Macroeconomics Unit 5

14. The statement that "the cost of reducing the rate of inflation is that people must lose their jobs" indicates that the speaker believes in a relationship that is usually depicted by which of the following? (A) The short-run Phillips curve (B) The liquidity trap (C) The production function (D) The quantity theory of money (E) The spending multiplier

(A) The short-run Phillips curve

2. Which of the following monetary and fiscal policy combinations would definitely cause an increase in aggregate demand? ___Reserve____|________|_Government Requirements_|_Taxes_|__Spending (A) Decrease, Decrease, Decrease (B) Decrease, Decrease, Increase (C) Increase, Decrease, Increase (D) Increase, Increase, Decrease (E) Increase, Decrease, Decrease

(B) Decrease, Decrease, Increase

12. When the unemployment rate is 10 percent and the CPI is rising at 2 percent, the federal government cuts taxes and increases government spending. If the Federal Reserve buys bonds on the open market, interest rates, investment, real gross domestic product (GDP) and the price level are most likely to change in which of the following ways? Interest_|_Investment_|_Real_|_Price _Rates__|______________|_GDP_|_Level (A) Decrease, Decrease, Increase, Increase (B) Decrease, Increase, Increase, Increase (C) Increase, Decrease, Decrease, Decrease (D) Increase, Decrease, Increase, Increase (E) Increase, Increase, Increase, Increase

(B) Decrease, Increase, Increase, Increase

11. "Sales of durable goods last month were surprisingly high. Recent price increases have pushed the CPI to more than a 7 percent increase for the past year. On average, the producer price index has gained 1 percent each month during the last year.Wage rates have increased throughout the economy, but productivity gains are minimal. The unemployment rate, however, is steady at 6 percent." Which of the following changes in the tax rate, government spending and the federal funds rate are most appropriate given the state of the economy? _Tax_|_Government_|_Federal Rate_|__Spending___|_Funds Rate (A) Increase, Increase, Increase (B) Increase, Decrease, Increase (C) Increase, Decrease, Decrease (D) Decrease, Increase, Decrease (E) Decrease, Decrease, Decrease

(B) Increase, Decrease, Increase

7. An expansionary fiscal policy will result in an increase in the interest rate unless which of the following occurs? (A) Taxes are cut instead of government expenditures being increased. (B) The money supply is increased. (C) Wage and price controls are imposed. (D) The exchange rate is fixed. (E) The Federal Reserve sells government bonds.

(B) The money supply is increased.

8. An expansionary monetary policy may promote long-run growth if it leads to (A) an increase in consumption. (B) an increase in investment. (C) an increase in government spending. (D) a constant level of government spending. (E) a decrease in net exports.

(B) an increase in investment.

16. If the production possibilities curve of an economy shifts from AB to CD, it most likely is caused by: (Figure 5.1) (A) full employment of resources. (B) technology advances. (C) allocative efficiency. (D) a decrease in the price level. (E) productive efficiency.

(B) technology advances.

13. When the unemployment rate is 4.5 percent and the CPI is rising at a 12 percent rate, the federal government raises taxes and cuts government spending. If the Federal Reserve sells bonds on the open market, interest rates, investment real gross domestic product (GDP) and the price level are most likely to change in which of the following ways? Interest_|_Investment_|_Real_|_Price _Rates__|______________|_GDP_|_Level (A) Decrease, Decrease, Increase, Increase (B) Increase, Decrease, Increase, Increase (C) Increase, Decrease, Decrease, Decrease (D) Decrease, Increase, Increase, Increase (E) Decrease, Decrease, Increase, Increase

(C) Increase Decrease Decrease Decrease

3. Assume that the economy has a low unemployment rate and a high rate of inflation.Which of the following sets of monetary and fiscal policies would be consistent and designed to reduce the rate of inflation? Discount_|_Government_|_Open Market __Rate___|___Spending___|__Operations (A) Increase, Increase, Buy bonds (B) Increase, Increase, Sell bonds (C) Increase, Decrease, Sell bonds (D) Increase, Decrease, Buy bonds (E) Decrease, Decrease, Buy bonds

(C) Increase, Decrease, Sell bonds

9. If the government increases spending without a tax increase and simultaneously no monetary policy changes are made, which of the following would most likely occur? (A) Income would not rise at all because no new money is available for increased consumer spending. (B) The rise in income may be greater than the multiplier would predict because the higher interest rates will stimulate investment spending. (C) The rise in income may be smaller than the multiplier would predict because the higher interest rates will crowd-out private investment spending. (D) Income will go up by exactly the amount of the new government spending since this acts as a direct injection to the income stream. (E) Income will not go up unless taxes are cut as well

(C) The rise in income may be smaller than the multiplier would predict because the higher interest rates will crowd-out private investment spending.

19. The Phillips curve shows the relationship between (A) unemployment and economic growth. (B) unemployment and full employment. (C) inflation and unemployment. (D) inflation and investment. (E) inflation and real interest rates.

(C) inflation and unemployment.

18. The theory of rational expectations implies which of the following? (A) Unemployment and the rate of inflation are directly related. (B) An increase in the money supply will have no effect on price level. (C) Attempts to decrease unemployment below the natural rate lead to depression. (D) Attempts to decrease unemployment through government policy will be thwarted by people's reactions. (E) Government policies work only if the money supply increases by 10 percent.

(D) Attempts to decrease unemployment through government policy will be thwarted by people's reactions.

1. Which of the following monetary and fiscal policy combinations would definitely cause a decrease in aggregate demand in the short run? Discount_|_Government_|_Open Market __Rate___|___Spending___|_Operations (A) Decrease, Decrease, Buy bonds (B) Decrease, Increase, Buy bonds (C) Decrease, Increase, Sell bonds (D) Increase, Decrease, Sell bonds (E) Increase, Decrease, Buy bonds

(D) Increase, Decrease, Sell bonds

6. An increase in which of the following would be most likely to increase long run economic growth? (A) Taxes (B) Interest rates (C) Consumer spending (D) Productivity (E) Value of domestic currency

(D) Productivity

17. If the production possibilities curve of an economy is CD and the economy is producing at Point X, which of the following is true? (Figure 5.1) (A) Technology advances changed industrial production. (B) The quality and quantity of productive resources increased. (C) Improvements in productivity led to increased output. (D) Resources are not fully employed. (E) Aggregate demand decreased.

(D) Resources are not fully employed.

15. In the short run, combining an expansionary fiscal policy with a tight money policy is most likely to cause (A) real GDP to increase. (B) real GDP to decrease. (C) interest rates to fall. (D) interest rates to rise. (E) the federal budget deficit to decrease.

(D) interest rates to rise.

10. If Congress and the Federal Reserve both wished to encourage growth of productive capacity in an economy already close to full employment, it would be most appropriate to (A) increase interest rates by buying bonds on the open market. (B) use a tight money policy to decrease government spending. (C) reduce taxes on consumption, increase income taxes and increase government transfer payments. (D) reduce interest rates by engaging in open market operations and raise taxes on personal income. (E) increase capital gains taxes and decrease the money supply.

(D) reduce interest rates by engaging in open market operations and raise taxes on personal income.

5. Which of the following would best portray long-run economic growth? (A) A leftward shift of the aggregate demand curve (B) A rightward shift of the aggregate demand curve (C) A leftward shift of the production possibilities curve (D) A leftward shift of the long-run aggregate supply curve (E) A rightward shift of the long-run aggregate supply curve

(E) A rightward shift of the long-run aggregate supply curve

20. Which of the following explains why inflation can increase? I. Increase in aggregate demand II. Decrease in aggregate supply III. Increase in rate of money supply growth (A) I only (B) II only (C) III only (D) I and II only (E) I, II and III

(E) I, II and III

4. To counter the crowding-out effect on interest rates caused by the government's deficit spending, the Federal Reserve can (A) cut tax rates. (B) increase tax rates. (C) increase the discount rate. (D) increase the reserve requirement. (E) buy bonds through open market operations.

(E) buy bonds through open market operations.