BSP 2701

BSP2701
Topic 2

1. A recession occurs when ________, when ________, or when both of these occur.

A. potential output grows slowly; actual output falls below potential output
B. potential output grows slowly; actual output rises above potential output
C. potential output grows rapidly; actual output equals potential output
D. potential output grows rapidly; actual output falls below potential output

Answer: A
2. When cyclical unemployment increases by 1%, the recessionary gap

_____by_____ percent of potential output.
A. widens; one
B. widens; two
C. closes; one
D. closes; two
Answer: B
3. Planned aggregate expenditure (PAE ) equals:
A. C p + I + G + NX.
B. C + I p + G + NX.
C. C + I + Gp + NX
D. C + I + G + NX p.
Answer: B
4. When prices are predetermined, the level of output that equals planned
aggregate expenditure is called ________ output.
A. the natural rate of

B. potential
C. short-run equilibrium
D. induced
Answer: C
5. If SR equilibrium output equals 10,000, mpc=0.9, and potential output (Y*) is

9000, then government purchases must _____

A increase by 100
B decrease by 100
C increase by 1,000
D decrease by 1,000
Answer: B
Topic 3
6. Money creation occurs when

A a person puts cash in a bank.
B a person deposits a payroll check in their checking account.
C banks make loans to borrowers.
D the Federal Reserve increases the reserve requirement.
Answer: C
7. A bank has a minimum reserve requirement of 20%. If $20,000 is deposited

in the bank, it can
A. lend $20,000.
B. lend $16,000.
C. hold $20,000 less in excess reserves.
D. reduce its required reserves by $20,000.
Answer: B
8. Which of the following is NOT a basic monetary policy tool used by the Fed?

A. the discount rate
B. reserve requirements
C. open-market operations
D. the income tax rate
Answer: D
9. If total reserves for a bank are $10,000, and demand deposits are $100,000,
then the money multiplier must be
A. 5
B.10
C. 15
D. 20
Answer: B
10. When the federal funds rate is raising , this signals its intention to ____
bonds in the open market and___ money supply
A buy; reduce
B buy; increase
C sell; increase
D sell; reduce

Answer: D

Topic 4
11. In symbolic terms where Y is real GDP, POP is total population, and N is the
number of employed workers, Y/P is
A Y / N × N / POP .
B N / Y × POP / N .
C Y / POP × N / POP .
D N / Y × N / POP
Answer: A
12. In order to promote growth through increased quantities of physical

capital, governments must promote:
A a better educational system.

B job training programs.
C high rates of saving and investing.
D funding for basic science.
Answer: C
13. If average labor productivity increases, real GDP per person:
A. increases
B. decreases
C. remains constant
D. uncertain
Answer: D
14. Long-run increases in living standards, as measured by real GDP per

person, are primarily the result of increases in:
A. population
B. the money supply.
C. government budget surpluses.
D. average labor productivity.
Answer: C
15. If the share of population employed in two countries is the same, average
living standards will be higher in the country
A. with the smaller population;

B. with the larger population.
C. with higher average labor productivity.
D. with lower average labor productivity.
Answer: C
Topic 5
16. Saving for protection against unexpected setbacks—such as the loss of

a job or a medical emergency—is called _____saving
A. public
B. bequest
C. precautionary
D. life-cycle
Answer: C
17. Where there is no international trade, national saving equals

A. C+I+G.
B. Y-C-G.
C. Y+C+G.
D. Y-C-I
Answer: B
18. Payments by the Gov. to the public for which the government receives no
current goods or services in return are called
A. public saving.
B. net taxes.
C. transfer payments.
D. capital losses.
Answer: C
19. Public saving is:

A. increased when the government budget deficit rises.
B. identical to the government budget surplus.
C. less important to national saving than private saving.
D. more important to national saving than private saving.
Answer: B
20. As the real interest rate decreases, the quantity of saving supplied
________ and the quantity of saving demanded ______
A. increases; increases
B. increases; decreases
C. does not change; does not change
D. decreases; increases
Answer: D
Topic 6
21. The rate at which two currencies can be traded for each other is called
the ________ exchange rate.
A. flexible
B. fixed
C. real
D. nominal
Answer: D
22. The theory that nominal exchange rates are determined so that the law of
one price holds is called:
A. the fixed-exchange-rate rule.

B. the equilibrium principle.
C. the law of supply and demand.
D. purchasing power parity.
Answer: D
23 Based on the theory of purchasing power parity, in the long run, currencies
of countries with significant inflation will

A. be flexible.
B. have nominal exchange rates.
C. depreciate.
D. appreciate.

Answer: C
24. The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S.
dollar, will depreciate when:
A. real GDP in Japan increases

B. the U.S. Federal Reserve tightens monetary policy.
C. U.S. consumers decrease their preference for Japanese cars.
D. real GDP in Japan decreases.
Answer: D
25. Easy monetary policy will ________ net exports as a result of a ________
currency.
A. increase; stronger
B. increase; weaker
C. decrease; weaker
D. decrease; stronger
Answer: B

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2. When cyclical unemployment increases by 1%, the recessionary gap

3. Planned aggregate expenditure (PAE ) equals:

A. the natural rate of

5. If SR equilibrium output equals 10,000, mpc=0.9, and potential output (Y*) is

6. Money creation occurs when

7. A bank has a minimum reserve requirement of 20%. If $20,000 is deposited

12. In order to promote growth through increased quantities of physical

A a better educational system.

13. If average labor productivity increases, real GDP per person:

14. Long-run increases in living standards, as measured by real GDP per

A. with the smaller population;

16. Saving for protection against unexpected setbacks—such as the loss of

17. Where there is no international trade, national saving equals

19. Public saving is:

A. the fixed-exchange-rate rule.

A. real GDP in Japan increases

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