ap econ unit 3
An economy is currently producing $250 billion 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? Responses $2.5 billion $5 billion $10 billion $25 billion $40 billion
$2.5 billion
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? Responses Real GDP Nominal Interest Rate Increase Decrease Real GDP Nominal Interest Rate Increase Increase Real GDPNominal Interest RateNo changeNo change Real GDPNominal Interest RateDecreaseIncrease Real GDPNominal Interest RateDecreaseDecrease
Real GDP Nominal Interest Rate Increase Increase
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 Responses $7.5 billion $15.5 billion $40 billion $80 billion $120 billion
$40 billion
Assume that the marginal propensity to consume out of disposable income is 0.8 and that the government taxes all income at a constant rate of 30 percent. If gross income increases by $100, consumption will initially increase by Responses $44 $56 $70 $80 $100
$56
If the marginal propensity to save is 0.25, a $15 billion increase in government spending will lead to an increase in national income by a maximum of Responses $60 billion $45 billion $15 billion $11.25 billion $3.75 billion
$60 billion
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 Responses $4,000 $8,000 $9,000 $10,000 $14,000
$8,000
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 Responses $0.5 million $1.5 million $2.0 million $8.0 million $15.0 million
$8.0 million
According to the income and consumption schedules shown above, the marginal propensity to consume is Responses 1.33 0.90 0.80 0.75 decreasing as real disposable income increases
0.75
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) and short-run aggregate supply (SRAS) curves? Responses A D Curve S R A S Curve Shifts to the right Shifts to the right A D Curve S R A S Curve Shifts to the left Shifts to the left A D Curve S R A S Curve Shifts to the right No change A D Curve S R A S Curve Shifts to the left No change AD CurveSRAS CurveNo changeNo change
A D Curve S R A S Curve Shifts to the right No change
Which of the following will most likely result from a decrease in government spending? Responses An increase in output An increase in the price level An increase in employment A decrease in aggregate supply A decrease in aggregate demand
A decrease in aggregate demand
With an increase in the real interest rate, consumption and real gross domestic product will most likely change in which of the following ways? Responses ConsumptionReal Gross Domestic ProductIncreaseIncrease ConsumptionReal Gross Domestic ProductIncreaseDecrease ConsumptionReal Gross Domestic ProductDecreaseIncrease ConsumptionReal Gross Domestic ProductDecreaseDecrease ConsumptionReal Gross Domestic ProductNo changeIncrease
ConsumptionReal Gross Domestic ProductDecreaseDecrease
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? Responses Short Run Long Run R to N M to N Short Run Long Run R to M R to N Short Run Long Run R to Q Q to N Short Run Long Run R to M R to Q Short RunLong RunR to N N to Q
Short Run Long Run R to M R to N
Question 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? Responses Thailand's ExportsThailand's Aggregate DemandIncreaseDecrease Thailand's ExportsThailand's Aggregate DemandIncreaseIncrease Thailand's ExportsThailand's Aggregate DemandIncreaseIndeterminate Thailand's ExportsThailand's Aggregate DemandDecreaseDecrease Thailand's ExportsThailand's Aggregate DemandDecreaseIncrease
Thailand's ExportsThailand's Aggregate DemandIncreaseIncrease
The aggregate demand curve assumes that Responses as the price of a good or service increases, nominal wages decrease as the domestic price level increases, consumers substitute domestic goods for foreign goods all prices and total consumer incomes are constant changes in the price level affect real wealth nominal interest rates increase as the price level decreases
changes in the price level affect real wealth
All of the following explain why prices and wages are sticky EXCEPT Responses menu costs experienced by firms efficiency wages paid to labor misperceptions about relative prices by suppliers competition in the business sector labor contracts covering multiple years
competition in the business sector
Aggregate demand may be measured by adding Responses consumption, investment, savings, and imports savings, government spending, and business inventories consumption, investment, government spending, and net exports domestic private expenditures and government spending domestic expenditures and imports
consumption, investment, government spending, and net exports
An ongoing increase in the price of oil will result in Responses demand-pull inflation cost-push inflation expansionary fiscal policy a decrease in the prices of substitute forms of energy deflation
cost-push inflation
When an economy is in equilibrium at potential gross domestic product, the actual unemployment rate is Responses equal to the cyclical rate greater than the natural rate less than the natural rate equal to the natural rate equal to zero
equal to the natural rate
A major advantage of automatic stabilizers in fiscal policy is that they Responses reduce the public debt increase the possibility of a balanced budget stabilize the unemployment rate go into effect without passage of new legislation 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 Responses decrease by $250 decrease by $1,000 increase by $150 increase by $750 increase by $1,250
increase by $750
The intersection of the aggregate supply curve and the aggregate demand curve occurs at the economy's equilibrium level of Responses real investment and the interest rate real disposable income and unemployment real national output and the price level government expenditures and taxes imports and exports
real national output and the price level
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 Responses interest rates unemployment the money supply the price level personal savings
unemployment
The government of Olympia is considering a fiscal policy action to slow the economy and curb inflation. If the marginal propensity to consume is 0.8, which of the following responses correctly identifies a policy action that would help the government achieve its goals and the impact of that action on Olympia's real gross domestic product (GDP)? Responses Increasing taxes by $10 billion increases real G D P by a maximum of $50 billion. Decreasing taxes by $10 billion decreases real G D P by a maximum of $50 billion. Increasing taxes by $10 billion increases real G D P by a maximum of $40 billion. Increasing government spending by $10 billion increases real G D P by a maximum of $50 billion. Decreasing government spending by $10 billion decreases real GDP by a maximum of $50 billion.
Decreasing government spending by $10 billion decreases real GDP by a maximum of $50 billion.
Which of the following is an example of fiscal policy? Responses Decreasing income tax rates Increasing the money supply Decreasing the discount rate Selling government bonds Decreasing the required reserve ratio
Decreasing income tax rates
Which of the following is a fiscal policy action aimed at reducing unemployment? Responses Decreasing government expenditures Decreasing income taxes Decreasing tax credits Increasing nominal interest rates Increasing required reserves
Decreasing income taxes
Suppose an economy is operating above full employment. Which of the following fiscal policy actions and resulting changes in aggregate demand will move the economy back towards full employment? Responses Increasing government spending, which will shift the A D curve rightward. Decreasing government spending, which will shift the A D curve rightward. Increasing taxes, which will shift the A D curve leftward. Decreasing taxes, which will shift the A D curve leftward. Increasing transfer payments, which will shift the AD curve leftward.
Increasing taxes, which will shift the A D curve leftward.
Which of the following is true about the marginal propensity to consume? Responses It is the percentage of total income that is spent on consumption. It determines the size of the simple spending multiplier. It increases as incomes increase because increases in income cause people to spend more. It is the same as the money multiplier. 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? Responses It decreases demand for loanable funds. It decreases the equilibrium price level. It decreases the equilibrium real interest rate. It increases aggregate demand. It increases the money supply.
It increases aggregate demand.
Which of the following best describes the aggregate demand curve? Responses It is a curve that shows the relationship between consumer spending and income. It is a curve that shows the amount of goods and services domestic consumers will buy from domestic and foreign firms. It is a curve that shows the level of spending by consumers, businesses, the government, and the foreign sector at different price levels. It is a curve that shows only the level of government spending at different price levels. It is a curve that shows the level of spending by all factors of production at different price levels.
It is a curve that shows the level of spending by consumers, businesses, the government, and the foreign sector at different price levels.
What is an automatic stabilizer? It is a program or policy that counteracts the business cycle with discretionary fiscal policy. It is a program or policy that counteracts the business cycle without any new government action required. It is a tax or spending program that is enacted to balance the federal budget. It is the change in consumption spending resulting from a given change in disposable income. It is a part of a market economic system that ensures that markets achieve equilibrium in the long run.
It is a program or policy that counteracts the business cycle without any new government action required.
Which of the following accurately describes the state of the macro-economy if it is operating at the intersection of the AD1 and SRAS2 curves? Responses It is operating at full employment and is in both a short-run and long-run equilibrium. It is operating above full employment and is in both a short-run and long-run equilibrium. It is operating below full employment and is in a short-run but not a long-run equilibrium. It is not in short-run equilibrium because output is below full employment. It is in long-run equilibrium because the economy is at full employment
It is operating below full employment and is in a short-run but not a long-run equilibrium.
An increase in taxes on businesses in the United States will likely have what impact on the short-run aggregate supply SRAS curve in the United States? Responses It will cause a movement along the S R A S curve to a higher real output. It will cause a movement along the S R A S curve to a lower real output. It will have no impact on the S R A S curve. It will cause the S R A S curve to shift leftward. It will cause the SRAS curve to shift rightward.
It will cause the S R A S curve to shift leftward.
An increase in which of the following would most likely result in an increase in aggregate supply? Responses The price level Aggregate demand Unemployment compensation Labor-force participation rate The minimum wage
Labor-force participation rate
Which of the following will remain unchanged when the price level decreases? Responses Inflationary expectations Aggregate quantity demanded Long-run aggregate supply Nominal wages Nominal output
Long-run aggregate supply
Using the disposable income and consumption data in the table above, calculate the value of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). Responses MPC=0.04 , MPS=0.96 MPC=0.10 , MPS=0.90 MPC=0.20 , MPS=0.80 MPC=0.50 , MPS=0.50 MPC=0.60, MPS=0.40
MPC=0.60, MPS=0.40
An increase in administered interest rates will most likely change the nominal interest rate and aggregate demand in which of the following ways in the short run? Responses Nominal Interest Rate Aggregate Demand Increase Decrease Nominal Interest RateAggregate DemandIncreaseIncrease Nominal Interest RateAggregate DemandIncreaseNot change Nominal Interest RateAggregate DemandDecreaseDecrease Nominal Interest RateAggregate DemandDecreaseIncrease
Nominal Interest RateAggregate DemandIncreaseDecrease
A decrease in taxes will necessarily result in an increase in which of the following? Responses Nominal gross domestic product Unemployment Exports Marginal propensity to save Money supply
Nominal gross domestic product
Which of the following represents an appropriate fiscal policy for the given economic conditions? Responses An expansionary fiscal policy is appropriate to reduce unemployment when there is an inflationary gap. An expansionary fiscal policy is appropriate to reduce inflation when there is a recessionary gap. An expansionary fiscal policy is appropriate to reduce inflation when there is an inflationary gap. A contractionary fiscal policy is appropriate to reduce unemployment when there is a recessionary gap. A contractionary fiscal policy is appropriate to reduce inflation when there is an inflationary gap
A contractionary fiscal policy is appropriate to reduce inflation when there is an inflationary gap
Which of the following would most likely lead to cost-push inflation in the short run? Responses A decrease in labor productivity A decrease in income tax rates A decrease in consumers' and businesses' optimism about future economic activity An increase in government deficit spending to stimulate a weak economic recovery 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? Responses A decrease in the price level A decrease in short-run aggregate supply A decrease in unemployment An increase in real wages An increase in aggregate demand
A decrease in short-run aggregate supply
According to the expenditure multiplier, if the marginal propensity to consume is greater than zero, a one-dollar change in autonomous expenditures will result in which of the following? Responses A one-dollar increase in government spending A greater-than-one-dollar increase in government spending A one-dollar increase in the production of goods and services A one-dollar increase in aggregate demand for goods and services A greater-than-one-dollar increase in aggregate demand for goods and services
A greater-than-one-dollar increase in aggregate demand for goods and services
Which of the following best explains the relationship between the price level and real output along the aggregate demand curve? Responses A higher price level increases the value of real assets. A higher price level increases the relative price of imports. A lower price level reduces the real interest rate and increases investment. A higher price level increases consumers' wealth and consumption. A lower price level reduces consumers' confidence and consumption.
A lower price level reduces the real interest rate and increases investment.
Based on the graph above, demand-pull inflation is caused by a movement from Responses SRAS 1 to SRAS 2 SRAS 2 to SRAS 1 AD 1 to AD 2 AD 2 to AD 1 Yf to Y1
AD 1 to AD 2
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? Responses Aggregate Demand Curve Aggregate Supply Curve Shift to the right Shift to the right Aggregate Demand Curve Aggregate Supply Curve Shift to the left Shift to the left Aggregate Demand Curve Aggregate Supply Curve Shift to the left No change Aggregate Demand Curve Aggregate Supply Curve No change Shift to the left Aggregate Demand CurveAggregate Supply CurveNo changeShift to the right
Aggregate Demand CurveAggregate Supply CurveNo changeShift to the left
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? Responses Aggregate Demand Output Price Level Decrease Decrease Decrease Aggregate Demand Output Price Level Decrease Increase Increase Aggregate Demand Output Price Level Increase Decrease Decrease Aggregate Demand Output Price Level Increase Increase Increase Aggregate DemandOutputPrice LevelNot changeNot changeNot change
Aggregate Demand Output Price Level Decrease 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? Responses Aggregate DemandAggregate SupplyNot changeDecrease Aggregate DemandAggregate SupplyNot changeIncrease Aggregate DemandAggregate SupplyDecreaseNot change Aggregate DemandAggregate SupplyDecreaseIncrease Aggregate DemandAggregate SupplyIncreaseNot change
Aggregate DemandAggregate SupplyDecreaseNot change
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? Responses Aggregate Supply CurvePrice LevelReal OutputShift to the leftIncreaseIncrease Aggregate Supply CurvePrice LevelReal OutputShift to the leftIncreaseNo change Aggregate Supply Curve Price Level Real Output Shift to the left Increase No change Aggregate Supply CurvePrice LevelReal OutputShift to the rightIncreaseIncrease Aggregate Supply Curve Price Level Real Output Shift to the right Decrease Increase Aggregate Supply CurvePrice LevelReal OutputShift to the rightDecreaseDecrease
Aggregate Supply CurvePrice LevelReal OutputShift to the rightDecreaseIncrease
Assume the economy of Country A is in long-run equilibrium. Which of the following will happen in the short run in Country A if one of its major trading partners, Country B, experiences a recession? Responses Aggregate demand will increase and the price level will increase. Aggregate demand will decrease and the price level will decrease. Short-run aggregate supply will decrease and the price level will decrease. Short-run aggregate supply will increase and the price level will increase. Short-run aggregate supply will decrease and the price level will increase.
Aggregate demand will decrease and the price level will decrease.
An increase in the purchases of newly constructed houses will result in which of the following? Responses Aggregate demand will decrease as a result of a decrease in the price level. Aggregate demand will increase as a result of an increase in investment spending. Aggregate demand will increase as a result of an increase in exports. Aggregate demand will not change, since consumer spending has not changed. 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? Responses Aggregate demand will shift rightward, increasing real output and decreasing the price level. Aggregate demand will shift rightward, decreasing real output and increasing the price level. Aggregate demand will shift rightward, increasing real output and the price level. Short-run aggregate supply will shift rightward, increasing 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? Responses An increase in long-run aggregate supply An increase in short-run aggregate supply An increase in aggregate demand A decrease in aggregate demand 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? Responses An increase in the price level and a decrease in the unemployment rate A decrease in the price level and an increase in the unemployment rate A decrease in both the price level and real output An increase in both the price level and real output 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? Responses An increase in the costs of production An improvement in the productivity of labor An increase in money supply A positive supply shock 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? Responses A decrease in the unemployment rate A decrease in the inflation rate A decrease in the long-run aggregate supply An increase in the price level An increase in the money supply
An increase in the price level
If nominal wages are fixed by labor contracts, then which of the following explains why the aggregate supply curve is upward sloping? Responses A decrease in the price level will increase profits and production. A decrease in the price level will decrease profits and increase production. An increase in the price level will increase real wages and production. An increase in the price level will increase profits and production. An increase in the price level will decrease real wages and decrease production.
An increase in the price level will increase profits and production.
A decrease in the prices of inputs will cause which of the following to occur in the short run? Responses An increase in the aggregate demand and an increase in the price level A decrease in the aggregate demand and an increase in the price level An increase in the short-run aggregate supply and a decrease in the price level An increase in the short-run aggregate supply and an increase in the price level 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 the relationship between the price level and real output along the aggregate demand curve? Responses At a lower price level, people need more money to spend and therefore deposit less money in banks, which lowers interest rates and increases real output. At a lower price level, the real value of savings decreases which causes an increase in spending. At a lower price level, domestic goods will become less expensive compared to foreign goods, which causes an increase in spending on domestic goods. At a lower price level, real incomes decrease which causes an increase in spending. At a lower price level, the purchasing power of consumers' income decreases which causes an increase in spending.
At a lower price level, domestic goods will become less expensive compared to foreign goods, which causes an increase in spending on domestic goods.
Which of the following explains why the long-run aggregate supply curve corresponds to the production possibilities curve? Responses Both curves are downward sloping. Both curves illustrate flexible wages and prices. Both curves illustrate the maximum sustainable capacity. Both curves illustrate the trade-off between inflation and unemployment. 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? Responses Both curves represent unemployment and inflation. Points to the left of either curve represent efficient use of resources. Points to the right of either curve represent inefficient use of resources. Both curves represent the maximum sustainable capacity given the economy's resources. 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.
Suppose a nation opened its borders to the free flow of workers from other nations. How would this event likely affect the long-run aggregate supply (LRAS) curve and the production possibilities curve of the nation? Responses The L R A S curve would shift to the right, and the production possibilities curve would not shift. Both curves would shift to the right. Neither curve would shift. Both curves would shift to the left. The LRAS curve would shift to the left, and the production possibilities curve would shift to the right.
Both curves would shift to the right.
Assume that stock prices and home values have increased, raising household wealth. At the same time, productivity increased due to new technology. What is the likely short-run impact on the economy? Responses The aggregate demand (AD) curve shifts right and the short-run aggregate supply (SRAS) curve shifts left, resulting in a higher price level and no change in the real output level. The aggregate demand (AD) curve shifts left and the short-run aggregate supply (SRAS) curve shifts right, resulting in a lower price level and no change in the real output level. The aggregate demand (AD) curve shifts right and the short-run aggregate supply (SRAS) curve shifts left, resulting in a higher real output level and lower price level. Both the aggregate demand (AD) and the short-run aggregate supply (SRAS) curves shift right, resulting in a higher real output level and indeterminate price level. Both the aggregate demand
Both the aggregate demand (AD) and the short-run aggregate supply (SRAS) curves shift right, resulting in a higher real output level and indeterminate price level.
Automatic stabilizers can do which of the following? Responses Offset the destabilizing influence of changes in tax revenues Aid the economy to move away from the full-employment output level Allow policymakers to formulate a set of rules flexible and comprehensive enough to eliminate discretionary actions Cause tax revenues to decrease when gross domestic product (GDP) decreases and to increase when GDP increases 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
Which of the following is true about the equilibrium real output in the aggregate demand-aggregate supply (AD-AS) model in the short run? Responses Equilibrium real output is always above full employment. Equilibrium real output is always below full employment. Equilibrium real output is always equal to full employment. Equilibrium real output can be above, equal to, or below full employment. Equilibrium real output is always indeterminate.
Equilibrium real output can be above, equal to, or below full employment.
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) ? Responses GDP will increase by a maximum of $200 million. GDP will increase by a maximum of $180 million. GDP will decrease by a maximum of $200 million. GDP will decrease by a maximum of $180 million. 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? Responses Less than Y 1 At Y 1 At Y 2 Greater than Y 1 and less than Y 2 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? Responses Lower level of output Higher level of output Lower price level Higher price level Higher aggregate supply
Higher price level
A fiscal policy action to reduce inflationary pressure would be to increase which of the following? Responses The required reserve ratio The discount rate Transfer payments Government spending Income tax rates
Income tax rates
Which of the following will shift the aggregate demand curve to the right? Responses A report that corporate earnings were lower than expected An increase in interest rates caused by a tightening of monetary policy Increased imports caused by appreciation of the dollar Increased spending by businesses on computers An increase in the government's budget surplus
Increased spending by businesses on computers
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? Responses Nominal wages fall, shifting the short-run aggregate supply curve to the right. Nominal wages fall, shifting the short-run aggregate supply curve to the left. Nominal wages do not change, shifting the short-run aggregate supply curve to the right. Nominal wages rise, shifting the short-run aggregate supply curve to the right. 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.
Assume an economy is currently at full employment. Which of the following best describes the long-run adjustments that will occur in the economy following a negative aggregate demand shock with no government intervention? Responses Short-run aggregate supply will decrease, offsetting the initial aggregate demand shock and restoring full employment in the long run. The aggregate demand shock will result in a multiplier effect on real output moving the economy farther away from full employment in the long run. The price level will decrease and aggregate demand will increase until full employment is restored in the long run. Nominal wages will decrease and short-run aggregate supply will increase until full employment is restored in the long run. Real income will decrease and consumption spending will decrease moving the economy farther away from full employment in the long run.
Nominal wages will decrease and short-run aggregate supply will increase until full employment is restored in the long run.
If the natural rate of unemployment exceeds the actual rate of unemployment, which of the following will occur in the long run in the absence of government intervention? Responses There will be cyclical unemployment. Input prices will decrease. Nominal wages will increase. The aggregate demand curve will shift to the left. The short-run aggregate supply curve will shift to the right
Nominal wages will increase.
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? Responses Output Price Level Increase Decrease Output Price Level Increase Increase Output Price Level Decrease Decrease Output Price Level Decrease Increase OutputPrice LevelNo changeNo change
Output Price Level Decrease Increase
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? Responses Price Level Output Decrease No effect Price Level Output Decrease Increase Price Level Output Increase Increase Price Level Output Increase Decrease Price LevelOutputNo effectNo effect
Price LevelOutputDecreaseIncrease
Which of the following must be true in the long run? Responses Production increases when prices increase. An increase in the price level reduces aggregate demand. The natural rate of unemployment is not affected by changes in production capacity. Full employment increases when price level decreases. Prices and wages are flexible.
Prices and wages are flexible.
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? Responses Real GDP Price Level Increase Decrease Real GDP Price Level Decrease No change Real GDP Price Level No change Increase Real GDP Price Level Increase Increase Real GDPPrice LevelDecreaseDecrease
Real GDP Price Level Increase Increase
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? Responses Real GDP Price Level Decrease Decrease Real GDP Price Level Decrease Increase Real GDP Price Level No change Decrease Real GDP Price Level Increase Decrease Real GDPPrice LevelNo changeIncrease
Real GDP Price Level No change Decrease
Assume the marginal propensity to consume is 0.75. What will happen if government spending increases by $100 billion? Responses Real output will increase by a maximum of $75 billion. Real output will increase by a maximum of $100 billion. Real output will increase by a maximum of $175 billion. Real output will increase by a maximum of $300 billion. Real output will increase by a maximum of $400 billion.
Real output will increase by a maximum of $400 billion.
Which of the following best explains how income taxes can moderate a business cycle during an expansion? Responses Tax revenues increase automatically as gross domestic product open parenthesis, G D P, close parenthesis rises, which dampens consumption spending. Tax revenues decrease automatically as G D P rises, which increases short-run aggregate supply. Tax revenues increase automatically as G D P falls, which decreases short-run aggregate supply. Tax revenues increase automatically as G D P falls, which prevents the economy from experiencing a downturn. Tax revenues decrease automatically as GDP falls, which dampens consumption spending.
Tax revenues increase automatically as gross domestic product open parenthesis, G D P, close parenthesis rises, which dampens consumption spending.
Suppose that the economy is in a recession. In the absence of government policy action to restore the economy to full employment, how will the economy adjust in the long run? Responses The S R A S 1 curve shifts to the left as nominal wages decrease and full employment is restored. The S R A S 1 curve shifts to the right as nominal wages increase and full employment is restored. The S R A S 2 curve shifts to the left as nominal wages increase and full employment is restored. The S R A S 2 curve shifts to the right as nominal wages decrease and full employment is restored. The AD2 curve shifts to the left as nominal wages decrease and full employment is restored.
The S R A S 2 curve shifts to the right as nominal wages decrease and full employment is restored.
Which of the following is true about inflationary expectations? Responses The actual unemployment rate equals the natural rate of unemployment if the actual inflation rate exceeds the expected inflation rate. The actual unemployment rate equals the natural rate of unemployment when wages fully adjust to expected inflation. Expectations are always correct in the short run. The actual inflation rate is always equal to the expected inflation rate because of labor contracts. 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? Responses An increase in personal income taxes The discovery of low-cost alternative sources of energy A decrease in labor productivity with no change in nominal wages Depreciation of country X's currency on the foreign exchange market An increase in the price level
The discovery of low-cost alternative sources of energy
In the AD−AS model, which of the following is true? Responses The economy is in an inflationary gap when the short-run equilibrium real output is below the long-run equilibrium real output. The economy is in an inflationary gap when the short-run equilibrium real output is at the long-run equilibrium real output. The economy is in a recessionary gap when the short-run equilibrium real output is at 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 economy is in a recessionary gap when the short-run equilibrium real output is below the long-run equilibrium real output.
Which of the following is true when an economy is operating at the intersection of the AD2 and SRAS2 curves? Responses The economy is facing a recessionary gap. The economy is facing an inflationary gap. The natural rate of unemployment is less than the actual unemployment rate. The natural rate of unemployment is greater than the actual unemployment rate. The economy is in short-run and long-run equilibrium.
The economy is in short-run and long-run equilibrium.
Based on the diagram above, which of the following describes the short-run equilibrium? Responses The economy is operating at full employment. The economy is operating below full employment. The economy is operating above full employment. There will be downward pressure on the price level. There is a recessionary gap.
The economy is operating above full employment.
Suppose that the prices of labor and inputs to production are fixed in the short run but not in the long run. What is a consequence of this flexibility in the long run? Responses The long-run aggregate supply curve is vertical and there is no trade-off between inflation and unemployment in the long run. The long-run aggregate supply curve is vertical and there is a trade-off between inflation and unemployment in the long run. The long-run aggregate supply curve is horizontal and there is a trade-off between inflation and unemployment in the long run. Real output is always greater than full employment in the long run. Real output is always less than full employment in the long run.
The long-run aggregate supply curve is vertical and there is no trade-off between inflation and unemployment in the long run.
Which of the following is illustrated by the long-run aggregate supply (LRAS) curve and the production possibilities curve (PPC)? Responses The multiplier effect The maximum sustainable capacity The trade-off between inflation and unemployment Sticky wages and prices Business cycles
The maximum sustainable capacity
If wages are sticky, which of the following is true? Responses The short-run aggregate supply curve is vertical. The short-run aggregate supply curve is upward sloping. The long-run aggregate supply curve is downward sloping. The aggregate demand curve is vertical. The aggregate demand curve is upward sloping.
The short-run aggregate supply curve is upward sloping.
Country X is currently in long-run macroeconomic equilibrium. If the country's economy experiences a significant increase in the price of energy, a major input in production, which of the following will occur in the short run? Responses The aggregate demand curve will shift to the left, and the actual rate of unemployment will exceed the natural rate of unemployment. The aggregate demand curve will shift to the left, and there will be an inflationary gap. The short-run aggregate supply curve will shift to the left, and the actual rate of unemployment will exceed the natural rate of unemployment. The short-run aggregate supply curve will shift to the left, and the price level will fall. The short-run aggregate supply curve will shift to the left and cause an inflationary gap.
The short-run aggregate supply curve will shift to the left, and the actual rate of unemployment will exceed the natural rate of unemployment.
If policy makers use fiscal policy to reduce inflation, which of the following will most likely happen in the short run? Responses The unemployment rate will decrease. The unemployment rate will increase. The real interest rate will increase. The nominal interest rate will increase. The economy will remain at the natural rate of unemployment.
The unemployment rate will increase.
The government of Euroland is considering increasing government spending to avoid a recession. What is the most likely effect on aggregate demand (AD) in Euroland? Responses There will be a movement along the A D curve to a lower real output. There will be a movement along the A D curve to a higher price level. There will be no change in the A D curve. There will be a leftward shift in the A D curve. There will be a rightward shift in the AD curve.
There will be a rightward shift in the AD curve.
In an economy where wages and prices are sticky, which of the following will happen as a result of an increase in the price level? Responses There will be a downward movement along the short-run aggregate supply curve to a lower real output level. There will be an upward movement along the short-run aggregate supply curve to a higher real output level. The short-run aggregate supply curve will shift to the right and real output will increase. The short-run aggregate supply curve will shift to the left and real output will decrease. The aggregate demand curve will shift to the right and real output will increase.
There will be an upward movement along the short-run aggregate supply curve to a higher real output level.
How will automatic stabilizers affect the economy during a recession? Responses They will shift the aggregate demand curve to the right, increasing real output. They will shift the aggregate demand curve to the left, decreasing real output. They will shift the long-run aggregate supply curve to the right, increasing potential output. They will shift the short-run aggregate supply curve to the left, increasing real output. They will shift the short-run aggregate supply curve to the right, decreasing real output.
They will shift the aggregate demand curve to the right, increasing real output.
Which of the following is an assumption underlying an upward-sloping short-run aggregate supply curve? Responses The economy is experiencing high inflation. The economy is at full employment. National income is fixed. Wages are sticky. 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? Responses Prices will increase. Unemployment will increase. Wages will fall. Aggregate demand will increase. Long-run aggregate supply will decrease.
Wages will fall.
Recession can be caused by Responses an increase in the price level an increase in exports a decrease in interest rates a decrease in aggregate demand a decrease in wages
a decrease in aggregate demand
The short-run aggregate supply curve would be vertical if Responses nominal wages adjust immediately to changes in the price level nominal wages adjust slowly when there is unemployment both nominal wages and prices adjust slowly to changes in aggregate demand the spending multiplier is very low investment demand is very responsive to changes in interest rates
nominal wages adjust immediately to changes in the price level
All the following are examples of automatic stabilizers EXCEPT: Responses unemployment insurance benefits personal income taxes welfare benefits corporate income taxes tariffs
tariffs
