1. Which of the following is a correct statement?
a. Fiscal policy is the use of tax and spending policies by the Congress and the president.
b. Fiscal policy involves the control of the money supply by the Federal Reserve Bank.
c. Monetary policy involves the control of the money supply by the Congress and the president.
d. Monetary policy is the use of tax and spending policies by the Federal Reserve Bank.

2. The four basic markets that characterize the economy (as in the circular flow diagram) are the
a. goods market, services market, stock market, and bond market.
b. resource market, labor market, goods market, and loanable funds market.
c. goods and services market, resource market, foreign exchange market, and loanable funds market.
d. savings market, stock market, bond market, and investment market.

3. (I)  The three reasons why the aggregate demand curve slopes downward are the international substitution effect, the real balance effect, and the interest rate effect.
(II) The aggregate demand curve shows the relationship between the aggregate quantity of goods and services demanded and the general price level in an economy.
a. I is true; II is false.
b. I is false; II is true.
c. Both I and II are true.
d. Both I and II are false.

4. As the general price level in an economy rises, the aggregate quantity demanded of goods and services falls because
a. the prices of domestic goods have risen relative to foreign goods, causing exports to fall and imports to rise.
b. higher interest rates caused by an increase in the demand for money balances causes a reduction in current investment and consumption.
c. the value of money will fall, reducing the real wealth and thus the consumption of persons holding money balances.
d. all of the above are correct.

5. (I)  The short-run aggregate supply curve is upward sloping because the prices firms pay for major resources is set by long-term contracts, thus unexpected increases in product prices lead to higher profits inducing firms to expand output.
(II) The long-run aggregate supply curve is vertical because an economy's productive ability is determined in the long run by its resources, not by the price level. Additionally, in the long run, decision makers will adjust long-term contracts to take price changes into account.
a. I is true; II is false.
b. I is false; II is true.
c. Both I and II are true.
d. Both I and II are false.

6. (I)  If long-run equilibrium is present in the goods and services market, the actual price level will equal the price level anticipated when buyers and sellers agreed to long-term contracts.
(II) When an economy is in long-run equilibrium, the output level will be less than the full employment or potential level.
a. Both I and II are true.
b. Both I and II are false.
c. I is true; II is false.
d. I is false; II is true.

7. The resource market is important from a macroeconomic perspective because
a. it coordinates the allocation of productive resources and determines the costs of production.
b. it determines the interest rates faced by borrowers and lenders.
c. inflation rates are set in the resource market by the government.
d. resource prices determine the position of the long-run aggregate supply curve.

8. The actions of borrowers and lenders are coordinated in
a. the loanable funds market by the real interest rate.
b. the goods and services market by the general price level.
c. the resource market by wage rates.
d. the loanable funds market by the inflation rate.

9. If the money or nominal interest rate is 3 percent and the inflation premium is 8 percent, the real interest rate is
a. -5 percent.
b. 3 percent.
c. 5 percent.
d. 11 percent.

10. The macroeconomy is said to be in long-run equilibrium only if
a. the resource, loanable funds, foreign exchange, and goods and services markets are all in equilibrium.
b. prices were incorrectly estimated by decision makers.
c. the output of the economy exceeds the full-employment level of output.
d. the economy is operating along its short-run aggregate supply curve.