Econ Practice Test 3

10. Fiscal policy that decreases aggregate demand is: A) balanced. B) supplemental. C) contractionary. D) expansionary.

C) contractionary.

9. Expansionary fiscal policy pushes the aggregate demand curve to the right. A) True B) False

A) True

48. The interest rate effect of a change in the aggregate price level occurs: A) when a higher price level decreases the purchasing power of money resulting in an increase in interest rate. B) when the Fed uses contractionary monetary policy causing an increase in interest rate. C) when government borrowing in the loanable funds market causes interest rate to increase. D) when the price of a bond increases resulting in a fall in the interest rate.

A) when a higher price level decreases the purchasing power of money resulting in an increase in interest rate.

14. The government budget balance equals: A) taxes plus government purchases plus government transfers. B) taxes minus government purchases minus government transfers. C) taxes minus government purchases plus government transfers. D) taxes plus government purchases minus government transfers.

B) taxes minus government purchases minus government transfers.

28. According to the long-run aggregate supply curve, when _________, the quantity of aggregate output supplied _________. A) nominal wages rise; falls B) the aggregate price level rises; does not change C) the aggregate price level rises; falls D) the price of commodities falls; rises

B) the aggregate price level rises; does not change

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

B) the interest rate effect

25. The wealth effect is reflected in: A) increases in interest rate to savers. B) the upward slope in aggregate supply. C) the upward slope in aggregate demand. D) the downward slope in aggregate demand.

D) the downward slope in aggregate demand.

6. When the government decreases government spending, the: A) AD curve will shift to the left. B) SRAS curve will shift to the left. C) government's budget balance will move toward a deficit. D) government debt will increase.

A) AD curve will shift to the left.

23. (Figure: Policy Alternatives) If the economy is in equilibrium at Y1 in panel (a), it is experiencing A) a recessionary gap B) an inflationary gap. C) simultaneous short-run and long-run equilibrium. D) full employment.

A) a recessionary gap

34. The positive relationship between the aggregate price level and aggregate output supplied gives the short-run aggregate supply curve: A) an upward slope. B) a vertical slope. C) a horizontal slope. D) a downward slope.

A) an upward slope.

7. (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

32. A recessionary gap can be closed by _______ wages that shift the _______. A) falling; SRAS curve rightward B) falling; LRAS curve to the right C) falling; SRAS curve leftward D) rising; SRAS curve rightward

A) falling; SRAS curve rightward

2. 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.

29. 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.

4. A government budget surplus would be contractionary because of all of the following EXCEPT that: A) increases in government purchases are contractionary. B) decreases in government purchases are contractionary. C) increases in taxes are contractionary. D) decreases in government transfers are contractionary.

A) increases in government purchases are contractionary.

24. 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

17. An expansionary fiscal policy either _______ government spending or _______ taxes. A) increases; increases B) decreases; increases C) increases; decreases D) decreases; decreases

C) increases; decreases

19. 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.

37. A recessionary gap causes: A) short-run aggregate supply to gradually increase. B) short-run aggregate supply to gradually decrease. C) aggregate demand to gradually increase. D) aggregate demand to gradually decrease.

A) short-run aggregate supply to gradually increase.

46. The point at which the long-run aggregate supply curve touches the X-axis is known as: A) the economy's potential output. B) the accelerator point. C) the multiplier point. D) the self-correcting economy point.

A) the economy's potential output.

8. President Johnson's use of a temporary 10% surcharge on income taxes is a classic example of: A) expansionary fiscal policy. B) contractionary fiscal policy. C) expansionary monetary policy. D) contractionary monetary policy.

B) contractionary fiscal policy.

18. The long run in macroeconomic analysis is a period: A) in which wages and some other prices are sticky. B) in which nominal wages are flexible. C) greater than 12 months. D) in which the capital stock is held constant.

B) in which nominal wages are flexible.

13. (Figure: Short- and Long-Run Equilibrium II) 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.

B) inflationary gap.

3. A cyclically adjusted budget balance: A) shows what the budget balance would be with a significant amount of cyclical unemployment. B) is an estimate of what the budget balance would be if real GDP were equal to potential output. C) is a good indicator of the structural deficit that exists in the economy. D) is the same as the national debt, and it rises as interest cost is accrued.

B) is an estimate of what the budget balance would be if real GDP were equal to potential output.

50. A cut in taxes will have a greater impact on aggregate demand if it is given to: A) people with a low MPC. B) people with a high MPC. C) everyone in the economy. D) those who hold a large amount of wealth.

B) people with a high MPC.

44. (Figure: Inflationary and Recessionary Gaps) The level of income associated with Y1 in panel (b): A) is equal to potential output. B) reveals an inflationary gap compared with Yp. C) is a long-run equilibrium. D) is caused by flexible wages and prices.

B) reveals an inflationary gap compared with Yp.

20. (Figure: An Increase in Aggregate Demand) Assume that the economy is initially in long-run equilibrium at YP and P1. Now suppose that there is an increase in the level of government purchases at each price level. This will: A) shift the aggregate demand curve from AD2 to AD1. B) shift the aggregate demand curve from AD1 to AD2. C) lead to increased output and a decrease in the price level. D) lead to decreased output and price level.

B) shift the aggregate demand curve from AD1 to AD2.

47. 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.

15. Medicaid, Medicare, and Social Security are examples of: A) unilateral payments. B) transfer payments. C) monetary policy. D) taxes.

B) transfer payments.

12. Real GDP equals $400 billion, the government collects 25% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government decreases spending by $40 billion, real GDP will decrease by: A) $40 billion. B) $80 billion. C) $100 billion. D) $200 billion.

C) $100 billion.

1. If the marginal propensity to consume is 0.75 and the federal government increases spending by $100 billion, the income expenditure model would predict that real GDP will increase by: A) $100 billion. B) $750 billion. C) $400 billion. D) $300 billion.

C) $400 billion.

26. (Figure: ADñAS Model II) If the central bank reduces the quantity of money that is circulating in the economy, then which of the following will take place? A) LRAS will shift to the right. B) LRAS will shift to the left. C) AD curve will shift to the left. D) AD curve will shift to the right.

C) AD curve will shift to the left.

45. (Figure: ADñAS Model II) When consumers and firms become more optimistic about the future, 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) AD curve will shift to the right. D) None of the provided answer choices will occur.

C) AD curve will shift to the right.

11. Suppose the economy is operating at an output level of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. Which of the following would be required to close this recessionary gap? A) a $25 billion increase in government spending B) a $25 billion increase in taxes C) a $250 billion increase in government spending D) a $1,000 billion increase in government spending

C) a $250 billion increase in government spending

49. 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.

27. (Figure: Policy Alternatives) In panel (b), the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the government decides to intervene, it would most likely: A) increase taxes. B) decrease the quantity of money available. C) increase the level of government purchases of goods and services. D) decrease the level of government purchases of goods and services.

C) increase the level of government purchases of goods and services.

41. Government purchases of goods and services differ from changes in taxes and transfer payments because government purchases of goods and services: A) is a type of fiscal policy while changes in taxes and transfer payments is a type of monetary policy. B) is a type of monetary policy while changes in taxes and transfer payments is a type of fiscal policy. C) influences aggregate demand directly while changes in taxes and transfer payments influence aggregate demand indirectly. D) influences aggregate demand indirectly while changes in taxes and transfer payments influence aggregate demand directly.

C) influences aggregate demand directly while changes in taxes and transfer payments influence aggregate demand indirectly.

5. When the government borrows funds in financial markets to pay for budget deficits: A) planned aggregate spending decreases rather than increases. B) the multiplier effect of government purchases increases. C) private investment spending may be crowded out. D) the interest rate and savings decrease.

C) private investment spending may be crowded out.

31. 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.

38. A general decrease 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.

C) short-run aggregate supply curve shifting to the right.

39. (Figure: ADñAS Model II) If the price level rises, which of the following will take place? A) SRAS curve will shift to the left. B) SRAS curve will shift to the right. C) AD curve will shift to the left. D) None of the answer choices provided will take place.

D) None of the answer choices provided will take place.

35. In the United States during the 1970s, oil prices increased dramatically and caused: A) AD to shift right. B) AD to shift left. C) SRAS to shift right. D) SRAS to shift left.

D) SRAS to shift left.

40. (Figure: ADñAS 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.

30. The long-run aggregate supply curve is vertical because in the long run: A) technological progress outpaces raises in nominal wages. B) all factors of production increase. C) the price of labor is flexible, while the price of physical capital is fixed. D) all prices are flexible.

D) all prices are flexible.

42. Producing a short-run level of aggregate output that exceeds the economy's potential output results in: A) a downward adjustment in nominal wages. B) an upward adjustment in profits per unit of output. C) a downward adjustment in production costs. D) an upward adjustment in nominal wages.

D) an upward adjustment in nominal wages.

16. Which of the following is NOT a method of fiscal policy? A) changing tax rates B) government transfers C) government purchases of goods and services D) changes in the money supply

D) changes in the money supply

33. According to the wealth effect, when prices decrease, the purchasing power of assets: A) decreases and consumer spending decreases. B) increases and consumer spending decreases. C) decreases and consumer spending increases. D) increases and consumer spending increases.

D) increases and consumer spending increases.

22. When the economy is producing output above the potential, it has a(n): A) Keynesian gap B) falling wages. C) recessionary gap. D) inflationary gap.

D) inflationary gap.

36. The aggregate demand curve would shift to the left for all the following reasons EXCEPT: A) a fall in consumers' wealth. B) a decrease in the amount of money in circulation. C) more pessimistic consumer expectations. D) lower labor productivity.

D) lower labor productivity.

43. 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