behavior of central banks. 
E) equilibrium in the economic fluctuations model. 
A) the behavior of the government. 
B) forces of supply and demand. 
C) the behavior of the market. 
D) the behavior of central banks. 
E) equilibrium in the economic fluctuations model.

Question 13

Which of the following best explains why consumption expenditures are affected by real interest rates?

Accepted Answer

A) Higher real interest rates make it more expensive to finance the purchase of a new home. 
B) When interest rates are high, banks stop lending to households. 
C) An increase in real interest rates encourages people to save a larger proportion of their income, which means there is less income for consumption. 
D) When real interest rates are low, it is more difficult for households to borrow money because the supply of savings is low. 
E) When real interest rates are high, it is more difficult for households to borrow money because the supply of savings is low. 
A) Higher real interest rates make it more expensive to finance the purchase of a new home. 
B) When interest rates are high, banks stop lending to households. 
C) An increase in real interest rates encourages people to save a larger proportion of their income, which means there is less income for consumption. 
D) When real interest rates are low, it is more difficult for households to borrow money because the supply of savings is low. 
E) When real interest rates are high, it is more difficult for households to borrow money because the supply of savings is low.

Question 14

A decrease in the target inflation rate will cause a downward movement along the AD curve.

Accepted Answer

A) True 
 B)False

Question 15

The Federal Reserve has an explicit inflation target.

Accepted Answer

A) True 
 B)False

Question 16

The table below shows the price level for 2002 through 2010.

Accepted Answer

The answer of The table below shows the price level...

Question 17

Which of the following facts about investment is not true?

Accepted Answer

A) Investment is the component of expenditure that is least sensitive to the real interest rate. 
B) Investment represents the purchase of new equipment or a new factory by a business firm. 
C) Investment generally decreases when the real interest rate increases. 
D) All of the above represent true facts about investment. 
E) None of the above represent true facts about investment. 
A) Investment is the component of expenditure that is least sensitive to the real interest rate. 
B) Investment represents the purchase of new equipment or a new factory by a business firm. 
C) Investment generally decreases when the real interest rate increases. 
D) All of the above represent true facts about investment. 
E) None of the above represent true facts about investment.

Question 18

If a change in interest rates will affect real GDP, the Fed should focus on the change in the nominal interest rate.

Accepted Answer

A) True 
 B)False

Question 19

When real interest rates decrease,

Accepted Answer

A) the firm's profits will decrease. 
B) the opportunity cost of borrowing has increased. 
C) the firm's profits will increase. 
D) there are fewer profitable investment opportunities for the firm. 
E) there are more profitable investment opportunities for the firm. 
A) the firm's profits will decrease. 
B) the opportunity cost of borrowing has increased. 
C) the firm's profits will increase. 
D) there are fewer profitable investment opportunities for the firm. 
E) there are more profitable investment opportunities for the firm.

Question 20

Which of the following statements is true?

Accepted Answer

A) The IA line describes the behavior of firms and consumers when a change in the inflation rate causes interest rates to change. 
B) The IA line identifies inflation at any given time. 
C) The IA line identifies all possible points of spending balance. 
D) The AD curve identifies the rate of inflation at any given time. 
E) The IA line identifies real GDP at any given time. 
A) The IA line describes the behavior of firms and consumers when a change in the inflation rate causes interest rates to change. 
B) The IA line identifies inflation at any given time. 
C) The IA line identifies all possible points of spending balance. 
D) The AD curve identifies the rate of inflation at any given time. 
E) The IA line identifies real GDP at any given time.

Exam 24: The Economic Fluctuations Model

A reduction in real interest rates will cause the demand for new homes to

Exhibit 24-1 -According to the data in Exhibit 24-1, the rate of inflation for 2009 was

Consumption expenditures are sensitive to interest rates mainly because the decision to purchase a new home depends on the mortgage rate.

When the rate of inflation rises, the central bank should

If interest rates increase, savings will increase, and the marginal propensity to consume will decrease.

There is an inverse relationship between real GDP and inflation because

If firms and workers expect prices to rise significantly, they are likely to raise wages and prices by a large amount to keep pace with the expected inflation.

In order for the aggregate demand (AD) curve to be downward-sloping,

According to the monetary policy rule, the Fed raises interest rates only when

Since inflation tends to rise when the percentage deviation of real GDP from potential GDP is positive, the aggregate demand curve must be upward-sloping.

An increase in real interest rates leads to

The positive correlation between real interest rates and inflation is best explained by examining

Which of the following best explains why consumption expenditures are affected by real interest rates?

A decrease in the target inflation rate will cause a downward movement along the AD curve.

The Federal Reserve has an explicit inflation target.

The table below shows the price level for 2002 through 2010.

Which of the following facts about investment is not true?

If a change in interest rates will affect real GDP, the Fed should focus on the change in the nominal interest rate.

When real interest rates decrease,

Which of the following statements is true?

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model

The Demand Curve and the Behavior of Consumers

The Supply Curve and the Behavior of Firms

The Efficiency of Markets

Costs and the Changes at Firms Over Time

The Rise and Fall of Industries

Monopoly

Product Differentiation, Monopolistic Competition, and Oligopoly

Antitrust Policy and Regulation

Labor Markets

Taxes, Transfers, and Income Distribution

Public Goods, Externalities, and Government Behavior

Capital and Financial Markets

Macroeconomics: the Big Picture

Measuring the Production, Income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

Using the Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Economic Growth Around the World

International Trade

International Finance

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