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#1. Which of the following statements is the most accurate statement about the expenditure approach to GDP or planned expenditures?
a. Interest rates influence spending.
b. Spending influences interest rates.
c. There is no relationship between interest rates and spending.
d. Interest rates both influence and are influenced by spending.
e. The relationship between spending and interest rates is too uncertain to be modeled.
#2. A higher interest rate today makes current consumption
a. more expensive relative to future consumption because the return on savings is lowered.
b. more expensive relative to future consumption because the return on savings is increased.
c. less expensive relative to future consumption because the return on savings is increased.
d. less expensive relative to future consumption because the return on savings is lowered.
e. just as expensive as future consumption because the return on saving is uncertain.
#3. Holding which of the following components of M2 has the greatest opportunity cost?
a. Savings deposits
b. Money market mutual funds
c. Currency
d. Repurchase agreements.
#4. Which of the following best describes the relationship between interest rates and net exports?
a. The relationship is positive.
b. There is no relationship because both imports and exports are unaffected by interest rates.
c. The relationship is negative.
d. It is not possible to determine the relationship between the two because exports are negatively related to interest rates and imports are positively related to interest rates.
e. It is not possible to determine the relationship between the two because exports are positively related to interest rates and imports are negatively related to interest rates.
#5. When the Fed raises interest rates, it expects
a. a decrease in potential GDP.
b. a decrease in the growth rate of real GDP.
c. an increase in the growth rate of real GDP.
d. an increase in potential GDP.
e. no change in either potential or real GDP.
#6. When the Fed wants to raise nominal interest rates, it
a. increases bank reserves.
b. orders all banks to increase interest rates.
c. recommends that Congress raise the federal funds rate.
d. recommends that Congress conduct open market operations.
e. sells government bonds.
#7. Suppose the Fed’s operating target is currently 4%. If nominal income increases, the Fed must do which of the following to maintain the target?
a. An increase in the discount rate.
b. A decrease in the required reserve ratio.
c. An open market sale of securities
d. Nothing, the change in nominal income does not affect the interest rate.
#8. Which of the following is probably the most sensitive to changes in real interest rates?
a. Government purchases.
b. Exports
c. Consumption
d. Imports
e. Investment
#9. Acting according to the multiplier effect,
a. an increase in planned investment causes a larger increase in the equilibrium level of planed expenditure as a whole.
b. The rate of business fixed investment and inventories are lowered.
c. The higher interest rates encourage increased homebuilding.
d. Lower interest rates increase the opportunity cost of carrying inventories.
#10. The demand for money curve
a. is upward sloping.
b. Is flat.
c. Is downward sloping.
d. Is vertical to show the link between the money supply and price level.
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