# Macro Midterm #2 (First Half)

1. If the MPS = 0.1, then the value of the multiplier equals: A) 1.
B) 5. C) 9. D) 10.
D) 10.

2. If the multiplier equals 4, then the marginal propensity to save must be equal to:
A) 1/4.
B) 1/2.
C) 3/4.
D) the marginal propensity to consume.
A) 1/4.

3. Suppose that the marginal propensity to consume is 0.8, and investment spending increases by \$100 billion. The increase in aggregate demand is:
A) \$100 billion, the same amount as investment spending.
B) \$125 billion, composed of \$100 billion in investment spending and \$25 billion in
consumption.
C) \$80 billion, composed of \$100 billion in investment spending and a decrease in
consumption of \$20 billion.
D) \$500 billion, composed of \$100 billion in investment spending and \$400 billion in
consumption.
D) \$500 billion, composed of \$100 billion in investment spending and \$400 billion in
consumption.

4. If the marginal propensity to save is 0.3, the size of the multiplier is: A) 3.3.
B) 2.3. C) 1.3. D) 0.7.
A) 3.3.

5. The multiplier is:
A) 1/(1-MPC).
B) MPS / MPC.
C) 1 / (MPC).
D) 1(1 + MPC).
A) 1/(1-MPC).

6. The marginal propensity to consume (MPC) is equal to the change in:
A) consumer spending divided by the change in disposable income.
B) consumer spending divided by the change in investment spending.
C) consumer spending divided by the change in gross domestic product.
D) disposable income divided by the change in consumer spending.
A) consumer spending divided by the change in disposable income.

7. Suppose that a financial crisis decreases investment spending by \$100 billion and the marginal propensity to consume is 0.8. Assuming no taxes and no trade, by how much will real GDP change?
A) \$500 billion decrease
B) \$200 billion decrease
C) \$800 billion decrease
D) \$400 billion increase
A) \$500 billion decrease

8. An increase in the MPC:
A) increases the multiplier.
B) shifts the autonomous investment line upward.
C) decreases the multiplier.
D) shifts the autonomous investment line downward.
A) increases the multiplier.

9. The _______ the _______, the _______ the multiplier.
A) smaller; level of wealth; bigger
B) bigger; MPS; bigger
C) bigger; MPC; smaller
D) bigger; MPC; bigger
D) bigger; MPC; bigger

10. Suppose investment spending increases by \$50 billion and as a result the equilibrium income increases by \$200 billion. The value of the MPC is:
A) 0.8.
B) 0.4.
C) 0.75.
D) 4.
C) 0.75.

11. According to the National Bureau of Economic Research, the U.S. economy is going through a severe recession. Most households are trying to save more of their income than before. This increase in private saving will lead to:
A) an increase in aggregate income, as more saving means more funds for business
investment.
B) a fall in aggregate income, as more saving means people will spend less.
C) no change in aggregate income, because there is no saving multiplier.
D) an increase in aggregate income, as an increase in saving will make people
wealthier.
B) a fall in aggregate income, as more saving means people will spend less.

12. If MPS is small, it will:
A) make the multiplier smaller.
B) make the multiplier larger.
C) not affect the value of the multiplier.
D) increase the interest rate.
B) make the multiplier larger.

13. (Figure: Consumption and Real GDP) The slope of the consumption function is called the:
A) marginal propensity to save.
B) average propensity to consume.
C) marginal propensity to consume.
D) marginal consumption increment.
C) marginal propensity to consume.

14. (Figure: Consumption and Real GDP) If real GDP is \$4 trillion, consumption is _______ trillion.
A) \$0.75 B) \$1 C) \$3 D) \$4
C) \$3

15. Suppose the marginal propensity to consume changes from 0.75 to 0.9. How will this affect the consumption function?
A) The slope will get steeper.
B) Autonomous consumption will increase.
C) The function will shift upward.
D) The slope will get steeper and autonomous consumption will increase.
A) The slope will get steeper.

16. (Table: Individual and Aggregate Consumption Functions) Which of the following represents Fred’s individual consumption function?
A) C=100+0.7YD.
B) C=100+0.5YD.
C) C=150+0.8YD.
D) C = 0.80YD.
A) C=100+0.7YD.

Suppose that the consumption function is: C = \$500 + 0.8 × YD, where YD is disposable income.
17. (Scenario: Consumption Spending) Autonomous consumption is:
A) \$500.
B) 0.
C) 0.8 of disposable income.
D) \$1,300 if disposable income is \$1,000.
A) \$500.

18. (Scenario: Consumption Spending) The marginal propensity to consume is: A) \$500.
B) 0. C) 0.8. D) 0.2.
C) 0.8.

19. When David has no income, he spends \$500. If his income increases to \$2,000, he spends \$1,900. Which of the following represents his consumption function?
A) C=1.2×YD.
B) C=0.95×YD.
C) C=\$500+0.7×YD. D) C=\$500+1,000×YD.
C) C=\$500+0.7×YD. D)

20. According to the table, the MPC and autonomous consumption are ________ and ________, respectively, for Bob.
A) 0.6; \$10,000
B) 0.4; \$13,000
C) 0.6; \$9,000
D) 0.4; \$9,000
D) 0.4; \$9,000

21. Assuming the A represents autonomous consumption and YD represents disposable income, for the economy as a whole it holds true that:
A) C=MPC+(A×YD).
B) C=A+(MPC×YD).
C) C=(A+MPC)×YD.
D) C=(A-MPS)+(MPC×YD).
B) C=A+(MPC×YD).

22. The slope of the consumption function is equal to the slope of:
A) the 45-degree line.
B) the aggregate expenditure line.
C) the aggregate demand curve.
D) the short-run aggregate supply curve.
B) the aggregate expenditure line.

23. An increase in the wealth of households, all other things unchanged, will result in _______ the aggregate consumption function.
A) no effect on
B) an upward shift in
C) a downward shift of
D) a movement to the right along
B) an upward shift in

24. If the stock market crashes:
A) the aggregate consumption function will shift up.
B) the aggregate consumption function will shift down.
C) unplanned inventory investment will be negative.
D) GDP will increase.
B) the aggregate consumption

25. Which of the following is NOT a determinate of consumer spending?
A) current disposable income
B) expected future disposable income
C) wealth
D) investment spending
D) investment spending

26. According to the life-cycle hypothesis, wealth affects consumer spending because:
A) wealthier people have higher incomes.
B) wealthier people have better connections to buy in-demand goods.
C) people try to smooth their consumption over the course of their lives.
D) people try to consume as early in their lives as they can.
C) people try to smooth their consumption over the course of their lives.

27. People are likely to save the most during what part of the life cycle, according to the life-cycle hypothesis?
A) as they get closer to retirement.
B) in their peak earnings years.
C) the older they get.
D) in their old age.
B) in their peak earnings years.

28. (Scenario: Aggregate Consumption Equation) If disposable income is \$500, autonomous consumption is:
A) \$0. B) \$200. C) \$400. D) \$600.
B) \$200

29. (Scenario: Aggregate Consumption Equation) If disposable income is \$500, aggregate consumption is:
A) \$0. B) \$200. C) \$400. D) \$600.
D) \$600

30. Planned investment spending depends on all of the following EXCEPT:
A) the rate of interest.
B) the expected future level of real GDP.
C) the current productive capacity in the economy.
D) the current level of real GDP .
D) the current level of real GDP .

31. Most recessions originate from:
A) an increase in investment spending.
B) a decrease in investment spending.
C) an increase in aggregate supply.
D) a decrease in aggregate supply.
B) a decrease in investment spending.

32. If the Federal Reserve increases interest rates to reduce inflation:
A) planned investment spending is most likely to increase.
B) planned investment spending is most likely to decrease.
C) planned investment spending is most likely to remain the same.
D) unplanned investment in inventories is likely to be negative.
B) planned investment spending is most likely to decrease.

33. If the interest rate rises, then:
A) planned investment spending rises.
B) more investment projects have a rate of return greater than the interest rate.
C) the opportunity cost of investment is greater.
D) excess capacity will increase.
C) the opportunity cost of investment is greater.

34. The current level of productive capacity ________________ investment spending.
A) has no impact on
B) is positively related to
C) is negatively related to
D) varies directly with
C) is negatively related to

35. Inventory investment is:
A) a part of planned investment spending and is always positive.
B) a part of unplanned investment spending and may either be positive or negative.
C) not a part of investment spending by firms, as it can’t be properly planned ahead of
time.
D) a part of the consumption spending, as these are unsold goods.
B) a part of unplanned investment spending and may either be positive or negative.

36. Rising inventories typically indicate _______ unplanned inventory investment and a _________ economy.
A) positive; slowing
B) negative; slowing
C) positive; expanding
D) negative; expanding
A) positive; slowing

37. Actual investment equals:
A) planned investment plus unplanned investment.
B) planned investment minus unplanned investment.
C) unplanned investment minus planned investment.
D) planned investment in a free market economy.
A) planned investment plus unplanned investment.

38. An increase in interest rates on business loans will:
A) decrease planned investment spending.
B) decrease unplanned investment spending.
C) increase planned investment spending.
D) increase unplanned investment spending.
A) decrease planned investment spending.

39. If investment spending increases, the planned aggregate spending line:
A) becomes flatter.
B) shifts down.
C) becomes steeper.
D) shifts up.
D) shifts up.

40. An increase in the expected future disposable income of households:
A) shifts down the planned aggregate spending line.
B) increases the slope of the aggregate spending line.
C) decreases the slope of the aggregate spending line.
D) shifts up the planned aggregate spending line.
D) shifts up the planned aggregate spending line.

41. Income-expenditure equilibrium GDP is:
A) the level of GDP at which the unemployment rate is zero.
B) the level of GDP at which GDP equals planned aggregate spending.
C) the level of GDP at which there is no saving.
D) the level of GDP at which autonomous consumption equals planned inventory
investment.
B) the level of GDP at which GDP equals planned aggregate spending.

42. If GDP is smaller than planned aggregate spending, then:
A) unplanned inventory investment is positive.
B) GDP will fall.
C) the economy is in equilibrium.
D) unplanned inventory investment is negative.
D) unplanned inventory investment is negative.

43. At the income-expenditure equilibrium:
A) investment net of depreciation is zero.
B) planned investment is zero.
C) unplanned inventory investment is zero.
D) inventory investment is zero.
the income-expenditure equilibrium
C) unplanned inventory investment is zero.

44. (Figure: Aggregate Expenditures and Real GDP) At a real GDP of \$9,000 billion:
A) planned investment is less than investment.
B) planned investment equals investment.
C) planned investment is greater than investment.
D) there will be no unplanned investment.
A) planned investment is less than investment.

45. (Figure: Aggregate Expenditures I) Refer to the figure Aggregate Expenditures I. The equilibrium real GDP is:
A) \$500 billion.
B) \$300 billion.
C) \$700 billion.
D) \$625 billion.
A) \$500 billion.

46. (Figure: Aggregate Expenditures I) Refer to the figure Aggregate Expenditures I. When real GDP is \$700 billion, there will be a:
A) \$125 million increase in unplanned inventory investment.
B) \$125 million decline in unplanned inventory investment.
C) \$200 million decline in unplanned inventory investment.
D) \$200 million increase in unplanned inventory investment.
A) \$125 million increase in unplanned inventory investment.

47. The Federal Reserve, the central bank of the United States, has been cutting the interest rate in order to stimulate the recessionary economy. Interest cuts by the Federal Reserve are supposed to:
A) lower the savings rate in the economy and stop leakages.
B) increase government spending on the economic infrastructure and thus increase GDP through the multiplier process.
C) increase cash holding by the general public thus lowering their dependence on credit.
D) increase investment spending and thus increase GDP via the multiplier.
D) increase investment spending and thus increase GDP via the multiplier.

48. If the slope of the aggregate expenditures curve = 0.8, the multiplier is equal to: A) 1.
B) 4.
C) 5.
D) infinity.
C) 5.

49. When Julie Ann’s disposable income is \$10,000, she spends \$10,000, and when her disposable income is \$15,000, her spending is \$12,500. Julie Ann’s autonomous consumption is ________ and her ___________.
A) \$5,000; MPC = 0.5
B) \$10,000; MPS = 0.5
C) \$0; MPC = 0.5
D) \$0; MPS = 0.5
A) \$5,000; MPC = 0.5

50. A firm has enough retained earnings to finance an investment project. For this firm, the market interest rate:
A) is not relevant to the investment decision.
B) represents the opportunity cost of using retained earnings.
C) will help to calculate the rate of return for the project.
D) has no impact on the profitability of the investment project.
B) represents the opportunity cost of using retained earnings.

Scenario: A Country’s Consumption Function
A country is closed. It has no government sector, and its aggregate price levels and interest rate levels are fixed. Furthermore, the marginal propensity to consume is constant and the country’s consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Assume that planned investment equals 75.
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51. (Scenario: A Country’s Consumption Function) Given this consumption function, if this country experienced an increase in income of \$10,000, consumption would increase by: A) \$10,000.
B) \$7,500.
C) \$200. D) \$7,700.
B) \$7,500.

52. The marginal propensity to consume is equal to:
A) the proportion of consumer spending as a function of aggregate disposable income.
B) the change in saving divided by the change in aggregate disposable income.
C) the ratio of the change in consumer spending to the change in aggregate disposable
income.
D) the change in saving divided by the change in consumer spending.
C) the ratio of the change in consumer spending to the change in aggregate disposable
income.

53. The aggregate demand curve shows the relationship between the aggregate price level and:
A) aggregate productivity.
B) the aggregate unemployment rate.
C) the aggregate quantity of output demanded by households, businesses, the
government, and the rest of the world.
D) the aggregate quantity of output demanded by businesses only.
C) the aggregate quantity of output demanded by households, businesses, the
government, and the rest of the world.

54. According to the aggregate demand curve, when the aggregate price level _________, the quantity of _________.
A) rises; aggregate output supplied falls
B) falls; aggregate output demanded falls
C) rises; aggregate output demanded falls
D) rises; aggregate output demanded does not change
C) rises; aggregate output demanded falls

55. A graphical representation of the relationship between the total quantity of goods and services demanded and the price level is the:
A) aggregate demand curve.
B) average price level.
C) circular flow model.
D) GDP curve.
A) aggregate demand curve.

56. In general, a change in the price level, all other things unchanged, causes:
A) a movement along the aggregate demand curve.
B) a shift of the aggregate demand curve.
C) both a movement along the aggregate demand curve and a shift in the curve.
D) no change in the purchasing power of assets.
A) a movement along the aggregate demand curve.

57. When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This is known as the _____ effect and is a reason why the _____ curve slopes _____.
A) interest rate; aggregate demand; downward
B) wealth; aggregate demand; downward
C) interest rate; investment demand; downward
D) wealth; short-run aggregate supply; upward
B) wealth; aggregate demand; downward

58. The aggregate demand curve is negatively sloped in part because of the impact of interest rates on:
A) potential output.
B) net exports.
C) consumption and investment.
D) government purchases.
C) consumption and investment.

59. Which of the following is one of the reasons that the aggregate demand curve slopes downward?
B) the interest rate effect
C) the substitution effect
D) the income effect
B) the interest rate effect

60. Which of the following is NOT true about the aggregate demand curve?
A) A rise in the price level lowers real wealth and results in a lower level of consumer
spending.
B) A rise in the price level increases the demand for money, raises the interest rate,
and reduces investment spending.
C) A fall in the price level will generally lead to a rise in the level of aggregate output
demanded.
D) A fall in the price level will reduce the demand for money, raise the interest rate,
and increase investment spending.
D) A fall in the price level will reduce the demand for money, raise the interest rate,
and increase investment spending.

61. Suppose that the stock market crashes. Which of the following is most likely to occur?
A) the aggregate demand curve shifts to the right
B) the aggregate demand curve shifts to the left
C) a movement up the aggregate demand curve
D) a movement down the aggregate demand curve
B) the aggregate demand curve shifts to the left

62. Which of the following factors cannot shift the aggregate demand curve?
A) changes in expectations
B) changes in wealth
C) changes in stock market indices
D) changes in the price level
D) changes in the price level

63. If prices are constant, but there is an increase in the value of financial assets: A) aggregate supply shifts to the left.
B) aggregate supply shifts to the right.
C) aggregate demand shifts to the left
D) aggregate demand shifts to the right.
D) aggregate demand shifts to the right.

64. As a result of a decrease in the value of the dollar in relation to other currencies, American imports decrease and exports increase. Consequently, there is a(n):
A) increase in short-run aggregate supply.
B) decrease in the quantity of aggregate output supplied in the short run.
C) increase in aggregate demand.
D) decrease in the quantity of aggregate output demanded.
C) increase in aggregate demand.

65. Suppose that consumer assets and wealth decrease in real value. How will this affect the aggregate demand curve?
A) The aggregate demand curve shifts to the left.
B) There will be a movement upward along the fixed aggregate demand curve.
C) There will be a movement downward along the fixed aggregate demand curve.
D) The aggregate demand curve shifts to the right.
A) The aggregate demand curve shifts to the left.

66. Raising taxes shifts the:
A) aggregate demand curve to the left.
B) long-run aggregate supply curve to the left.
C) aggregate demand curve to the right.
D) short-run aggregate supply curve to the left.
A) aggregate demand curve to the left.

67. If government increases income tax rates, the aggregate demand curve is likely to:
A) shift to the right.
B) shift to the left.
C) remain constant.
D) become positively sloped.
B) shift to the left.

68. An increase in government spending, all other things unchanged, will cause the aggregate demand curve to:
A) become positively sloped.
B) remain constant.
C) shift to the right.
D) shift to the left.
C) shift to the right.

69. If the Fed increases the quantity of money in circulation:
A) interest rates decrease, investment increases, and the aggregate demand curve shifts
to the right.
B) interest rates increase, investment increases, and the aggregate demand curve shifts
to the right.
C) interest rates decrease, investment increases, and the aggregate demand curve shifts
to the left.
D) interest rates increase, investment decreases, and the aggregate demand curve shifts
to the left.
A) interest rates decrease, investment increases, and the aggregate demand curve shifts
to the right.

70. (Figure: Shift of the Aggregate Demand Curve) A movement from point A on AD1 to point C on AD2 could have resulted from a(n):
A) lower price level.
B) higher price level.
C) increase in the total quantity of consumer goods and services demanded at every price level.
D) significant decrease in the income level of consumers.
C) increase in the total quantity of consumer goods and services demanded at every price level.

71. (Figure: Shift of the Aggregate Demand Curve) A movement from point B on AD1 to point E on AD2 could have been the result of:
A) an increase in consumer optimism.
B) an increase in consumer pessimism.
C) an increase in personal income taxes.
D) the central bank reducing the quantity of money.
A) an increase in consumer optimism.

72. (Figure: Shift of the Aggregate Demand Curve) A movement from point C on AD2 to point A on AD1 may have been the result of:
A) an increase in investment demand due to optimistic GDP forecasts.
B) a decrease in investment due to pessimistic GDP forecasts.
C) decreases in the taxes paid by businesses.
D) lower interest rates.
B) a decrease in investment due to pessimistic GDP forecasts.

73. (Figure: Shift of the Aggregate Demand Curve) An increase in aggregate demand is illustrated by a movement from:
B) point C to point A.
C) point B to point A.
D) point C to point E.

74. During the Great Depression, the United States:
A) moved to the right along its aggregate demand curve.
B) moved to the right along its short-run aggregate supply curve.
C) moved to the left along its aggregate demand curve.
D) moved to the left along its short-run aggregate supply curve.
D) moved to the left along its short-run aggregate supply curve.

75. The aggregate supply curve shows the relationship between:
A) the price of oil and the quantity of aggregate output supplied.
B) the aggregate price level and the quantity of aggregate output supplied.
C) the price of money and the quantity of aggregate output supplied.
D) the level of employment and the quantity of aggregate output supplied.
B) the aggregate price level and the quantity of aggregate output supplied.

76. The SRAS curve is upward sloping because:
A) a higher aggregate price level leads to lower output as costs of production increase.
B) a higher aggregate price level leads to higher output since most production costs
are fixed in the short run.
C) a lower aggregate price level leads to higher output since production costs tend to
fall in the short run.
D) a lower aggregate price level leads to higher profit and higher productivity.
B) a higher aggregate price level leads to higher output since most production costs
are fixed in the short run.

77. The short-run aggregate supply curve is positively sloped because:
A) wages and other costs of production respond immediately to changes in prices.
B) profit is lower when prices increase, so output decreases.
C) workers are willing to work for lower wages rather than be laid off.
D) higher prices lead to higher profit and higher output.
D) higher prices lead to higher profit and higher output.

78. According to the short-run aggregate supply curve, when the _________ rises, the quantity of _________ rises.
A) profit per unit; aggregate output demanded
B) aggregate price level; aggregate output supplied
C) aggregate price level; aggregate output demanded
D) interest rate; aggregate output supplied
B) aggregate price level; aggregate output supplied

79. Profit per unit equals:
A) price per unit minus cost per unit.
B) price per unit divided by cost per unit.
C) cost per unit minus price per unit.
D) price per unit minus the nominal wage rate.
A) price per unit minus cost per unit.

80. The short-run aggregate supply curve slopes upward because of:
A) wage and price stickiness.
B) wage and price flexibility.
C) increasing technology.
D) a reduction in resource availability at higher price levels.
A) wage and price stickiness.

81. The _____ curve shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied in the economy.
A) aggregate demand curve
B) short-run aggregate supply curve
C) aggregate spending curve
D) long-run aggregate supply curve
B) short-run aggregate supply curve

82. An increase in the aggregate price level will increase:
A) short-run aggregate supply.
B) the quantity of aggregate output supplied in the short run.
C) aggregate demand.
D) the quantity of aggregate output demanded.
B) the quantity of aggregate output supplied in the short run.

83. Nominal wages are “sticky” because:
A) wages are slow to rise in the short run when there are labor shortages and slow to
fall even when there is significant level of unemployment.
B) wages remain fixed in the long run thereby increasing the profitability of the firms.
C) wages are slow to fall in the short run when there are labor shortages and slow to
rise even when there is significant level of unemployment.
D) in the long run all wages become adjusted for inflation.
A) wages are slow to rise in the short run when there are labor shortages and slow to
fall even when there is significant level of unemployment.

84. (Figure: Aggregate Supply Movements) Refer to the accompanying figure called Aggregate Supply Movements. In this figure, ________.
A) an increase in the price level is responsible for pushing the SRAS curve to the right
B) a decrease in the price level is responsible for pushing the SRAS curve to the right
C) that there has been an increase in the short-run aggregate supply
D) that there has been a decrease in the short-run aggregate supply
C) that there has been an increase in the short-run aggregate supply

85. During the Great Depression, the United States experienced a ________ the short-run aggregate supply curve; during the 1979 oil crisis, the United States experienced a _________ in the short-run aggregate supply curve.
A) movement down along; a leftward shift
B) movement up along; a leftward shift
C) movement up along; a rightward shift
D) movement down along; a rightward shift
A) movement down along; a leftward shift

86. A general increase in wages will result in the:
A) aggregate demand curve shifting to the right.
B) aggregate demand curve shifting to the left.
C) short-run aggregate supply curve shifting to the right.
D) short-run aggregate supply curve shifting to the left.
D) short-run aggregate supply curve shifting to the left.

87. In the long run, nominal wages are:
A) sticky downward but flexible in an upward direction.
B) sticky upward but flexible in a downward direction.
C) sticky in both an upward and downward direction.
D) flexible because contracts and informal agreements are renegotiated in the long
run.
D) flexible because contracts and informal agreements are renegotiated in the long
run.

88. In the long run, the aggregate price level has:
A) no effect on the quantity of aggregate output.
B) a positive effect on the quantity of aggregate output.
C) a negative effect on the quantity of aggregate output.
D) an impact on aggregate output but no impact on employment.
A) no effect on the quantity of aggregate output.

89. The long-run supply curve illustrates how the aggregate output supplied is:
A) positively related to the aggregate price level.
B) negatively related to the aggregate price level.
C) unrelated to the aggregate price level.
D) a one-to-one correspondence with the aggregate price level.
C) unrelated to the aggregate price level.

90. The level of output that the economy would produce if all prices, including nominal wages, were fully flexible is called:
A) real GDP .
B) Keynesian GDP .
C) structural GDP .
D) potential output.
D) potential output.

1. Potential output is:
A) the level of real GDP that exists when the economy experiences only cyclical unemployment
B) the level of real GDP that the economy would produce if all the prices, including nominal wages, were fully flexible
C) the level of real GDP that exists when the actual rate of unemployment is zero
D) the level of real GDP that the economy would produce if all prices, including nominal wages, were sticky
B) the level of real GDP that the economy would produce if all the prices, including nominal wages, were fully flexible

92. All of the following will increase the economy’s potential output EXCEPT:
A) an increase in physical capital.
B) a decrease in the aggregate price level.
C) an increase in human capital.
D) technological innovation.
B) a decrease in the aggregate price level.

93. Which of the following is TRUE with respect to the short-run aggregate supply and the long-run aggregate supply?
A) The economy can be on both curves simultaneously.
B) If the economy is on the short-run aggregate supply curve, it cannot also be on the
long-run aggregate supply curve.
C) If the economy is on the long-run aggregate supply curve, it cannot also be on the
short-run aggregate supply curve.
D) The economy can never be in a position where it rests on both curves
simultaneously.
A) The economy can be on both curves simultaneously.

94. (Figure: Aggregate Supply) If the economy is at point E, which of the following describes the likely adjustment process?
A) Nominal wages increase, and the short-run aggregate supply curve shifts left until
actual and potential output are equal.
B) Nominal wages increase, and the short-run aggregate supply curve shifts right until
potential output is greater than actual output.
C) Nominal wages decrease, and the short-run aggregate supply curve shifts right until
actual and potential output are equal.
D) Nominal wages decrease, and the short-run aggregate supply curve shifts right until
potential output is less than actual output.
A) Nominal wages increase, and the short-run aggregate supply curve shifts left until
actual and potential output are equal.

95. A positive demand shock will:
A) increase the aggregate price level and aggregate output.
B) decrease the aggregate price level and increase aggregate output.
C) increase the aggregate price level and decrease aggregate output.
D) decrease both the aggregate price level and aggregate output.
A) increase the aggregate price level and aggregate output.

96. A natural disaster that destroys part of a country’s infrastructure is a type of _________ and therefore shifts the _________ to the _________.
A) negative demand shock; aggregate demand curve; right
B) negative supply shock; aggregate demand curve; left
C) negative supply shock; short-run aggregate supply curve; left
D) negative demand shock; long-run aggregate supply curve; left
C) negative supply shock; short-run aggregate supply curve; left

97. Stagflation may result from:
A) an increase in the supply of money.
B) a decrease in the supply of money.
C) an increase in the price of imported oil.
D) a decrease in the price of imported oil.
C) an increase in the price of imported oil.

98. Unexpectedly rising commodity prices lead to:
A) a positive supply shock.
B) a positive demand shock.
C) a negative supply shock.
D) a negative demand shock.
C) a negative supply shock.

99. In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:
A) LRAS and SRAS.
B) LRAS and aggregate demand.
C) SRAS and aggregate demand.
D) potential output and LRAS.
C) SRAS and aggregate demand.

100. An increase in aggregate demand will generate _______ in real GDP and _______ in the price level in the short run.
A) an increase; an increase
B) an increase; no change
C) a decrease; no change
D) no change; an increase
A) an increase; an increase

101. An improvement in the business outlook of firms is a type of _________ and therefore shifts the _________ to the _________.
A) positive supply shock; long-run aggregate supply curve; right
B) positive demand shock; aggregate demand curve; left
C) positive supply shock; short-run aggregate supply curve; right
D) positive demand shock; aggregate demand curve; right
D) positive demand shock; aggregate demand curve; right

102. If membership falls in labor unions and unions become less popular, then:
A) production costs will increase, SRAS will shift to the left, decreasing equilibrium
GDP and increasing the aggregate price level.
B) production costs will fall, there will be a downward movement along SRAS,
equilibrium GDP will increase and aggregate price level will fall.
C) production costs will not change, AD will shift to the right, increasing equilibrium
GDP and aggregate price level.
D) production costs will fall, SRAS will shift to the right, increasing equilibrium GDP
and lowering the aggregate price level.
D) production costs will fall, SRAS will shift to the right, increasing equilibrium GDP
and lowering the aggregate price level.

103. Potential real GDP is equal to \$10,000 and the current level of real GDP is equal to \$9,000. The output gap is therefore equal to:
A) -90%
B) -110%
C) -10%
D) 10%
C) -10%

104. In the long run (as the economy self-corrects), an increase in aggregate demand will cause the price level to _______ and potential output to _______ .
A) rise; increase
B) fall; decrease
C) rise; remain stable
D) fall; remain stable
C) rise; remain stable

105. The intersection of an economy’s aggregate demand and long-run aggregate supply curves:
A) determines its equilibrium real GDP in both the long run and the short run.
B) determines its equilibrium price level in both the long run and the short run.
C) occurs at the economy’s potential output.
D) occurs at high levels of cyclical unemployment.
C) occurs at the economy’s potential output.

106. If the SRAS curve intersects the aggregate demand curve to the right of LRAS, the result will be:
A) a recessionary gap.
B) an inflationary gap.
C) cyclical unemployment.
D) long-run equilibrium.
B) an inflationary gap.

107. In the long run, inflationary and recessionary gaps are self-correcting because, eventually:
A) nominal wages rise in order to close an inflationary or fall in order to close a recessionary gap.
B) the government applies the right combination of fiscal and monetary policies.
C) the multiplier compensates the negative supply or demand shocks.
D) nominal wages rise in order to close a recessionary gap and fall to close an
inflationary gap.
A) nominal wages rise in order to close an inflationary or fall in order to close a recessionary gap.

108. In the long run, the economy is:
A) self-fulfilling as commodity prices rise during recessionary gaps and fall during
inflationary gaps to move the economy to long-run equilibrium.
B) self-correcting as prices of goods that are sticky in the short run become very
flexible in the long run and thus move the economy to full employment.
C) fluctuating as nominal wages rise and fall during short-run economic fluctuations.
D) self-correcting as nominal wages rise during recessionary gaps and fall during
inflationary gaps to move the economy to long-run equilibrium.
B) self-correcting as prices of goods that are sticky in the short run become very
flexible in the long run and thus move the economy to full employment.

109. Which curve is easier to shift?
A) the short-run aggregate supply curve
B) the long-run aggregate supply curve
C) the aggregate demand curve
D) all of the curves easily shift
C) the aggregate demand curve

110. (Figure: Inflationary and Recessionary Gaps) In panel (a), an expansionary policy designed to move the economy from Y1 to Yp would attempt to:
A) shift the aggregate demand curve to the left by increasing aggregate demand.
B) shift the aggregate demand curve to the right by increasing aggregate demand.
C) shift the SRAS curve to the left.
D) shift the LRAS curve to the left.
B) shift the aggregate demand curve to the right by increasing aggregate demand.

111. (Figure: AD-AS Model I) If the economy is at point X, there is:
A) an inflationary gap with low unemployment.
B) an inflationary gap with high unemployment.
C) a recessionary gap with low unemployment.
D) a recessionary gap with high unemployment.
D) a recessionary gap with high unemployment.

112. (Figure: AD-AS Model II) If nominal wages fall, which of the following will take place in the short run?
A) SRAS curve will shift to the left.
B) SRAS curve will shift to the right.
C) LRAS will shift to the right.
D) AD curve will shift to the right.
B) SRAS curve will shift to the right.

113. (Figure: AD-AS) Suppose that initially the economy is at long-run equilibrium. If the government cuts taxes, ________.
A) SRAS will shift to the right
B) SRAS will shift to the left
C) AD will shift to the right
D) AD will shift to the left
C) AD will shift to the right

114. If the government increases spending in the short run, this will:
A) increase aggregate output and aggregate price levels.
B) increase aggregate output, but lead to a decrease in aggregate price levels.
C) decrease both aggregate output and aggregate price levels.
D) decrease aggregate output, but increase aggregate price level.
A) increase aggregate output and aggregate price levels.

115. When wages rise:
A) AS shifts left and aggregate price levels falls.
B) AS shifts right and the aggregate output level falls.
C) AS shifts right and the aggregate price level rises.
D) AS shifts left and the aggregate price level rises.
D) AS shifts left and the aggregate price level rises.

116. A negative supply shock often results in:
A) a leftward shift of the AD curve.
B) an increase in the aggregate price level and a decrease in aggregate output.
C) no change in the price level.
D) a drop in the unemployment level.
B) an increase in the aggregate price level and a decrease in aggregate output.

117. If an economy is currently in short-run equilibrium where the level of real GDP is greater than potential output, then, in the long run, one will find:
A) nominal wages will rise and the SRAS curve will shift left bringing the economy
back to its potential real GDP.
B) nominal wages will rise shifting the AD curve to the right and restoring real GDP
to its potential level.
C) nominal wages will fall and the SRAS curve will shift right bringing the economy
back to its potential real GDP.
D) nominal wages will fall shifting the AD curve to the left and bringing the economy
back to its potential real GDP.
A) nominal wages will rise and the SRAS curve will shift left bringing the economy
back to its potential real GDP.

118. All of the following are sources of federal tax revenue EXCEPT:
A) the personal income tax.
B) sales taxes.
C) social insurance taxes.
D) the corporate profits tax.
B) sales taxes.

119. Social insurance programs are:
A) government programs intended to protect families against economic hardships.
B) private insurance policies to protect families from hardships caused by government
actions.
C) private insurance policies that cover gaps in government-provided health care.
D) programs to help unemployed people have a social life.
A) government programs intended to protect families against economic hardships.

120. Which of the following is NOT an example of government purchases of goods and services?
A) a federal prosecutor’s salary in a lawsuit against Halliburton
B) new pavement for interstate highway I-95
C) a surgeon’s bill reimbursed under the Medicare program
D) equipping U.S. air marshals with electroshock weapons
C) a surgeon’s bill reimbursed under the Medicare program

121. Which of the following is NOT an example of government transfers?
A) Medicaid-paid prescription drugs for low-income individuals
B) unemployment insurance
C) a Social Security disability pension
D) a reimbursement of personal income tax withheld from wages
D) a reimbursement of personal income tax withheld from wages

122. Which of the following is not an example of a government transfer payment?
A) environmental protection programs
B) Social Security
C) Medicare
D) Medicaid
A) environmental protection programs

123. A change in taxes or a change in government transfers affects consumption through a change in:
A) autonomous consumption.
B) the marginal propensity to save.
C) disposable income.
D) government spending.
C) disposable income.

124. Consumer spending will rise if:
A) government transfers rise.
B) the government raises tax rates.
C) government transfers fall.
D) the government raises tax rates or government transfers fall.
A) government transfers rise.

125. Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:
A) decrease government purchases.
B) decrease taxes.
C) decrease government transfers.
D) increase real interest rates.
B) decrease taxes.

126. If the current level of real GDP lies below potential GDP, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.
A) increase government purchases; AD; left.
B) increase transfer payments; AS; right.
C) increase tax rates; AD; right.
D) increase government purchases; AD; right.
D) increase government purchases; AD; right.

127. (Figure: Short-Run Equilibrium) The accompanying graph shows the current short-run equilibrium in the economy. Appropriate fiscal policy action in this situation would be:
A) a decrease in transfer payments.
B) an increase in government purchases.
C) a decrease in tax rates.
D) an increase in the investment tax credit.
A) a decrease in transfer payments.

128. (Figure: Short-Run Equilibrium) The accompanying graph reflects a short-run inflationary gap. According to the labeling on the graph, the size of the inflationary gap is equal to:
A) P2-P1.
B) Y1-YP.
C) P2-P0.
D) P1-P0.
B) Y1-YP.

129. (Figure: Short-Run Equilibrium) If the economy is at equilibrium at Y1 and P1, the government should use __________ fiscal policy to shift the aggregate demand curve to the ________.
A) expansionary; right
B) expansionary; left
C) contractionary; right
D) contractionary; left
D) contractionary; left

130. (Figure: Short-Run Equilibrium) If the economy is at equilibrium at Y1 and P1, the appropriate policy to return the economy to potential output would be a(n):
A) increase in transfer payments.
B) increase in government spending.
C) increase in taxes.
D) decrease in taxes.
C) increase in taxes.

131. (Figure: Short- and Long-Run Equilibrium) Using the accompanying figure, which of the following would be the appropriate response of the government upon viewing the state of the economy?
A) Expand aggregate demand by increasing taxes to close the inflationary gap.
B) Reduce aggregate demand by cutting taxes to close the inflationary gap.
C) Expand aggregate demand by cutting taxes to close the recessionary gap.
D) Reduce aggregate demand by increasing taxes to close the recessionary gap.
C) Expand aggregate demand by cutting taxes to close the recessionary gap.

132. (Figure: Short- and Long-Run Equilibrium) If the economy is at equilibrium at E1, it is experiencing a(n):
A) recessionary gap.
B) inflationary gap.
C) high level of unemployment.
D) liquidity trap.
A) recessionary gap.

133. (Figure: Short- and Long-Run Equilibrium) If the economy is at equilibrium at E1, the government should use __________ fiscal policy to shift the aggregate demand curve to the ________ .
A) expansionary; right
B) expansionary; left
C) contractionary; right
D) contractionary; left
A) expansionary; right

134. (Figure: Short- and Long-Run Equilibrium) If the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output would be a(n):
A) increase in transfer payments.
B) decrease in transfer payments.
C) increase in taxes.
D) decrease in government spending.
A) increase in transfer payments.

135. If the economy is at equilibrium below potential output:
A) there is a recessionary gap, and expansionary fiscal policy is appropriate.
B) there is an inflationary gap, and expansionary fiscal policy is appropriate.
C) there is a recessionary gap, and contractionary fiscal policy is appropriate.
D) there is an inflationary gap, and contractionary fiscal policy is appropriate.
A) there is a recessionary gap, and expansionary fiscal policy is appropriate.

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