ECON 2101 - Principle of Macroeconomics, Fall 2008 - Test 3Student: ___________________________________________________________________________Multiple Choice/TF (2.5 points each).Choose the response that best completes the statement or answers the question. For True/False questions,use A for True and B for False on your opscan form.1. In order to function as a medium of exchange, money must:a) Maintain a constant value over an extended period of timeb) Be backed by goldc) Have a relatively high intrinsic valued) Be willingly received by those who sell goods and services2. Demand-pull inflation is associated with a(n):a) Increase in SR aggregate supplyb) Decrease in aggregate demandc) Increase in aggregate demandd) Decrease in SR aggregate supply3. M1 consists primarily of:a) Cash in the hands of the public and in the vaults of private banksb) Cash in the hands of the public and savings depositsc) Cash in the hands of the public and checkable depositsd) Checkable deposits and savings account balances4. Money market mutual funds are:a) Excluded from both M1 and M2b) Included in both M1 and M2c) Included in M2 but not M1d) Included in M1 but not M25. The aggregate demand curve shows that when the price level rises, the quantity of real GDP demandeddecreases.True False6. The value of money varies inversely with the price level.True False7. The Federal Reserve System is:a) a group of twelve commercial banks.b) the branch of the U.S. Treasury that keeps the U.S. gold reserves.c) the agency of the U.S. government that insures commercial bank deposits.d) the central bank of the United States.8. The Federal Open Market Committee makes decisions about ____ policy.a) deposit insuranceb) fiscalc) monetaryd) tax19. Refer to the above graph. At income level 1, the amount of dissaving is represented by the line segment:a) BCb) ABc) ACd) AD10. Refer to the above graph. As income rises from level 2 to level 3, the amount of:a) Consumption increases and the amount of saving decreasesb) Consumption increases and the amount of saving increasesc) Consumption increases and the amount of dissaving increasesd) Consumption decreases and the amount of saving increases11. Economic studies conducted in industrially advanced countries suggest there is:a) An inverse relationship between the degree of independence of the central bank and the size of the averageannual rate of inflationb) No relationship between the degree of independence of the central bank and the size of the average annualrate of inflationc) A positive relationship between the degree of independence of the central bank and the size of the centralbankd) A positive relationship between the degree of independence of the central bank and the size of the averageannual rate of inflation12. If the economy dips into a recessiona) automatic stabilizers will cause tax revenue to fall and transfer payments to rise.b) discretionary fiscal policy will generate increased transfer payments and lower tax revenue.c) automatic stabilizers will cause tax revenue to rise and transfer payments to fall.d) discretionary fiscal policy will reduce government outlays and increase tax revenue.13. What "backs" the money supply?a) The U.S. government's ability to keep the value of money relatively stableb) The fact that the intrinsic value of coins in circulation is greater than their face valuec) The fact that currency is issued as Federal Reserve Notesd) The amount of gold the U.S. government has on deposit at its banks14. The short-run aggregate supply curve is vertical because firms adjust both prices and quantity in the short run.True False15. Other things being equal, a reorganization of the OPEC cartel to permit it to increase world oil prices by 70percent would most likely have which effect?a) It would shift the aggregate demand curve rightb) It would shift the aggregate demand curve right and the SR aggregate supply curve leftc) It would shift the SR aggregate supply curve rightd) It would shift the SR aggregate supply curve left216. Refer to the above diagram, in which Qfis the full-employment output. The shift of the aggregate demand curvefrom AD3to AD2is consistent with:a) demand-pull inflation.b) a contractionary fiscal policy.c) an expansionary fiscal policy.d) cost-push inflation.17. Refer to the above diagram, in which Qfis the full-employment output. If aggregate demand curve AD1describesthe current situation, this economy is suffering from _______________ , and the appropriate fiscal policy would beto:a) a recessionary gap; decrease taxes and/or reduce government spending.b) a recessionary gap; decrease taxes and/or increase government spending.c) an inflationary gap; decrease taxes and/or increase government spending.d) neither an inflationary nor recessionary gap; do nothing since the economy appears to be achievingfull-employment real GDP.18. A decrease in aggregate demand:a) Has an unpredictable effect on potential outputb) Reduces potential outputc) Does not change potential outputd) Increases potential output19. A federal budget surplusa) occurs when government expenditures exceed tax revenues.b) causes the national debt to increase.c) occurs when government expenditures are less than government tax revenues.d) occurs when government tax revenues and expenditures are equal.20. The Federal Open Market Committee (FOMC) serves as the fiscal agent for the U.S. government.True False21. Members of the Federal Reserve Board of Governors are:a) Elected by majority vote in state electionsb) Selected by the Federal Open Market Committee for 4-year termsc) Appointed by the President to staggered 14-year termsd) Appointed by the President to lifetime terms, like Supreme Court Justices22. Credit cards are considered to be part of the money supply.True False323. The nominal rate of interest is 8 percent and the real rate is 5 percent. The expected rate of return on aninvestment is 8 percent. The firm should:a) Undertake the investment because the expected rate of return of 8 percent is greater than the differencebetween the nominal and real interest ratesb) Not undertake the investment because the expected rate of return of 8 percent is greater than the nominal plusthe real interest ratec) Not undertake the investment because the expected rate of return of 8 percent is equal to the nominal interestrated) Undertake the investment because the expected rate of return of 8 percent is greater than the real rate ofinterest24. Which statement is true?a) The public