Macro Unit 3
Which of the following would most likely lead to cost-push inflation in the short run? A A decrease in labor productivity B A decrease in income tax rates C A decrease in consumers' and businesses' optimism about future economic activity D An increase in government deficit spending to stimulate a weak economic recovery E Discovery of new sources of energy
A decrease in labor productivity
An increase in the price of oil, an important input to production, will result in which of the following in the short run? A A decrease in the price level B A decrease in short-run aggregate supply C A decrease in unemployment D An increase in real wages E An increase in aggregate demand
A decrease in short-run aggregate supply
Which of the following best explains the relationship between the price level and real output along the aggregate demand curve? A A higher price level increases the value of real assets. B A higher price level increases the relative price of imports. C A lower price level reduces the real interest rate and increases investment. D A higher price level increases consumers' wealth and consumption. E A lower price level reduces consumers' confidence and consumption.
A lower price level reduces the real interest rate and increases investment.
The aggregate demand curve assumes that A as the price of a good or service increases, nominal wages decrease B as the domestic price level increases, consumers substitute domestic goods for foreign goods C all prices and total consumer incomes are constant D changes in the price level affect real wealth E nominal interest rates increase as the price level decreases
changes in the price level affect real wealth
Assume the government reduces its spending and raises income taxes in an effort to reduce the budget deficit. The most likely short-run result will be an increase in A interest rates B unemployment C the money supply D the price level E personal savings
unemployment
An economy is currently producing $250billion of output. The full-employment output is $260 billion, and the marginal propensity to consume is 0.75 Assuming no crowding out and a horizontal aggregate supply curve, what level of additional spending is necessary to achieve full employment? A $2.5 billion B $5 billion C $10 billion D $25 billion E $40 billion
$2.5 billion
Assume that the marginal propensity to consume is 0.75, net exports decline by $10 billion, and government spending increases by $20 billion. Given that there is no crowding out, the equilibrium gross domestic product can increase by a maximum of A $7.5 billion B $15.5 billion C $40 billion D $80 billion E $120 billion
$40 billion
If the marginal propensity to save is 0.250.25, a $15$15 billion increase in government spending will lead to an increase in national income by a maximum of A $60 billion B $45 billion C $15 billion D $11.25 billion E $3.75 billion
$60 billion
Suppose that in an economy with lump-sum taxes and no international trade, autonomous investment spending increases by $2 million. If the marginal propensity to consume is 0.75, equilibrium gross domestic product will change by a maximum of A $0.5 million B $1.5 million C $2.0 million D $8.0 million E $15.0 million
$8 mill
Assume that Jane's marginal propensity to consume equals 0.8, and that in 2004 Jane spent $36,000 from her disposable income of $40,000. If her disposable income in 2005 increased to $50,000, her consumption spending increased by A $4,000 B $8,000 C $9,000 D $10,000 E $14,000
$8,000
According to the income and consumption schedules shown above, the marginal propensity to consume is A 1.33 B 0.90 C 0.80 D 0.75 E decreasing as real disposable income increases
0.75
Which of the following will most likely result from a decrease in government spending? A An increase in output B An increase in the price level C An increase in employment D A decrease in aggregate supply E A decrease in aggregate demand
A decrease in aggregate demand
An increase in government spending that is financed by an equal increase in taxes results in which of the following changes in aggregate demand (AD)(AD) and short-run aggregate supply (SRAS)(SRAS) curves? A ADAD CurveSRASSRAS CurveShifts to the rightShifts to the right B ADAD CurveSRASSRAS CurveShifts to the leftShifts to the left C ADAD CurveSRASSRAS CurveShifts to the rightNo change D ADAD CurveSRASSRAS CurveShifts to the leftNo change E ADAD CurveSRASSRAS CurveNo changeNo change
AD to right and SRAS no change
Based on the graph above, demand-pull inflation is caused by a movement from A SRAS1 to SRAS2 B SRAS2 to SRAS1 C AD1 to AD2 D AD2 to AD1 E Yf to Y1
AD1 to AD2
An increase in the purchases of newly constructed houses will result in which of the following? A Aggregate demand will decrease as a result of a decrease in the price level. B Aggregate demand will increase as a result of an increase in investment spending. C Aggregate demand will increase as a result of an increase in exports. D Aggregate demand will not change, since consumer spending has not changed. E Aggregate demand will not change, since investment spending has not changed.
Aggregate demand will increase as a result of an increase in investment spending.
An economy is at full-employment equilibrium. If consumers and firms become more optimistic about future income and profits, which of the following will occur in the short run? A Aggregate demand will shift rightward, increasing real output and decreasing the price level. B Aggregate demand will shift rightward, decreasing real output and increasing the price level. C Aggregate demand will shift rightward, increasing real output and the price level. D Short-run aggregate supply will shift rightward, increasing real output and the price level. E Short-run aggregate supply will shift rightward, decreasing real output and the price level.
Aggregate demand will shift rightward, increasing real output and the price level.
If the short-run aggregate supply curve is upward sloping, which of the following will cause inflation? A An increase in long-run aggregate supply B An increase in short-run aggregate supply C An increase in aggregate demand D A decrease in aggregate demand E A decrease in aggregate demand and an increase in aggregate supply
An increase in aggregate demand
A negative aggregate supply shock will result in which of the following in the short run? A An increase in the price level and a decrease in the unemployment rate B A decrease in the price level and an increase in the unemployment rate C A decrease in both the price level and real output D An increase in both the price level and real output E An increase in both the price level and the unemployment rate
An increase in both the price level and the unemployment rate
An economy is currently operating at the full-employment level of output. Which of the following would result in a recessionary gap in the short run? A An increase in the costs of production B An improvement in the productivity of labor C An increase in money supply D A positive supply shock E A decrease in income tax rates
An increase in the costs of production
Assume a country's economy is currently in long-run equilibrium. What is the long-run effect of an increase in aggregate demand? A A decrease in the unemployment rate B A decrease in the inflation rate C A decrease in the long-run aggregate supply D An increase in the price level E An increase in the money supply
An increase in the price level
A decrease in the prices of inputs will cause which of the following to occur in the short run? A An increase in the aggregate demand and an increase in the price level B A decrease in the aggregate demand and an increase in the price level C An increase in the short-run aggregate supply and a decrease in the price level D An increase in the short-run aggregate supply and an increase in the price level E A decrease in the short-run aggregate supply and a decrease in the price level
An increase in the short-run aggregate supply and a decrease in the price level
Which of the following explains why the long-run aggregate supply curve corresponds to the production possibilities curve? A Both curves are downward sloping. B Both curves illustrate flexible wages and prices. C Both curves illustrate the maximum sustainable capacity. D Both curves illustrate the trade-off between inflation and unemployment. E Both curves illustrate short-run macroeconomic equilibrium.
Both curves illustrate the maximum sustainable capacity.
Which of the following is true about both the long-run aggregate supply curve and the production possibilities curve? A Both curves represent unemployment and inflation. B Points to the left of either curve represent efficient use of resources. C Points to the right of either curve represent inefficient use of resources. D Both curves represent the maximum sustainable capacity given the economy's resources. E Both curves represent fluctuations of real gross domestic product around its potential level over time.
Both curves represent the maximum sustainable capacity given the economy's resources.
If the government implements an expansionary fiscal policy, how will real gross domestic product (GDP) and the price level be affected in the short run? A Real GDPPrice LevelIncreaseDecrease B Real GDPPrice LevelDecreaseNo change C Real GDPPrice LevelNo changeIncrease D Real GDPPrice LevelIncreaseIncrease E Real GDPPrice LevelDecreaseDecrease
Both increase
Automatic stabilizers can do which of the following? A Offset the destabilizing influence of changes in tax revenues B Aid the economy to move away from the full-employment output level C Allow policymakers to formulate a set of rules flexible and comprehensive enough to eliminate discretionary actions D Cause tax revenues to decrease when gross domestic product (GDP) decreases and to increase when GDP increases E Allow policymakers to prescribe public works programs during inflationary periods because expenditures for unemployment and welfare have correspondingly decreased
Cause tax revenues to decrease when gross domestic product (GDP) decreases and to increase when GDP increases
With an increase in the real interest rate, consumption and real gross domestic product will most likely change in which of the following ways? A ConsumptionReal Gross Domestic ProductIncreaseIncrease B ConsumptionReal Gross Domestic ProductIncreaseDecrease C ConsumptionReal Gross Domestic ProductDecreaseIncrease D ConsumptionReal Gross Domestic ProductDecreaseDecrease E ConsumptionReal Gross Domestic ProductNo changeIncrease
Decrease Decrease
An increase in personal income taxes will most likely cause aggregate demand and aggregate supply to change in which of the following ways in the short run? A Aggregate DemandAggregate SupplyNot changeDecrease B Aggregate DemandAggregate SupplyNot changeIncrease C Aggregate DemandAggregate SupplyDecreaseNot change D Aggregate DemandAggregate SupplyDecreaseIncrease E Aggregate DemandAggregate SupplyIncreaseNot change
Decrease Not change
In the short run, a restrictive fiscal policy will cause aggregate demand, output, and the price level to change in which of the following ways? A Aggregate DemandOutputPrice LevelDecreaseDecreaseDecrease B Aggregate DemandOutputPrice LevelDecreaseIncreaseIncrease C Aggregate DemandOutputPrice LevelIncreaseDecreaseDecrease D Aggregate DemandOutputPrice LevelIncreaseIncreaseIncrease E Aggregate DemandOutputPrice LevelNot changeNot changeNot change
Decrease all three
A favorable supply shock, such as a decrease in energy prices, is most likely to have which of the following short-run effects on the price level and output? A Price LevelOutputDecrease No effect B Price LevelOutputDecreaseIncrease C Price LevelOutputIncreaseIncrease D Price LevelOutputIncreaseDecrease E Price LevelOutputNo effectNo effect
Decrease price level and increase output
Which of the following is an example of fiscal policy? A Decreasing income tax rates B Increasing the money supply C Decreasing the discount rate D Selling government bonds E Decreasing the required reserve ratio
Decreasing income tax rates
Which of the following is a fiscal policy action aimed at reducing unemployment? A Decreasing government expenditures B Decreasing income taxes C Decreasing tax credits D Increasing nominal interest rates E Increasing required reserves
Decreasing income taxes
An increase in the price of a key input will cause the aggregate demand curve and the short-run aggregate supply curve to change in which of the following ways? A Aggregate Demand CurveAggregate Supply CurveShift to the rightShift to the right B Aggregate Demand CurveAggregate Supply CurveShift to the leftShift to the left C Aggregate Demand CurveAggregate Supply CurveShift to the leftNo change D Aggregate Demand CurveAggregate Supply CurveNo changeShift to the left E Aggregate Demand CurveAggregate Supply CurveNo changeShift to the right
Demand=no change Supply=left shift
Assume that the marginal propensity to consume is 0.90. As a result of an increase in the tax rates, the government collects an additional $20 million. What will be the impact on gross domestic product (GDP) ? A GDP will increase by a maximum of $200 million. B GDP will increase by a maximum of $180 million. C GDP will decrease by a maximum of $200 million. D GDP will decrease by a maximum of $180 million. E GDP will decrease by a maximum of $20 million.
GDP will decrease by a maximum of $180 million.
The graph above shows the macroeconomic conditions of Wattsonia. Many economists estimate that the natural rate of unemployment is 6 percent. If this is true and the current rate of unemployment is 5.1 percent, in what range of real gross domestic product is the economy currently producing? A Less than Y1 B At Y1 C At Y2 D Greater than Y1 and less than Y2 E Greater than Y2
Greater than Y2
An economy experiences a sharp increase in energy prices, and policy makers adopt a stabilization policy to increase aggregate demand. Compared with the initial short-run equilibrium, which of the following will definitely occur? A Lower level of output B Higher level of output C Lower price level D Higher price level E Higher aggregate supply
Higher price level
A fiscal policy action to reduce inflationary pressure would be to increase which of the following? A The required reserve ratio B The discount rate C Transfer payments D Government spending E Income tax rates
Income tax rates
A contraction in the money supply will most likely change the nominal interest rate and aggregate demand in which of the following ways in the short run? A Nominal Interest RateAggregate DemandIncreaseDecrease B Nominal Interest RateAggregate DemandIncreaseIncrease C Nominal Interest RateAggregate DemandIncreaseNot change D Nominal Interest RateAggregate DemandDecreaseDecrease E Nominal Interest RateAggregate DemandDecreaseIncrease
Increase Decrease
Thailand and Malaysia are trading partners. If the price level in Thailand decreases relative to the price level in Malaysia, what will happen to Thailand's exports to Malaysia and Thailand's aggregate demand? A Thailand's ExportsThailand's Aggregate DemandIncreaseDecrease B Thailand's ExportsThailand's Aggregate DemandIncreaseIncrease C Thailand's ExportsThailand's Aggregate DemandIncreaseIndeterminate D Thailand's ExportsThailand's Aggregate DemandDecreaseDecrease E Thailand's ExportsThailand's Aggregate DemandDecreaseIncrease
Increase Increase
With an expansionary fiscal policy, what will most likely happen to the real gross domestic product (GDP) and the nominal interest rate in the short run? A Real GDPNominal Interest RateIncreaseDecrease B Real GDPNominal Interest RateIncreaseIncrease C Real GDPNominal Interest RateNo changeNo change D Real GDPNominal Interest RateDecreaseIncrease E Real GDPNominal Interest RateDecreaseDecrease
Increase both
Which of the following will shift the aggregate demand curve to the right? A A report that corporate earnings were lower than expected B An increase in interest rates caused by a tightening of monetary policy C Increased imports caused by appreciation of the dollar D Increased spending by businesses on computers E An increase in the government's budget surplus
Increased spending by businesses on computers
Which of the following is true about the marginal propensity to consume? A It is the percentage of total income that is spent on consumption. B It determines the size of the simple spending multiplier. C It increases as incomes increase because increases in income cause people to spend more. D It is the same as the money multiplier. E It is equal to the average propensity to consume for people with low incomes.
It determines the size of the simple spending multiplier.
Which of the following statements is true about an expansionary fiscal policy? A It decreases demand for loanable funds. B It decreases the equilibrium price level. C It decreases the equilibrium real interest rate. D It increases aggregate demand. E It increases the money supply.
It increases aggregate demand.
Which of the following is true of a horizontal aggregate supply curve? A It is the usual assumption made by classical economists analyzing the long run. B It suggests that increases in output can occur without increases in price levels. C It suggests that a shift in the aggregate demand curve will lead to a change in the price level. D It is likely to occur only in highly industrialized economies. E It cannot shift, therefore output remains constant.
It suggests that increases in output can occur without increases in price levels.
Which of the following will remain unchanged when the price level decreases? A Inflationary expectations B Aggregate quantity demanded C Long-run aggregate supply D Nominal wages E Nominal output
Long-run aggregate supply
A decrease in taxes will necessarily result in an increase in which of the following? A Nominal gross domestic product B Unemployment C Exports D Marginal propensity to save E Money supply
Nominal gross domestic product
How does the automatic adjustment mechanism move the economy to potential real gross domestic product (GDP) in the long run when current real GDP is above potential GDP? A Nominal wages fall, shifting the short-run aggregate supply curve to the right. B Nominal wages fall, shifting the short-run aggregate supply curve to the left. C Nominal wages do not change, shifting the short-run aggregate supply curve to the right. D Nominal wages rise, shifting the short-run aggregate supply curve to the right. E Nominal wages rise, shifting the short-run aggregate supply curve to the left.
Nominal wages rise, shifting the short-run aggregate supply curve to the left.
An economy is in short-run equilibrium at a level of output that is greater than potential output. If there were no active fiscal or monetary policy intervention, which of the following changes in output and the price level would occur in the long run? A OutputPrice LevelIncreaseDecrease B OutputPrice LevelIncreaseIncrease C OutputPrice LevelDecreaseDecrease D OutputPrice LevelDecreaseIncrease E OutputPrice LevelNo changeNo change
Output=decrease Price=increase
Which of the following must be true in the long run? A Production increases when prices increase. B An increase in the price level reduces aggregate demand. C The natural rate of unemployment is not affected by changes in production capacity. D Full employment increases when price level decreases. E Prices and wages are flexible.
Prices and wages are flexible.
In the long run, if aggregate demand decreases, real gross domestic product (GDP) and the price level will change in which of the following ways? A Real GDPPrice LevelDecreaseDecrease B Real GDPPrice LevelDecreaseIncrease C Real GDPPrice LevelNo changeDecrease D Real GDPPrice LevelIncreaseDecrease E Real GDPPrice LevelNo changeIncrease
RGDP No change. Price level decreases
When firms restructure their operations to decrease production costs, the aggregate supply curve, the price level, and real output will change in which of the following ways? A Aggregate Supply CurvePrice LevelReal OutputShift to the leftIncreaseIncrease B Aggregate Supply CurvePrice LevelReal OutputShift to the leftIncreaseNo change C Aggregate Supply CurvePrice LevelReal OutputShift to the rightIncreaseIncrease D Aggregate Supply CurvePrice LevelReal OutputShift to the rightDecreaseIncrease E Aggregate Supply CurvePrice LevelReal OutputShift to the rightDecreaseDecrease
Shifts to the right, price decreases and output increases
According to the graph above and starting with equilibrium point R, which of the following shifts identifies the short-run and the long-run impact of a demand-pull inflation? A Short RunLong RunR to NM to N B Short RunLong RunR to MR to N C Short RunLong RunR to QQ to N D Short RunLong RunR to MR to Q E Short RunLong RunR to N N to Q
Short run=R to M Long run=R to N
Which of the following is true about inflationary expectations? A The actual unemployment rate equals the natural rate of unemployment if the actual inflation rate exceeds the expected inflation rate. B The actual unemployment rate equals the natural rate of unemployment when wages fully adjust to expected inflation. C Expectations are always correct in the short run. D The actual inflation rate is always equal to the expected inflation rate because of labor contracts. E The natural rate of unemployment equals the inflation rate when the actual inflation rate equals the expected inflation rate.
The actual unemployment rate equals the natural rate of unemployment when wages fully adjust to expected inflation.
Which of the following will cause aggregate supply to increase in Country X? A An increase in personal income taxes B The discovery of low-cost alternative sources of energy C A decrease in labor productivity with no change in nominal wages D Depreciation of country X's currency on the foreign exchange market E An increase in the price level
The discovery of low-cost alternative sources of energy
In the AD−ASAD−AS model, which of the following is true? A The economy is in an inflationary gap when the short-run equilibrium real output is below the long-run equilibrium real output. B The economy is in an inflationary gap when the short-run equilibrium real output is at the long-run equilibrium real output. C The economy is in a recessionary gap when the short-run equilibrium real output is at the long-run equilibrium real output. D The economy is in a recessionary gap when the short-run equilibrium real output is below the long-run equilibrium real output. E The economy is in a recessionary gap when the short-run equilibrium real output is above the long-run equilibrium real output.
The economy is in a recessionary gap when the short-run equilibrium real output is below the long-run equilibrium real output.
The diagram above shows a nation's short-run aggregate supply curve (SRAS)(SRAS), long-run aggregate supply curve (LRAS)(LRAS), and aggregate demand curve (AD)(AD). Based on the diagram above, which of the following describes the short-run equilibrium? A The economy is operating at full employment. B The economy is operating below full employment. C The economy is operating above full employment. D There will be downward pressure on the price level. E There is a recessionary gap.
The economy is operating above full employment.
In an economy with lump-sum taxes and no international sector, assume that the aggregate supply curve is horizontal. If the marginal propensity to consume is equal to 0.8, which of the following will necessarily be true? A The average propensity to consume will be less than the marginal propensity to consume. B The government expenditure multiplier will be equal to 5. C A $10 increase in consumption spending will bring about an $80 increase in disposable income. D Wealth will tend to accumulate in the hands of a few people. E The economy will be running a deficit, since consumption expenditures exceed personal saving.
The government expenditure multiplier will be equal to 5.
If policy makers use fiscal policy to reduce inflation, which of the following will most likely happen in the short run? A The unemployment rate will decrease. B The unemployment rate will increase. C The real interest rate will increase. D The nominal interest rate will increase. E The economy will remain at the natural rate of unemployment.
The unemployment rate will increase.
Which of the following is an assumption underlying an upward-sloping short-run aggregate supply curve? A The economy is experiencing high inflation. B The economy is at full employment. C National income is fixed. D Wages are sticky. E The velocity of money is constant.
Wages are sticky
Assuming no government policies, which of the following will occur in the long run if the actual unemployment rate exceeds the natural rate of unemployment? A Prices will increase. B Unemployment will increase. C Wages will fall. D Aggregate demand will increase. E Long-run aggregate supply will decrease.
Wages will fall
Recession can be caused by A an increase in the price level B an increase in exports C a decrease in interest rates D a decrease in aggregate demand E a decrease in wages
a decrease in aggregate demand
All of the following explain why prices and wages are sticky EXCEPT A menu costs experienced by firms B efficiency wages paid to labor C misperceptions about relative prices by suppliers D competition in the business sector E labor contracts covering multiple years
competition in the business sector
Aggregate demand may be measured by adding A consumption, investment, savings, and imports B savings, government spending, and business inventories C consumption, investment, government spending, and net exports D domestic private expenditures and government spending E domestic expenditures and imports
consumption, investment, government spending, and net exports
A demand-pull inflation B cost-push inflation C expansionary fiscal policy D a decrease in the prices of substitute forms of energy E deflation
cost-push inflation
When an economy is in equilibrium at potential gross domestic product, the actual unemployment rate is A equal to the cyclical rate B greater than the natural rate C less than the natural rate D equal to the natural rate E equal to zero
equal to the natural rate
A major advantage of automatic stabilizers in fiscal policy is that they A reduce the public debt B increase the possibility of a balanced budget C stabilize the unemployment rate D go into effect without passage of new legislation E automatically reduce the inflation rate
go into effect without passage of new legislation
Assume that the marginal propensity to consume is 0.8. If the government increases its purchases of goods and services by $200 and exports decline by $50, at most the equilibrium level of income will A decrease by $250 B decrease by $1,000 C increase by $150 D increase by $750 E increase by $1,250
increase by $750
The short-run aggregate supply curve would be vertical if A nominal wages adjust immediately to changes in the price level B nominal wages adjust slowly when there is unemployment C both nominal wages and prices adjust slowly to changes in aggregate demand D the spending multiplier is very low E investment demand is very responsive to changes in interest rates
nominal wages adjust immediately to changes in the price level
The intersection of the aggregate supply curve and the aggregate demand curve occurs at the economy's equilibrium level of A real investment and the interest rate B real disposable income and unemployment C real national output and the price level D government expenditures and taxes E imports and exports
real national output and the price level
An aggregate supply curve may be horizontal over some range because within that range A a higher price level leads to higher interest rates, which reduce the money supply and consumer spending B changes in the aggregate price level do not induce substitution C output cannot be increased unless prices and interest rates increase D rigid prices prevent employment from fluctuating E resources are underemployed and an increase in demand will be satisfied without any pressure on the price level
resources are underemployed and an increase in demand will be satisfied without any pressure on the price level
All the following are examples of automatic stabilizers EXCEPT: A unemployment insurance benefits B personal income taxes C welfare benefits D corporate income taxes E tariffs
tariffs
