Chapter 12 Econ 202 exam Questions

A) short-run aggregate supply curve to shift to the right.

A decrease in the price of oil will cause the: A) short-run aggregate supply curve to shift to the right. B) long-run aggregate supply curve to shift to the left. C) aggregate demand curve to shift to the right. D) short-run aggregate supply curve to shift to the left.

D) short-run supply shock.

A year-long drought that destroys most of the summerʹs crops would be considered a: A) long-run supply shock. B) short-run demand shock. C) long-run demand shock. D) short-run supply shock.

B) negative supply side shock.

An economy in which output has decreased and prices have increased would suggest that there has been a: A) positive demand side shock. B) negative supply side shock. C) negative demand side shock. D) positive supply side shock.

D) real GDP; the price level

An increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run. (Assume that there is no government policy in place.) A) real GDP; real GDP B) the price level; the price level C) the price level; real GDP D) real GDP; the price level E) None of the above is correct

B) the short-run aggregate supply curve to shift to the left.

An increase in the expected future price of inputs will cause: A) the long-run aggregate supply curve to shift to the left. B) the short-run aggregate supply curve to shift to the left. C) the aggregate demand curve to shift to the right. D) a movement rightward along the short-run aggregate supply curve.

B) long-run aggregate supply curve to shift to the right.

An increase in the level of immigration into a nation would cause the: A) short-run aggregate supply curve to shift to the left. B) long-run aggregate supply curve to shift to the right. C) long-run aggregate supply curve to shift to the left. D) long-run aggregate supply to remain fixed.

A) increase; decrease ; decrease

As the price level increases, interest rates will _____, which causes a _______ in investment spending, and thus a _________ in the quantity demanded of AD. A) increase ; decrease ; decrease B) decrease; decrease ; decrease C) decrease ; increase ; increase D) increase ; increase ; increase

B) $1 trillion

Assume that the MPC is 0.75, actual GDP is $14 trillion and potential GDP is $17 trillion. Policymakers want to use tax cuts to stimulate the economy and get GDP back to its potential level. How big should the tax cut be? A) $4 trillion B) $1 trillion C) $750 billion ($0.75 trillion) D) $3 trillion E) $1.5 trillion

A) increase; decrease to its initial value

Assume that the economy is initially in a long run equilibrium. There is then an increase in investment. As a result, real GDP will ________ in the short run, and ________ in the long run. A) increase; decrease to its initial value B) decrease; increase to its initial level C) increase; increase further D) decrease; decrease further E) None of the above is correct

B) SRAS must have decreased.

Consider the mythical economy of ʺNelsonvilleʺ. Suppose that, in 2009, real GDP was $14 trillion and the price level was 150. In 2010, real GDP $13 trillion and the price level was 160. What must have happened in Nelsonville? (Assume that Nelsonville is always in a short-run equilibrium.) A) AD must have decreased. B) SRAS must have decreased. C) SRAS must have increased. D) AD must have increased. E) More than one of the above must have happened.

C) negatively related to the overall price level.

Consumption spending is: A) not correlated with the overall price level. B) positively related to the overall price level. C) negatively related to the overall price level. D) equal to the overall price level

B) the dollar weakens relative to foreign currencies.

How would we need the value of the dollar (relative to other currencies) to change to get US aggregate demand to increase? A) the value of the dollar remains constant relative to foreign currencies. B) the dollar weakens relative to foreign currencies. C) the dollar strengthens relative to foreign currencies. D) Exchanges rates donʹt generally affect aggregate demand.

D) to increase and exports to fall.

If U.S. prices increase relative to the rest of the world, we would expect imports: A) as well as exports to increase. B) to decrease and exports to increase. C) as well as exports to decrease. D) to increase and exports to fall.

D) higher price level and lower level of output.

If a natural disaster were to cause a negative long-run supply shock to the economy, once the economy adjusts, the new equilibrium will be at a: A) lower price level and lower level of output. B) lower price level and higher level of output. C) higher price level and higher level of output. D) higher price level and lower level of output.

A) a decrease in interest rates

If aggregate demand just increased (shifted to the right), which of the following may have caused the increase? A) a decrease in interest rates B) an increase in imports C) a decrease in the price level D) an increase in taxes E) More than one of the above is correct

A) an increase in wealth in the economy

If aggregate demand just increased (shifted to the right), which of the following may have caused the increase? A) an increase in wealth in the economy B) a decrease in the price level C) an increase in taxes D) an increase in imports E) More than one of the above is correct

B) shift to the right.

If government spending were to increase we expect that the aggregate demand curve will: A) shift to the left. B) shift to the right. C) remain unchanged but the economy will move down along the curve to a lower quantity. D) remain unchanged but the economy will move down along the curve to a higher quantity.

D) 4

If the MPC = 0.75, then the government expenditure multiplier must be: A) 1.25 B) 3 C) 5 D) 4

A) $500b.

If the MPC is 0.8, and the government spends an additional $100b, the overall effect on GDP will be: A) $500b. B) $120b. C) $180b. D) $400b.

C) a decrease of $2,000b.

If the MPC is 0.9, and the government cuts spending by $200b, the overall effect on GDP will be: A) a decrease of $1,800b. B) an increase of $180b. C) a decrease of $2,000b. D) an increase of $2,000b.

D) the short-run aggregate supply curve will shift to bring it back into long-run equilibrium.

If the aggregate demand curve shifts in the short run moving the economy out of long-run equilibrium: A) we will move along the short-run aggregate supply curve back to equilibrium. B) inflation will always occur. C) the aggregate demand curve will eventually shift back once expectations are taken into account. D) the short-run aggregate supply curve will shift to bring it back into long-run equilibrium.

A) lower price level and same level of output.

If the aggregate demand curve shifts to the left in the short run then the long-run equilibrium will be at a: A) lower price level and same level of output. B) lower price level and lower level of output. C) higher price level and higher level of output. D) higher price level and lower level of output.

A) decrease its spending by $800b.

If the government wishes to decrease GDP by $2,000b, and the MPC is 0.6, it should: A) decrease its spending by $800b. B) increase its spending by $800b. C) increase its spending by $1,200b. D) decrease its spending by $1,200b.

B) increase its spending by $20 billion.

If the government wishes to increase GDP by $200 billion, and the MPC is 0.9, it should: A) increase its spending by $100 billion. B) increase its spending by $20 billion. C) decrease its spending by $100 billion. D) increase its spending by $40 billion E) decrease its spending by $20 billion

D) consumers spend $9 out of every $10 of additional disposable income.

If the marginal propensity to consume was 0.9, it would mean that: A) people should save more. B) consumers save $9 out of every $10 of additional disposable income. C) consumers spend $1 out of every $10 of additional disposable income. D) consumers spend $9 out of every $10 of additional disposable income.

D) $1200B

If you were told the MPC was = 0.75 and the government engaged in a tax decrease of $400B, then the overall change in GDP would be: A) $1600B. B) $400B. C) $300B. D) $1200B

D) higher

In general we can note that households with lower wealth tend to have a(n) ________ MPC relative to wealthier households. A) similar B) exactly equivalent C) lower D) higher

B) increase; increase

Last week, six Swedish kronor could purchase one U.S. dollar. This week, four Swedish kronor can purchase one U.S. dollar. This change in the value of the dollar will ________ exports from the U.S. to Sweden and ________ U.S. aggregate demand. A) decrease; increase B) increase; increase C) increase; decrease D) decrease; decrease

C) decrease; decrease

Last week, six Swedish kronor could purchase one U.S. dollar. This week, it takes eight Swedish kronor to purchase one U.S. dollar. This change in the value of the dollar will ________ exports from the U.S. to Sweden and ________ U.S. aggregate demand. A) increase; decrease B) decrease; increase C) decrease; decrease D) increase; increase

C) firms to invest more in new factories and working capital.

Lower interest rates motivate: A) individuals to spend less on capital goods. B) individuals to spend less on consumption goods. C) firms to invest more in new factories and working capital. D) firms to invest less in new factories and working capital.

A) an increase in the price level has no effect on the aggregate quantity of GDP supplied.

On the long run aggregate supply curve, A) an increase in the price level has no effect on the aggregate quantity of GDP supplied. B) an increase in the price level reduces the aggregate quantity of GDP supplied. C) an increase in the price level increases the aggregate quantity of GDP supplied. D) an increase in the price level increases the level of potential GDP. E) More than one of the above is correct

D) leftward shift of the U.S. aggregate demand curve.

Other things equal, if the exchange rate between the United Statesʹ dollar and Great Britainʹs 81) pound goes from 1 dollar for 0.67 pounds to 1 dollar for 0.75 pounds, there is a: A) movement downward along the U.S. aggregate demand curve. B) movement upward along the U.S. aggregate demand curve. C) rightward shift of the U.S. aggregate demand curve. D) leftward shift of the U.S. aggregate demand curve.

D) All of these would shift the long-run aggregate supply curve to the right.

Something that would cause the long-run aggregate supply curve to shift to the right would be: A) increase in the growth rate of the labor force. B) discovery of a new oil reserve. C) technological advance. D) All of these would shift the long-run aggregate supply curve to the right.

A) inflation rises and GDP falls.

Stagflation occurs when A) inflation rises and GDP falls. B) inflation falls and GDP falls. C) inflation rises and GDP rises. D) inflation falls and GDP rises.

D) All of these are true.

Sticky wages occur because: A) wages can only be changed at the end of contracts, as opposed to final good prices which can change anytime. B) unions often negotiate wages for several years in advance. C) employers must wait until the current contract ends to cut someoneʹs pay. D) All of these are true.

D) negative supply shock

Suppose that the economy begins at a long-run equilibrium, but a shock pushes the economy in a recession. Likewise, we observe that the inflation rate is high during the recession. Which of the following is most likely the shock that caused the recession? A) negative demand shock B) positive demand shock C) positive supply shock D) negative supply shock

C) Short-run aggregate supply will shift to the left.

Suppose the economy is at a short run equilibrium GDP that lies beyond potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP? A) Prices will decrease. B) Wages will decrease. C) Short-run aggregate supply will shift to the left. D) Unemployment will decline. E) More than one of the above is correct

A) Prices will increase.

Suppose the economy is at a short run equilibrium GDP that lies beyond potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP? A) Prices will increase. B) Short-run aggregate supply will shift to the right. C) Unemployment will decrease. D) Wages will decrease. E) More than one of the above is correct

E) More than one of the above is correct

Suppose the economy is at a short run equilibrium GDP that lies beyond potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP? A) Unemployment will decline. B) Prices will increase. C) Wages will increase. D) Short-run aggregate supply will shift to the left. E) More than one of the above is correct

D) may rise, fall, or stay the same and the price level will fall.

Suppose the economy is in long-run equilibrium. If there is an increase in technology as well as a decrease in consumer confidence about future income, then we would expect that in the short run, real GDP A) will rise and the price level might rise, fall, or stay the same. B) may rise, fall, or stay the same and the price level will rise. C) will fall and the price level might rise, fall, or stay the same. D) may rise, fall, or stay the same and the price level will fall.

B) will rise and the price level might rise, fall, or stay the same.

Suppose the economy is in long-run equilibrium. If there is an increase in the nation's capital stock as well as an increase in optimism about future business conditions, then we would expect that in the short run, real GDP A) will fall and the price level might rise, fall, or stay the same. B) will rise and the price level might rise, fall, or stay the same. C) may rise, fall, or stay the same and the price level will rise. D) may rise, fall, or stay the same and the price level will fall.

A) Output and the price level

The aggregate supply and aggregate demand model describes the interaction of which macroeconomic variables? A) Output and the price level B) Prices and immigration C) Output and number of sellers D) Employment and immigration

C) overall price level in the economy and total production by firms.

The aggregate supply curve shows the relationship between the: A) unemployment rate and total production by firms. B) inflation rate and the overall price level in the economy. C) overall price level in the economy and total production by firms. D) overall price level in the economy and the unemployment rate.

B) government spending.

The component of aggregate expenditure that is not like other components because, in general, it does not directly change with macroeconomic changes is: A) net export spending. B) government spending. C) investment spending. D) consumption spending.

D) All of these are true.

The downward sloping aggregate demand curve can be explained in part through the: A) negative relationship between the price level and investment spending. B) wealth effect. C) negative relationship between the price level and net exports. D) All of these are true.

C) an increase in both prices and output in the short run.

The effect of a shift in the aggregate demand curve due to an increase in consumer confidence will be: A) a decrease in prices only in the long run; output will remain the same. B) an increase in output only in the long run; prices will remain the same. C) an increase in both prices and output in the short run. D) a decrease in both prices and output in the short run.

B) This will shift the aggregate demand curve to the left.

The impact of Hurricane Katrina on consumers in the economy was to make them very pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve? A) This will move the economy up and to the left along a stationary aggregate demand curve. B) This will shift the aggregate demand curve to the left. C) This will shift the aggregate demand curve to the right. D) This will move the economy down and to the right along a stationary aggregate demand curve.

C) vertical.

The long-run aggregate supply curve is: A) downward sloping. B) upward sloping. C) vertical. D) horizontal.

C) is operating at full capacity.

The long-run aggregate supply curve represents the level of output possible if the economy: A) has a zero inflation rate. B) has no structural unemployment. C) is operating at full capacity. D) is operating at an unemployment rate of zero.

B) shifts right when the economy experiences economic growth.

The long-run aggregate supply curve: A) never moves. B) shifts right when the economy experiences economic growth. C) shifts left when the economy experiences economic growth. D) is affected by the price level.

B) positive; final goods and services; inputs

The short run aggregate supply curve has a(n) ________ slope because as prices of ________ rise, prices of ________ rise more slowly. A) infinite; final goods and services; inputs B) positive; final goods and services; inputs C) positive; inputs; final goods and services D) infinite; inputs; final goods and services

B) as overall price levels increase, firms are willing to produce more.

The slope of the short-run aggregate supply curve shows that: A) firms are constrained to a certain price in the short run, regardless of level of output. B) as overall price levels increase, firms are willing to produce more. C) firms are constrained to a certain level of output in the short run, regardless of the price. D) as overall price levels decrease, firms are willing to produce more.

B) firms produce more in the short run when the price level increases

The ʺsticky wage theoryʺ helps us understand why A) the LRAS curve is vertical B) firms produce more in the short run when the price level increases C) the AD curve has a negative slope D) the natural rate of unemployment is not equal to zero

A) foreign incomes rise.

U.S. net exports rise when A) foreign incomes rise. B) domestic incomes rise. C) domestic consumers develop a distaste for foreign goods. D) the value of the U.S. dollar increases relative to other currencies. E) More than one of the above is correct.

A) Positive

What type of relationship exists between expected future income and consumption? A) Positive B) Constant C) Indirect D) Negative

B) imports; exports; net exports

When foreign incomes decrease then in the domestic economy, ________ will rise, ________ will fall, and ________ will fall. A) net exports; exports; imports B) imports; exports; net exports C) net exports; imports; exports D) exports; imports; net exports

B) it is called the business cycle.

When the economy fluctuates around its long-run aggregate supply: A) the economy is in a state of chaos. B) it is called the business cycle. C) we must be in a recession. D) the value of currency becomes unstable.

D) All of these are true.

When the economy produces less than its potential output, it is: A) producing a quantity less than the long-run aggregate supply quantity. B) not in long-run equilibrium. C) called a recession. D) All of these are true.

D) faster recovery time; inflation

When the government considers whether it should change its spending in response to a recession, it must weigh the trade off between ________ and ________. A) less output; higher prices B) more output; lower prices C) faster recovery time; lower prices D) faster recovery time; inflation

A) SRAS ; left

When wages increase the ________ curve shifts to the __________. A) SRAS ; left B) LRAS ; left C) LRAS ; right D) SRAS ; right E) AD ; left

B) Interest rates

Which component of consumption has a negative or indirect relationship with consumption? A) Expected future income B) Interest rates C) Wealth D) Real income

A) An increase in the price level raises the interest rate and reduces investment spending.

Which of the following best describes the ʺinterest rate effectʺ concerning the AD curve? A) An increase in the price level raises the interest rate and reduces investment spending. B) An increase in the price level lowers the interest rate and reduces government spending. C) An increase in the price level raises the interest rate and reduces government spending. D) An increase in the price level lowers the interest rate and reduces investment spending.

C) When the price level falls, the real value of household wealth rises.

Which of the following best describes the ʺwealth effectʺ? A) When the price level falls, the real value of household wealth falls. B) When the price level falls, the nominal value of household wealth rises. C) When the price level falls, the real value of household wealth rises. D) When the price level falls, the nominal value of household wealth falls.

A) The level of output produced by an economy when business are operating at normal capacity.

Which of the following best describes ʺpotential GDPʺ? A) The level of output produced by an economy when business are operating at normal capacity. B) The level of output produced by an economy when unemployment equals zero. C) The absolutely largest possible amount of output than an economy can produce in a given time period. D) The level of output that the economy may potentially be able to produce in the future if it keeps growing. E) Both B and C are correct

C) Wealth increases.

Which of the following could be a cause of consumption increasing? A) Income decreases. B) Expected future income decreases. C) Wealth increases. D) Interest rates increase.

C) Consumption

Which of the following is a component of aggregate demand? A) Taxes B) Transfer payments C) Consumption D) Income

D) the rightward shift in short run aggregate supply that occurs in response to a recession

Which of the following is an example of the automatic mechanism through which the economy adjusts to long run equilibrium? A) the leftward shift in short run aggregate supply that occurs in response to a recession B) the leftward shift in aggregate demand that occurs in response to a recession C) the rightward shift in aggregate demand that occurs in response to a recession D) the rightward shift in short run aggregate supply that occurs in response to a recession E) More than one of the above is correct

B) Real income

Which of the following is not a determinant of Investment spending? A) Expected profitability B) Real income C) Taxes D) Interest rates

A) Interest rates.

Which of the following is not a direct determinant of net export spending? A) Interest rates. B) Exchange rates. C) Domestic income. D) Foreign income.

A) It shows the level of potential GDP.

Which of the following is true of the LRAS curve? A) It shows the level of potential GDP. B) It shows that aggregate supply increases as price level increases in the long run. C) It shifts to the right if there is an increase in demand for output. D) It is positively-sloped. E) More than one of the above is correct

A) an increase in interest rates

Which of the following will shift aggregate demand to the left, ceteris paribus? A) an increase in interest rates B) an increase in disposable income C) an increase in net exports D) an increase in expected profits for firms E) More than one of the above is correct

A) Decreased corporate income taxes

Which of the following would cause aggregate demand to shift to the right? A) Decreased corporate income taxes B) Decreased government spending C) Decreased consumer confidence D) Increased income taxes

B) increase in the expected profitability of businesses

Which of the following would cause an increase in investment spending? A) increase in business taxes B) increase in the expected profitability of businesses C) increase in the interest rate D) All of the above

A) A reduction in business taxes

Which of the following would lead to an increase in Investment spending? A) A reduction in business taxes B) An increase in interest rates C) A decrease in expected profitability of businesses D) All of the above