Basic Econ Chapters 6-11

To eliminate the AD shortfall of $100 billion when the economy has an MPC of 0.80, the government should increase its purchase by:

(a) $20 Billion

If the desired fiscal restraint is $10 billion and the excess AD is $100 billion, we can conclude that the multiplier is:

(a) 10

An increase in interest rates will likely cause:

(a) A decrease in both aggregate demand and the consumption function.

Any event that causes a decrease in consumer confidence, such as the terrorist attacks on the World Trade Center and The Pentagon on September 2001, will cause:

(a) A downward shift of the consumption function and decrease in aggregate demand.

A change in autonomous consumption would correspond to:

(a) A shift of both the consumption function and the aggregate demand curve.

In macro equilibrium:

(a) Aggregate quantity demanded equals aggregate quantity supplied.

According to the Keynesian view od the macro economy, when the economy is at equilibrium:

(a) Aggregate supply equals aggregate demand.

If actual inflation is greater than anticipated inflation in an economy:

(a) Borrowers would experience an increase in real income.

A rightward shift in the aggregate demand curve will cause:

(a) Both higher prices and higher output if the aggregate supply curve is upward sloping.

According to Keynes, policy makers should respond to a downturn in the business cycle by:

(a) Cutting taxes and increasing government spending.

When aggregate demand falls below the full-employment level of output, which of the following types of unemployment is most likely to inrease?

(a) Cyclical.

Ceteris paribus, if income is transferred from individuals with a higher MPC to those with a low MPC, aggregate demand will:

(a) Decrease

Which of the following is inherent in the classical view of a self-adjusting economy?

(a) Flexible wages and prices.

When an economy is at full employment and consumption spending decreases, if all other levels of spending remain constant:

(a) Increased unemployment results.

Which of the following is not a tool of fiscal policy?

(a) Increasing the money supply.

Because the aggregate supply curve rises more steeply as the economy approached full employment:

(a) Inflation tends to accelerate.

When consumers, government, businesses, and the foreign sector do not buy all of the output that is produced, then:

(a) Inventories accumulate.

If actual investment exceeds desired investment then:

(a) Inventories are increasing.

Ceteris paribus, as the rate of employment moves closer to the level of full employment, then the:

(a) Level of output moves closer to the production possibilities curve, but not beyond it.

The initial, or first round, increase in consumption because of a tax cut is equal to:

(a) MPC x the amount of the tax cut.

For the balanced-budget multiplier to equal 1, the budget:

(a) Need not be balanced, but the changes in taxes and spending must be equal.

Which one of the following statements about inflation in the U.S. is correct?

(a) Prior to World War II, the U.S. experienced periods of both deflation and inflation.

Which of the following is a reason why the aggregate supply curve is upward sloping?

(a) Profit effect

With respect to the aggregate demand curve, improved consumer confidence will:

(a) Shift the curve rightward.

Which of the following is a macro consequence of inflation?

(a) Shortened time horizons.

People become labor force participants when they:

(a) Take a full-time job.

The line described by the consumption function C=a+bYd will change its slope when:

(a) The MPC changes.

Which of the following is a reason for a downward-sloping aggregate demand curve?

(a) The foreign-trade effect.

COLAs are desired because:

(a) The real value of wages can be maintained, since COLAs correct for the effects of inflation.

Controversies between Keynesian, monetarist, supply-side, and eclectic theories focus on:

(a) The shape and sensitivity of aggregate demand and aggregate supply curves.

Which of the following government programs would be most appropriate to counteract cyclical unemployment?

(a) Those that stimulate economic growth.

The reason that policy makers are reluctant to force the economy to a zero percent inflation rate is that:

(a) Unacceptable levels of unemployment might result.

Individuals who are working part-time while seeking full-time employment are classified as:

(a) Underemployed

When a person who worked as a camp counselor all summer seeks employment during the winter, the unemployment rate goes up. This situation is an example of:

(a) seasonal unemployment

Suppose the MPC is 0.9 and the level of consumption spending independent of current disposable income is $1 billion. At a disposable income is $12 billion, what is the level of consumption?

(b) $11.8 billion.

An MPS of 0.20 means a $100 tax increase ultimately causes spending to fall by:

(b) $400

Given C=100+0.90Yd the multiplier is:

(b) 10

At the beginning of 1960 the CPI was 29.6. At the beginning of 2009 it was approximately 170.8. Which of the following most closely approximates the forty-year rate of inflation?

(b) 477 percent

The marginal propensity to consume is the:

(b) Additional consumption because of additional income.

In a diagram of aggregate demand and aggregate supply curves, the GDP gap is measured:

(b) As the horizontal distance between the equilibrium output and the full employment output.

If an economy is suffering from excessively high rates of inflation, an appropriate monetary policy lever would be to:

(b) Decrease AD by increasing interest rates.

The interest-rate effect helps explain the downward slope of the aggregate demand curve because as the price level falls, the need to borrow:

(b) Decreases which cause the interest rate to fall and loan-financed sales increase.

Which of the following shifts would definitely result in higher unemployment?

(b) Demand shifts to the left and supply shifts to the left.

Which of the following groups is likely to lose as a result of unanticipated inflation?

(b) Fixed-income groups.

According to Okun's Law, a two-percent decrease in unemployment will result in a :

(b) Four percent increase in real output

Which of the following is not a consequence of unemployment?

(b) Improved confidence for workers

If equilibrium GDP is less than full employment GDP, an appropriate fiscal policy action would be to:

(b) Increase AD by increasing government spending.

Crowding out occurs when the government:

(b) Issues debt, thus making it more difficult for the privare sector to issue debt.

The point where aggregate demand and aggregate supply are equal always represents:

(b) Macro equilibrium.

If the CPI doesn't adjust for product quality improvements, then the CPI tends to:

(b) Overstate the inflation rate.

Which of the following groups would be the most likely to qualify for unemployment benefits?

(b) People who lose their jobs due to increased foreign competition and are looking for work.

The official underemployment statistics may exaggerate the significance of unemployment by including the:

(b) Phantom unemployed

When the economy is in equilibrium, all of the following are true except:

(b) Saving equals spending.

The cost effect implies all of the following except:

(b) That demand increases when production decreases.

The most desirable inflation rate is the rate:

(b) That least affects the behavior of companies, investors, consumers and workers.

Fiscal policy works principally through shifts of:

(b) The aggregate demand curve.

Suppose that an economy has an upward-sloping aggregate supply curve and a GDP gap equal to $66 billion. If aggregate demand increases by a total of $66 billion:

(b) The resulting equilibrium GDP will be lower than full employment GDP because some of the additional spending will drive up prices instead of increasing output.

The growth in the value of the U.S. stock market in the 1990s caused aggregate demand to increase primarily because of:

(b) The wealth effect.

When an economy experiences a zero rate of inflation, which of the following statements is definitely true?

(b) There is no redistribution of income and wealth because of inflation.

In which of the following cases would cyclical unemployment tend to increase, ceteris paribus?

(b) Total value of goods supplied exceeds the total value of goods demanded.

U.S. aggregate demand can shift due to changes in expectations on the part of:

(b) U.S. businesses, foreign businesses, and U.S. consumers.

Assuming an upward-sloping aggregate supply curve, when aggregate demand increases:

(b) Unemployment decreases and the price level increases.

Business cycles in the United States:

(b) Vary greatly in length, frequency, and intensity.

The desired tax cut necessary to close an AD shortfall is given by:

(b) desired fiscal stimulus ÷ MPC.

Suppose the consumption function is C=100+.75Yd. If the government stimulates the economy with $50 billion in increased spending, total aggregate expenditure will ultimately rise by:

(c) $200 billion.

The federal government approves a new highway the injects $100 million of new spending into the economy during the first year of the project. Ceteris paribus, if the consumption function for theis economy is given by the equation C=250+0.9Yd, how much is the increase in spending for the second round of the multiplier process?

(c) $90 million

Which of the following causes a movement along the investment demand curve?

(c) A change in the rate of interest.

A leakage from the circular flow is:

(c) A diversion of income from spending on output.

Frictional unemployment goes up when:

(c) A worker quits one job in order to search for another.

Which of the following will cause the level of income to change by the greatest amount, ceteris paribus?

(c) An increase in defense spending of $100 million.

Equilibrium GDP could be upset by a change in:

(c) Any leakage or injection.

Dissaving:

(c) Can be financed with savings from a prior period.

In the consumption function C=a+bYD, the value of a is determined in part by:

(c) Consumer confidence.

If the price of MP3 players falls 5 percent during a period when the level of average prices falls 3 percent, the relative price of MP3 players compared with other goods:

(c) Decreases.

Keynesian theory became important when classical economic theory did not adequately explain a prolonged period of:

(c) Economic contraction

When the average price level falls in our economy, consumers tend to buy:

(c) Fewer imported goods and more domestic goods, ceteris paribus.

If the equilibrium level of output is less than full employment, to achieve a full-employment equilibrium the AD curve must shift to the right by an amount:

(c) Greater than the GDP gap because the spending increase raises the price level.

Suppose you get a 5 percent raise during a year in which the price level rises by 8 percent. Then over the year your real:

(c) Income falls, but your nominal income rises.

With an MPC of 0.70 an increase of $4 billion in autonomous consumption would cause:

(c) Income to change by a total of $13.33 billion.

The most fundamental function of prices in a market economy is to provide:

(c) Information about the relative scarcities of resources and goods and services.

Which of the following best describes the impact of uncertainty caused by inflation?

(c) Investment decisions are more difficult to make because of uncertain but rising costs.

Which of the following is true concerning the outsourcing of jobs?

(c) It allows U.S. firms to become more globally competitive.

If the economy is operating below full employment, which of the following policies will increase aggregate spending but will not increase the size of the government?

(c) Leave government spending unchanged and decrease taxes.

When the growth rate of the labor force is more rapid than the growth rate of unemployment workers, then it is certain that the:

(c) Percentage of the labor force that is employed is rising.

When aggregate demanded exceeds aggregate supply, what will happen to the price level?

(c) Prices will rise.

Ceteris paribus, when the size of the labor force increases in a economy, then the:

(c) Production possibilities curve shifts outward.

As a result of inflation:

(c) Tension between labor and management increases.

If you were interested in charting "price changes" for all goods and services produced, which of the following would be the most appropriate to use?

(c) The GDP deflator.

If, in the aggregate, consumers spend 87 cents out of every additional dollar received:

(c) The MPS is 0.13

In the aggregate demand-aggregate supply diagram:

(c) The intersection of the two curves marks the macro equilibrium.

Suppose that as a result of higher interest rates, desired investment and aggregate demand decrease. Additional decreases in aggregate demand will occur because of:

(c) The multiplier effect.

In an inflationary GDP gap situation:

(c) There is excess demand for goods and consumers bid up prices.

If aggregate demand is too great:

(c) There will be an inflationary GDP gap.

1÷(1-MPC) multiplied by a new spending injection gives the:

(c) Total change in income generated from the new spending.

Which of the following is most powerful in shifting the aggregate demand curve?

(c) an increase in defense of $10 billion.

Assuming an MPC of 0.5, the change in total spending for the economy as a result of a $100 billion new government spending injection would be:

(d) $200 billion

Using a consumption function of the form c=a+bYd, which of the following would best measure the total impact on output of a change in autonomous spending?

(d) 1/1-MPC

Which of the following is not typically used to shift the aggregate demand curve or the aggregate supply curve?

(d) A laissez-faire approach.

When output exceeds desired spending, which of the following is included in the Keynesian adjustment process?

(d) All of the Above.

The desired fiscal stimulus that will eliminate an AD shortfall should equal the:

(d) All of the above

A basic conclusion of Keynesian analysis is that:

(d) All of the above.

Between 1956 and 1979 greater proportions of teenagers and women entered the labor force causing :

(d) An increase in the structural unemployment rate.

Which of the following does not characterize consumers' or businesses' reactions to the uncertainties caused by inflation?

(d) Businesses lengthen their time horizons and plan to build new facilities.

The Employment Act of 1946:

(d) Committed the government to pursue a goal of "maximum" employment.

Which of the following includes all the components of aggregate demand?

(d) Consumption, government spending, net exports, and investment.

Which of the following is not consistent with Keynes' view of the economy?

(d) Increased consumer spending is the only solution for a recession.

The difference between market demand and aggregate demand is:

(d) Market demand applies to a given market while aggregate demand applies to the entire economy.

Which of the following groups typically has the highest unemployment rate in the United States?

(d) Minority teenagers

For an economy in which nominal interest rates are equal to real interest rates, which of the following statements is definitely true?

(d) No inflation occurred.

When an economy enters recession, the:

(d) Number of discouraged workers rises.

According to classical theorists, when consumer demand slowed down, ____ would ____ and all the output would be sold.

(d) Prices; fall

Cutbacks in national defense spending during the 1990's caused an increase in:

(d) Structural unemployment

Speculation during periods of inflation can cause:

(d) The hording of resources for future sale.

Which of the following is not a consequence of inflation?

(d) The horizon effect.

All of the following limit the effectiveness of fiscal policy in the real world except:

(d) The multiplier effect.

Which of the following is included in investment spending?

(d) The purchase of new accounting software by a small business.

In terms of the musical chairs analogy in the text, which of the following is a description of cyclical unemployment?

(d) There are too few chairs.

If a recent college graduate is looking for a job but cannot find one, this is known as

(d) Unemployment

According to classical and monetarist theories, in the long run the aggregate supply curve is:

(d) Vertical at the natural rate of output.

The determinants of consumption include:

(d) Wealth, credit, current income, and taxes.