Principles of Economics Exam Questions
with Answers
Austrian Business Cycle Theory (ABCT) - ✔✔believe that there is intertemporal disequilibrium;
disequilibrium over time; savings don't equal investment; booms and busts
Aggregate Demand - ✔✔MsV, where V equals C+I+G
nominal interest rate - ✔✔real interest rate + inflation rate
real interest rate - ✔✔nominal interest rate - inflation rate
When there is inflation the CB has two choices - ✔✔1) accept higher inflation
2) kill inflation
What results in growth? - ✔✔The biggest factor is ideas, discoveries, and innovations
What shifts the Aggregate demand (AD) curve? - ✔✔1) change in the velocity of the money
supply
2) change in the growth of the money supply
What shifts the LRAS curve? - ✔✔1) price of inputs
2) productivity/technology changes
3) changes in regulation
4) smooth versus disruptive production
5) weather
, What shifts the SRAS curve? - ✔✔Because of a change in the expected inflation rate
Spending shocks equal - ✔✔unexpected changes to AD
Real shocks cause - ✔✔changes to the LRAS curve
Expectation shocks cause - ✔✔changes to the SRAS curve
Keynesian theory suggests - ✔✔an increase in government spending where the debt is
monetized will cure a recession
The difference between ABCT and Keynesian Theory is: - ✔✔ABCT considers the interest rate to
be a price that coordinates the inter temporal market while Keynesians believe there is no
means of coordinating savings and investment
What is the most liquid asset?
1) currency
2) savings accounts
3) checkable deposits
4) money market accounts - ✔✔1) currency
What is Money Base (MB) - ✔✔currency and reserves held by the banks at the Fed
What is M1? - ✔✔currency and checkable deposits (could include savings)
What is M2? - ✔✔Currency, checkable deposits, savings deposits, money market mutual funds,
and small time investments
with Answers
Austrian Business Cycle Theory (ABCT) - ✔✔believe that there is intertemporal disequilibrium;
disequilibrium over time; savings don't equal investment; booms and busts
Aggregate Demand - ✔✔MsV, where V equals C+I+G
nominal interest rate - ✔✔real interest rate + inflation rate
real interest rate - ✔✔nominal interest rate - inflation rate
When there is inflation the CB has two choices - ✔✔1) accept higher inflation
2) kill inflation
What results in growth? - ✔✔The biggest factor is ideas, discoveries, and innovations
What shifts the Aggregate demand (AD) curve? - ✔✔1) change in the velocity of the money
supply
2) change in the growth of the money supply
What shifts the LRAS curve? - ✔✔1) price of inputs
2) productivity/technology changes
3) changes in regulation
4) smooth versus disruptive production
5) weather
, What shifts the SRAS curve? - ✔✔Because of a change in the expected inflation rate
Spending shocks equal - ✔✔unexpected changes to AD
Real shocks cause - ✔✔changes to the LRAS curve
Expectation shocks cause - ✔✔changes to the SRAS curve
Keynesian theory suggests - ✔✔an increase in government spending where the debt is
monetized will cure a recession
The difference between ABCT and Keynesian Theory is: - ✔✔ABCT considers the interest rate to
be a price that coordinates the inter temporal market while Keynesians believe there is no
means of coordinating savings and investment
What is the most liquid asset?
1) currency
2) savings accounts
3) checkable deposits
4) money market accounts - ✔✔1) currency
What is Money Base (MB) - ✔✔currency and reserves held by the banks at the Fed
What is M1? - ✔✔currency and checkable deposits (could include savings)
What is M2? - ✔✔Currency, checkable deposits, savings deposits, money market mutual funds,
and small time investments
