Chapter 3 Practice Test

The government increases taxes by $40 billion. If the marginal propensity to consume is 0.8, what will be the maximum impact on aggregate demand and gross domestic product?

$160 billion

Which of the following would directly lead to an actual unemployment rate exceeding the natural rate of unemployment?

A decrease in aggregate demand from an initial long-run equilibrium

Which of the following could explain a rightward shift of the short-run aggregate supply curve?

A decrease in business regulation

Assume that the marginal propensity to consume is 0.9. If the government decreases spending by $50 billion at the same time that it decreases taxes by $50 billion, what would be the maximum impact on aggregate demand?

A decrease of $50 billion

Which of the following factors will cause a recession in an economy showing a long-run equilibrium?

A negative demand shock that causes a decrease in output, and a decrease in the price level

Which of the following combinations from the model above would accurately illustrate an economy in an equilibrium with a recession according to the AD-AS model?

A price level of P2 with LRASB

Which of the following statements about the AD-AS model above is accurate?

ADy would achieve long-run equilibrium for this economy

Movement up the short run aggregate supply curve would correspond to

An increase in real output and the price level

Which of the following is an example of a contractionary fiscal policy?

An increase in the income tax rates

A progressive tax system is a type of a(n) ___ because it helps increase ___ and maintain aggregate demand during times of economic recession.

Automatic, stabilizer, disposable income

Which of the following shifts would correspond to a decrease in the price level for the economy?

From B to C

Which of the following would be the result of an increase in private investment in an economy due to favorable interest rates and expectations in the short run?

Output would increase, aggregate demand would increase, and unemployment would decrease

The production possibility curve and long run aggregate supply curve both illustrate

Potential output

Which of the following resists change in the short run but becomes flexible in the long run?

Prices and wages

An increase in income taxes, ceteris paribus, would ___consumption, and ____ real output.

Decrease, increase, decrease

In deriving AD, when the cost of borrowing to purchase goods and services increases, the quantity demanded for those goods and services will generally decrease. This is a description of the

Interest rate effect to explain aggregate demand's negative slope

Which of the following best describes the main reason for the upward-sloping shape of the short-run aggregate supply curve?

Sticky wages and prices

Which of the following scenarios will hamper the effectiveness of the discretionary fiscal policy?

The government took excessive time to assess the economic trends before agreeing on a policy solution

How do automatic stabilizes work during times of an economic downturn?

Transfer payments will increase, and the income tax revenues will decrease

An economy is operating with a significant inflationary gap. Based on this, what would happen in the long run?

Wages and factor prices will increase