Exercises Explained 1

1. In a close economy, interest rate and national saving will increase if the Government
increases purchase of good and services.
FALSE.
If the Government increases purchase of good and services will reduce national saving since
the government spend more money and save less.
Explain more.

2. In an economy where the bank deposits increase, do the M0 and the M1 will increase?
Explain.
TRUE.
M1 = demand deposits and travellers’ cheques and M0 = coin currency, physical paper, and
central bank reserves.
Both of them increase. Since M0 is obligations of a central bank, including currency and
central bank depository accounts and M1 is demand deposits and travellers’ cheques,
depositing $100 in my bank account both of them increase.
Explain more.

3. Does the government transfer need to be included in the calculation of GDP? Explain
why and the GDP’s components.
FALSE.
Government’s transfers =redistribution of income and wealth without taking good and
services in return.
Government purchases are expenditures on goods and services by federal, state, and local
governments with the exception of debt and transfer payments such as Social Security. The
combined total of this spending, excluding transfer payments and interest on the debt, is a key
factor in determining a nation's gross domestic product (GDP). Transfer payments are
expenditures that do not involve purchases, such as Social Security payments and farm
subsidies.
Explain more.

4. The inflow of FDI will improve Current Account (CA) balance and balance of payments
(BoP).
TRUE.
The balance of payments (BOP) is the place where countries record their monetary
transactions with the rest of the world. Examining the current account balance (CA) of a
country's BOP can provide a good idea of its economic activity. It includes activity around a
country's industries, capital market, services, and the money entering the country from other
governments (which FDI inflow is included) or through remittances.
Explain more.

5. Is the production possibilities frontier a graph that shows the various combinations of
employment? Explain.
FALSE
 The Production Possibilities Frontier (PPF) is a graph that shows all the different
combinations of output of two goods that can be produced using available resources and
technology. The PPF captures the concepts of scarcity, choice, and trade-offs.
 Points that lie on the PPF illustrate combinations of output that are productively
efficient.
 The slope of the PPF indicates the opportunity cost of producing one good versus the
other good, and the opportunity cost can be compared to the opportunity costs of another
producer to determine comparative advantage.
Explain more with diagram of production possibility frontier.
6. Are the determinants of productivity given by ONLY physical capital, human capital
and natural resources? Explain all its components.
FALSE
There are four determinants of productivity: physical capital, human capital, natural
resources, and technological knowledge.
Explain all its components.

7. According to purchasing power parity theory, the foreign currency will be appreciated
relatively to domestic currency if foreign price of good and services decreased relatively
to domestic prices.
FALSE.
One popular macroeconomic analysis metric to compare economic productivity and standards
of living between countries is purchasing power parity (PPP). PPP is an economic theory that
compares different countries' currencies through a "basket of goods" approach. If foreign
price of good and services decreased, the foreign currency should be depreciated.
Explain more.

8. Is the terms of financial intermediaries and financial markets referring to the same
concepts? Explain.
FALSE
Financial markets are the institutions through which a person who wants to save can directly
supply funds to a person who wants to borrow. The two most important financial markets in
our economy are the bond market and the stock market.
Financial intermediaries are financial institutions through which savers can indirectly provide
funds to borrowers. The term intermediary reflects the role of these institutions in standing
between savers and borrowers. Here we consider two of
the most important financial intermediaries: banks and mutual funds.
Explain more.

9. Is the net export positive in a close economy where the country does not engage in
international trade? Explain.
FALSE
Close economies do not engage in international trades, so they do not have importation and
exportation.
Net export is the differences between exportations and importations and in the close
economies is zero.
Explain more.

10. If the tax revenue is higher than government spending, is the government running a
budget surplus? Explain budget deficit, surplus and balanced.
TRUE
If T exceeds G, the government runs a budget surplus because it receives more money than it
spends. If the government spends more than it receives in tax revenue, then G is larger than T
. In this case, the government runs a budget deficit, and public saving T – G is a negative
number. If government spending exactly equals tax revenue, the government is said to have a
balanced budget
Explain more.

11. Can Central Banks change the money supply? Explain with diagram.
TRUE
One important role of central banks is determined the money supply, which is the quantity of
money in the economy through the purchase and sale of government bonds in open-market
operations.
 Explain more (See chapter 34).

12. The production of Apple’s Iphone in China contributes to China’s GDP and US’s GNP.
Explain.
TRUE.
GDP measures the value of goods and services produced within a country's borders, by
citizens and non-citizens alike. GNP measures the value of goods and services produced by
only a country's citizens but both domestically and abroad. Thus, Apple’s Iphone contribute
to China’s GDP and US’s GNP.
Explain more.

13. Because CPI uses fixed basket of consumer goods and services, economist say that CPI
overstates actual cost of living. Explain.
TRUE.
The quality/new goods bias causes inflation calculated using a fixed basket of goods over
time to overstate the true rise in cost of living because improvements in the quality of existing
goods and the invention of new goods are not taken into account.
The substitution bias causes an inflation rate calculated using a fixed basket of goods over
time to overstate the true rise in the cost of living because it does not take into account that
people can substitute away from goods whose prices rise disproportionately
Explain more.

14. You take $100 you kept under your mattress and deposit it in your bank account. This
action will make M1 increase and M0 remain unchanged. Explain.
FALSE.
M1 = demand deposits and travellers’ cheques and M0 = coin currency, physical paper, and
central bank reserves.
Both of them increase. Since M0 is obligations of a central bank, including currency and
central bank depository accounts and M1 is demand deposits and travellers’ cheques,
depositing $100 in my bank account both of them increase.
Explain more.

Exercises Explained 2
1. In an economy where government purchase increases what is the effect on AD. Using
AD-AS model to explain the fluctuation and adjustment in the economy. Use diagrams.
(See Chapter 33 and 34).

- Government purchase increase -> AD increase

- AD increase -> price increase, total output increase, unemployment decrease.
- Explain with diagram (see Chapters 33 and 34 as well as the slides reported below)

2. In an economy where consumption sharply increases what is the effect on AD. Using
AD-AS model to explain the fluctuation and adjustment in the economy. Use diagrams.
(See Chapter 33 and 34)

- Consumption increase -> AD increase

- AD increase -> price increase, total output increase, unemployment decrease.
- Explain with diagram (see Chapters 33 and 34 as well as the slides reported below)
3. Domestic investment expands and promotes economic performance. Using AD-AS
model to explain the changes in the economy. Suggest macroeconomics policies that can
bring the economy to the initial price level. Use diagrams. (See Chapter 33 and 34)
- Investment increase -> AD increases
- AD increase -> price increase, total output increase
- Policies: contractionary fiscal policies and contractionary monetary policies
- Explain with diagram (see Chapters 33 and 34 as well as the slides reported below)

4. Vietnam’s exports of good increases sharply compared to imports. Using AD-AS model
to explain the fluctuation in the economy. Suggest macroeconomics policies that can
bring the economy to the initial price level. (See Chapter 33 and 34)
- Net export increases -> AD increases
- AD increase -> price increase, total output increase, unemployment decrease
- Policies: contractionary fiscal policies and contractionary monetary policies
- Explain with diagram (see Chapters 33 and 34 as well as the slides reported below)

Slides below useful to explain questions 1,2 and 3.

5. In an economy with no cash in payment, all banks maintain reserve ratio of 10%.
Calculate the change in money supply after the central bank purchase $1000 million
government bond in open market. Use diagram of money market to explain changes in
money supply and value of money (chapter 30 slide 27).

- Money multiplier is 10
- Money base increase $1000
- Money supply increase (10*1000) =10,000
- Diagram: money supply increase -> value of money decreases
PART 1: MULTIPLE-CHOICE QUESTIONS

#1 GDP is divided into four components: ________

Consumption, investment, government purchases and net imports.
Consumption, investment, government sells and net exports.
Capital, investment, government purchases and net imports.
Consumption, investment, government purchases and net exports.

#2 ______of an item is what you give up to get that item.

Potential costs, the costs of goods or services forecasted.
The opportunity cost, the value of the next-best alternative when a decision is made.
Society costs as the sum of the private and public costs
Production cost incurred by a business when it manufactures a product or provides a service.

#3 _____often make decisions by comparing marginal benefits and marginal costs.

Intellectual people. An ability to relate a broad range of ideas and synthesize commonalities among
them.
Clever people. A clever person can solve a puzzle easily.
Rational people. Rational behaviour refers to a decision-making process on optimal level.
Production people is the ability of people to produce effectively and efficiently.

#4 ____is something that induces a person to act.

A motivation, willingness to do something, or something that causes such willingness.
An incentive, something that encourages a person to do something.
A provocation, an action or statement that is intended to make someone disappointed.
An impulse, a strong sudden desire to do something.

#6 ____ that bargains with employers over wages, benefits, and working conditions.
Union. A labour union or trade union is an organized group of workers.
Collective. Collective bargaining is a process of negotiation.
Coalition is a group formed when two or more people, factions, states, political parties, militaries, or
other parties agree to work together.
All the above

#7 The determinants of_____ is physical capital, human capital, natural resources, and technological
knowledge.
Agglomeration, a mass or collection of economic things.
GDP per capita is the amount of GDP per person in a country.
Productivity is the ability to produce goods and services that the society needs.
Externality is a cost or benefit caused by a producer that is not financially incurred or received by that
producer.

#8 Financial institutions can be grouped into two categories:_____.

Financial borrowers and financial intermediaries
Financial markets and financial suppliers
Financial markets and financial intermediaries
Financial markets and financial demand

#9 ______are financial institutions through which savers can indirectly provide funds to borrowers.
Financial borrowers, which refers to the demand of borrower from savers.
Financial markets, which include stocks and bonds
Financial intermediaries, which include financial institutions within the financial market.
Financial demand, which is the demand of finance in the financial markets.

#10 _____ does not engage in international trade, imports and exports are exactly zero.
Close economy does not interact with other economies around the word.
Open economy interacts with other economies around the word.
Planned economy where the government decide what to produce and consume.
Decentralized planning is a type of economic system in which decision-making is distributed amongst
various economic agents or localized within production agents.

PART 2: CHOOSE TRUE or FALSE and EXPLAIN

#11 Is the terms of financial intermediaries and financial markets referring to the same concepts?
Explain.
FALSE
Financial markets are the institutions through which a person who wants to save can directly supply
funds to a person who wants to borrow. The two most important financial markets in our economy are
the bond market and the stock market.
Financial intermediaries are financial institutions through which savers can indirectly provide funds to
borrowers. The term intermediary reflects the role of these institutions in standing between savers and
borrowers. Here we consider two of the most important financial intermediaries: banks and mutual
funds.

#12 Is the net export positive in a close economy where the country does not engage in international
trade? Explain.
FALSE
Close economies do not engage in international trades, so they do not have importation and
exportation.
Net export is the differences between exportations and importations and in the close economies is
zero.

#13 If the tax revenue is higher than government spending, is the government running a budget
surplus? Explain budget deficit, surplus and balanced.
TRUE
If T exceeds G, the government runs a budget surplus because it receives more money than it spends.
If the government spends more than it receives in tax revenue, then G is larger than T. In this case, the
government runs a budget deficit, and public saving
T – G is a negative number. If government spending exactly equals tax revenue, the government is
said to have a balanced budget

#14 Can Central Banks change the money supply? Explain with diagram.
TRUE
One important role of central banks is determined the money supply, which is the quantity of money
in the economy through the purchase and sale of government bonds in open-market operations.
Explain more (See chapter 34).

1. Gross domestic product measures two things at once:

a. the total spending of everyone in the economy and the total saving of everyone in the
economy.
b. the total income of everyone in the economy and the total expenditure on the economy's
output of goods and services.
c. the value of the economy's output of goods and services for domestic citizens and the
value of the economy's output of goods and services for the rest of the world.
d. the total income of households in the economy and the total profit of firms in the
economy.
2. Which of the following is correct?
a. The market value of rental housing services is included in GDP, but the market value of
owner-occupied housing services is not.
b. The market value of owner-occupied housing services is included in GDP, but the market
value of rental housing services is not.
c. The market values of both owner-occupied housing services and rental housing services
are included in GDP.
d. Neither the market value of owner-occupied housing services nor the market value of
rental housing services is included in GDP.
3. GDP excludes most items that are produced and sold illegally and most items that are
produced and consumed at home because
a. the quality of these items is not high enough to contribute value to GDP.
b. measuring them is so difficult.
c. the government wants to discourage the production and consumption of these items.
d. these items are not reported on income tax forms.
4. Estimates of the values of which of the following non-market goods or services are included in
GDP?
a. the value of unpaid housework
b. the value of vegetables and other foods that people grow in their gardens
c. the estimated rental value of owner-occupied homes
d. All of the above are included in GDP.
5. Which of the following statements is correct?
a. The value of intermediate goods is always included in GDP.
b. The value of intermediate goods is included in GDP only if those goods were produced in
the previous year.
c. The value of intermediate goods is included in GDP only if those goods are added to
firms’ inventories to be used or sold at a later date.
d. The value of intermediate goods is never included in GDP.
6. The consumer price index is used to
a. monitor changes in the level of wholesale prices in the economy.
b. monitor changes in the cost of living over time.
c. monitor changes in the level of real GDP over time.
d. monitor changes in the stock market.
7. Which of the following is not correct?
a. The consumer price index gives economists a way of turning dollar figures into
meaningful measures of purchasing power.
b. The consumer price index is used to monitor changes in the cost of living over time.
 c. The consumer price index is used by economists to measure the inflation rate.
d. The consumer price index is used to measure the quantity of goods and services that the
economy is producing.
8. When the consumer price index rises, the typical family
a. has to spend more dollars to maintain the same standard of living.
b. can spend fewer dollars to maintain the same standard of living.
c. finds that its standard of living is not affected.
d. can offset the effects of rising prices by saving more.
9. The CPI is a measure of the overall cost of the goods and services bought by
a. a typical firm.
b. the government.
c. a typical consumer.
d. All of the above are correct.
10. The CPI is calculated
a. weekly.
b. monthly.
c. quarterly.
d. yearly.
11. In the calculation of the CPI, coffee is given greater weight than tea if
a. consumers buy more coffee than tea.
b. the price of coffee is higher than the price of tea.
c. it costs more to produce coffee than it costs to produce tea.
d. coffee is more readily available than tea is to the typical consumer.
12. The one variable that stands out as the most significant explanation of large variations in
living standards around the world is
a. productivity.
b. population.
c. preferences.
d. prices.