Macro exam #3

Which one of the following would not shift the aggregate demand curve? a. a change in the price level b. depreciation of the international value of the dollar c. a decline in the interest rate at each possible price level d. an increase in personal income tax rates

a change in the price level

In the accompanying graph, which of the following factors will shift AS1 to AS2? a. an increase in real interest rates b. a decrease in business subsidies c. an increase in input prices d. a decrease in business taxes

a decrease in business taxes

The United States' economy is considered to be at full employment when a. about 5 to 6 percent of the total population is unemployed. b. 90 percent of the labor force is employed. c. about 5 to 6 percent of the labor force is unemployed. d. 100 percent of the labor force is employed.

about 5 to 6 percent of the labor force is unemployed.

The diagram illustrates the pattern of a. business cycles b. wage movements over time c. price level movements d. economic growth patterns

business cycles

Suppose the government purposely changes the economy's cyclically adjusted budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n) a. expansionary fiscal policy. b. contractionary fiscal policy. c. neutral fiscal policy. d. high-interest-rate policy.

contractionary fiscal policy.

Which of the following is considered a legitimate concern of a large public debt? a. bankruptcy of the federal government b. crowding out of private investment c. burdening future generations d. collapse of the financial system

crowding out of private investment

Without a change in discretionary fiscal policy, we would expect that if the economy goes into recession, then the a. cyclically adjusted deficit and the actual deficit would both increase. b. cyclically adjusted deficit and the actual deficit would both decrease. c. cyclically adjusted deficit would stay the same while the actual deficit would increase. d. cyclically adjusted deficit would increase while the actual deficit would stay the same.

cyclically adjusted deficit would stay the same while the actual deficit would increase.

If the U.S. dollar appreciates in value relative to foreign currencies, then this will a. increase aggregate demand and aggregate supply. b. decrease aggregate demand and aggregate supply. c. decrease aggregate demand and increase aggregate supply. d. increase aggregate demand and decrease aggregate supply.

decrease aggregate demand and increase aggregate supply.

A decrease in government spending will cause a(n) a. increase in the quantity of real output demanded. b. decrease in the quantity of real output demanded. c. decrease in aggregate demand. d. increase in aggregate demand.

decrease in aggregate demand.

The crowding-out effect works through interest rates, and it tends to a. increase the effectiveness of a tax increase. b. decrease the effectiveness of a tax increase. c. decrease the effectiveness of an increase in government spending. d.

decrease the effectiveness of an increase in government spending.

A decline in disposable income a. increases consumption by moving upward along a specific consumption schedule. b. decreases consumption because it shifts the consumption schedule downward. c. decreases consumption by moving downward along a specific consumption schedule. d. increases consumption because it shifts the consumption schedule upward.

decreases consumption by moving downward along a specific consumption schedule.

Inflation that occurs when total spending is greater than the economy's ability to produce output at the existing price level is a. anticipated inflation. b. demand-pull inflation. c. cost-push inflation. d. unanticipated inflation.

demand-pull inflation.

The amount of consumption in an economy correlates a. inversely with the level of disposable income. b. directly with the level of disposable income. c. directly with the level of saving. d. directly with the rate of interest.

directly with the level of disposable income.

If 100 percent of any change in income is spent, the multiplier will be a. equal to the MPC b. 1 c. zero d. infinitely large

infinitely large

If the real interest rate and the nominal interest rate are both negative and equal to each other, then the a. inflation premium is zero. b. inflation premium is also negative. c. inflation premium is positive. d. economy must be in a recession.

inflation premium is zero.

Refer to the graph. The economy is initially at point 1. Which of the following events would cause a shift that would help offset the crowding-out effect? An increase in a. interest rates caused by a change in Federal Reserve policy. b. interest rates caused by a change in Federal Reserve policy. c. business taxes levied by government to pay for new government programs. d. the degree of excess capacity in business stemming from a recession.

interest rates caused by a change in Federal Reserve policy.

Discretionary fiscal policy is so named because it a. is undertaken at the option of the nation's central bank. b. occurs automatically as the nation's level of GDP changes. c. involves specific changes in T and G undertaken expressly for stabilization at the option of Congress. d. is invoked secretly by the Council of Economic Advisers.

involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.

Expansionary fiscal policy is so named because it a. involves an expansion of the nation's money supply. b. necessarily expands the size of government. c. is aimed at achieving greater price stability. d. is designed to expand real GDP.

is designed to expand real GDP.

Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending a. increases during a period of recession, rather than prosperity. b. increases during a period of recession, rather than prosperity. c. is financed by borrowing. d. is financed by taxation.

is financed by borrowing.

One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy a. makes the actual budget a better reflection of the condition of the economy than the standardized budget. b. does not produce a cyclical deficit, as discretionary policy does. c. is not subject to the timing problems of discretionary policy. d. has a greater multiplier effect than discretionary policy.

is not subject to the timing problems of discretionary policy.

The accompanying table is the before-tax consumption schedule for a closed economy. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the tax system a. is regressive b. is proportional c. is progressive d. may be either proportional or progressive

is regressive.

Refer to the given saving schedule. Dissaving occurs when disposable income is a. equal to level 2 b. less than level 2 c. greater than level 2 d. equal to level 3

less than level 2

In Year 1, the actual budget deficit was $150 billion and the cyclically adjusted deficit was $125 billion. In Year 2, the actual budget deficit was $130 billion and the cyclically adjusted deficit was $125 billion. It can be concluded that from Year 1 to Year 2, a. real GDP decreased. b. real GDP increased. c. full employment was attained. d. fiscal policy became less expansionary.

real GDP increased.

The labels for the axes of the aggregate demand graph should be a. quantity of a product on the vertical axis and the price of a product on the horizontal axis. b. price of a product on the vertical axis and quantity of a product on the horizontal axis. c. real domestic output on the vertical axis and the price level on the horizontal axis. d. real domestic output on the horizontal axis and the price level on the vertical axis.

real domestic output on the horizontal axis and the price level on the vertical axis.

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should a. encourage personal saving by increasing the interest rate on government bonds. b. decrease government expenditures. c. reduce tax rates and/or increase government spending. d. discourage private investment by increasing corporate income taxes.

reduce tax rates and/or increase government spending.

An increase in input productivity will a. shift the aggregate supply curve leftward. b. reduce the equilibrium price level, assuming downward flexible prices. c. reduce the equilibrium real output. d. reduce aggregate demand.

reduce the equilibrium price level, assuming downward flexible prices.

Which would most likely shift the aggregate supply curve? A change in the prices of a. domestic products b. foreign products c. financial assets d. resources

resources

The cyclically adjusted budget deficit for the United States a. rose to −7.1 percent of potential GDP in 2009 but has since declined. b. was zero in 2009, but the cyclical deficit created by the recession was −7.1 percent of potential GDP. c. changed to a surplus in 2009. d. rose to −10.1 percent of potential GDP in 2009 but has since declined.

rose to −7.1 percent of potential GDP in 2009 but has since declined.

If the consumption schedule is linear, then the a. saving schedule will also be linear. b. MPS will decline as income rises. c. MPC will decline as income rises. d. APC will be constant at all levels of income.

saving schedule will also be linear.

Refer to the given figure. If the relevant saving schedule were constructed, a. saving would be minus $20 billion at the zero level of income. b. aggregate saving would be $60 at the $60 billion level of income. c. its slope would be 1/2. d. it would slope downward and to the right.

saving would be minus $20 billion at the zero level of income.

The wealth effect is shown graphically as a a. shift of the consumption schedule. b. movement along an existing consumption schedule. c. shift of the investment schedule. d. movement along an existing investment schedule.

shift of the consumption schedule.

Other things equal, an improvement in productivity will a. shift the aggregate demand curve to the left. b. shift the aggregate supply curve to the left. c. shift the aggregate supply curve to the right. d. increase the price level.

shift the aggregate supply curve to the right.

The accompanying table shows the aggregate demand and aggregate supply schedules for a hypothetical economy. At the price level of 150, there will be a general a. surplus in the economy, and output supplied will decrease as the price level falls. b. shortage in the economy, and output demanded will decrease as the price level rises. c. surplus in the economy, and output supplied will increase as the price level rises. d. shortage in the economy, and output demanded will increase as the price level falls.

shortage in the economy, and output demanded will decrease as the price level rises.

A specific reduction in government spending will dampen demand-pull inflation by a greater amount the a. smaller is the economy's MPC. b. flatter is the economy's aggregate supply curve. c. smaller is the economy's MPS. d. less is the economy's built-in stability.

smaller is the economy's MPS.

The table gives data on interest rates and investment demand (in billions of dollars) in a hypothetical economy. Using the Id1 schedule, assume that the government needs to finance the public debt and this public borrowing increases the interest rate from 3 percent to 4 percent. How much crowding out of private investment will occur? a. $100 billion b. $200 billion c. $600 billion d. $700 billion

$100 billion

If the MPC is 0.8, what change in investment spending is required to effect a total change in income by $60 billion? a. $12 billion b. $15 billion c. $20 billion d. $25 billion

$12 billion

The table contains budget information for a hypothetical economy. All data are in billions of dollars. Assume that Year 1 is the first year for this economy and Year 5 is the current year. What is the public debt in this economy at Year 5? a. $25 billion b. $75 billion c. $125 billion d. $925 billion

$125 billion

In the diagram, the economy's relevant aggregate demand and immediate-short-run aggregate supply curves, respectively, are lines a. 4 and 3 b. 4 and 1 c. 2 and 4 d. 2 and 3

4 and 3

What percentage of the U.S. public debt is held by U.S. government agencies and the Federal Reserve (2015)? a. 26 percent b. 50 percent c. 41 percent d. 34 percent

41 percent

True or False An increase in business taxes will tend to shift the investment-demand curve rightward.

False

True or False If the real rate of interest increases, then the level of investment in the economy will also increase.

False

True or False: The greater the upward slope of the AS curve, the larger is the realized multiplier effect of a change in investment spending.

False

True or False: The price level in the United States is more flexible downward than upward.

False

True or false: The real-balance effect explains a shift in aggregate demand, while the wealth effect explains a movement along the AD curve.

False

True or false: If the consumption schedule becomes steeper, then the saving schedule will become steeper also.

False

What is the main problem with mild inflation, according to some economists? a. It reduces the size of the GDP gap. b. It leads to unanticipated deflation. c. It increases frictional and structural unemployment in the economy. d. It diverts productive time toward activities to hedge against inflation.

It diverts productive time toward activities to hedge against inflation.

In which of the following cases would real income rise? a. Nominal income rises by 8 percent, and the price level rises by 10 percent. b. Nominal income rises by 2 percent, and the price level remains unchanged. c. Nominal income falls by 4 percent, and the price level falls by 2 percent. d. Real income will rise in all of these cases.

Nominal income rises by 2 percent, and the price level remains unchanged.

True or False A change in business taxes and regulation can affect production costs and aggregate supply.

True

True or False In response to slow recoveries after the Great Recession, several governments made the nominal interest rates in their nations turn negative with the intent of stimulating their economies.

True

True or False Permanent tax reductions are more likely to be expansionary than temporary tax reductions.

True

True or False The so-called crowding-out effect refers to government spending crowding out private investment spending.

True

True or False: In the immediate short run, both input and output prices are fixed.

True

True or False: The United States has experienced both budget surpluses and deficits since 2000.

True

True or False: The aggregate expenditures model and the immediate-short-run aggregate supply have similar assumptions regarding the economy's price level.

True

True or False: An increase in business excise taxes will shift the aggregate supply curve leftward.

True

True or false Expansionary fiscal policy during a recession means cutting taxes, increasing government spending, or taking both actions.

True

True or false: The aggregate demand curve shows that when the price level rises, the quantity of real output demanded decreases.

True

True or false: The payment of interest on the public debt in the United States mildly increases income inequality.

True

(Consider This) Which of the following best explains why unemployment rises significantly during a recession? a. Wages are sticky both upward and downward. b. Wages are flexible both upward and downward. c. Wages are flexible upward but sticky downward. d. Wages are sticky upward but flexible downward.

Wages are flexible upward but sticky downward.

If the average level of nominal income in a nation is $44,000 and the price level index is 175, the average real income would be about a. $18,857. b. $25,143. c. $44,000. d. $77,000.

$25,143.

The public debt for the economy is a. $540 billion b. $400 billion. c. $580 billion. d.$460 billion.

$460 billion.

Refer to the given data. The marginal propensity to consume is a. .25 b. .75 c. .20 d. .80

.80

Based on OECD data for 2014, the average propensity to consume (APC) in the United States is about a. 0.75. b. 0.95 c. 0.60 d. 0.50

0.95

The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about a. 2.8 percent. b. 3.4 percent. c. 1.6 percent. d. 4.1 percent.

1.6 percent.

Full-Time Employed = 80 Part-Time Employed = 25 Unemployed = 15 Discouraged Workers = 5 Members of Underground Economy = 6 Consumer Price Index = 110 Refer to the given information about a hypothetical economy. The unemployment rate is a. 18.8 percent. b. 12.5 percent. c. 16.7 percent. d. 25 percent.

12.5 percent.

Suppose that new computer software for accounting and analysis at a business has a useful life of only one year and costs $200,000 before it needs to be upgraded to a new version. The revenue generated by this software is expected to be $250,000. The expected rate of return from this new computer software is a. 11% b. 20% c. 25% d. 80%

25%

In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. If the equilibrium level of real GDP is $43 billion, its level of consumption will be a. 20 billion b. 22 billion c. 24 billion d. 26 billion

26 billion

Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = 0.6, how much will the change in investment increase aggregate demand? a. 12 billion b. 20 billion c. 33.3 billion d. 50 billion

50 billion

The table contains information about the hypothetical economy of Scoob. All figures are in millions. The unemployment rate in Scoob is a. 2.5 percent b. 3.2 percent c. 5.0 percent d. 6.9 percent

6.9 percent

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, inflation is absent in a. A b. B c. C d. A and C

A and C

Which of the following statements is correct? a. Built-in stability only partially offsets fluctuations in economic activity. b. Built-in stability works in halting inflation, but it cannot alleviate unemployment. c. Built-in stability can be relied on to eliminate completely any fluctuation in economic activity. d. Built-in stability has eliminated the need for discretionary fiscal policy.

Built-in stability only partially offsets fluctuations in economic activity.

Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, an increase in investment spending is depicted by a. A b. B c. C d. B and C

C

Which of the diagrams for the U.S. economy best portrays the effects of an increase in foreign spending on U.S. products? a. A b. B c. C d. D

C

(Last Word) In response to the Great Recession, the federal government engaged in significant deficit-funded spending, but it did not fully achieve the desired result. Which of the following best explains why the fiscal policy actions fell short of their objective? a. Monetary policy counteracted fiscal policy, keeping the unemployment rate from falling as much as intended. b. Consumers did not respond to the fiscal stimulus as well as hoped, as they put more income into saving and repaying debt. c. Although the fiscal stimulus increased consumer spending significantly, it mostly went to purchase foreign-produced goods and services. d. The fiscal stimulus caused massive inflation that further disrupted economic activity.

Consumers did not respond to the fiscal stimulus as well as hoped, as they put more income into saving and repaying debt.

The graph shows the relationship between consumption and income. Which of the following statements is correct? a. The marginal propensity to consume in the economy shown is greater than 1. b. The marginal propensity to consume varies across income levels. c. The average propensity to consume at income level K is given by KM divided by KN. d. The marginal propensity to consume can be calculated by dividing LM by 0K.

The average propensity to consume at income level K is given by KM divided by KN.

(Last Word) In response to the Great Recession, the federal government engaged in significant deficit-funded spending. While it kept the recession from getting worse, and did result in some positive economic growth, it did not fully achieve the desired result. Which of the following best explains why the fiscal policy actions fell short of their objective? a. Despite the fiscal stimulus, aggregate demand continued to shift to the right. b. The fiscal stimulus caused a significant leftward shift of aggregate supply. c. Offsetting monetary policy caused the aggregate demand to remain virtually unchanged, meaning that all gains in output came from aggregate supply shifts. d. The fiscal stimulus shifted aggregate demand to the right, but not enough to restore full employment.

The fiscal stimulus shifted aggregate demand to the right, but not enough to restore full employment.

If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes a. the output effect. b. the foreign purchases effect. c. the real-balances effect. d. the shift-of-spending effect.

The foreign purchases effect

Refer to the diagram, where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion, while the actual GDP is $200 billion, the a. actual budget deficit exceeds the cyclically adjusted budget deficit. b. actual budget deficit is less than the cyclically adjusted budget deficit. c. cyclically adjusted deficit exceeds the cyclical deficit. d. cyclical deficit exceeds the cyclically adjusted deficit.

actual budget deficit exceeds the cyclically adjusted budget deficit.

Refer to the diagram. Assume that G and T2 are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a(n) a. cyclically adjusted budget surplus. b. actual budget deficit. c. cyclically adjusted budget deficit. d. actual budget surplus.

actual budget deficit.

In deriving the aggregate demand curve from the aggregate expenditures model, we note that a. the real-balances effect is irrelevant to both models. b. a change in the price level will have no impact on the aggregate expenditures schedule. c. an increase (decrease) in the price level shifts the aggregate expenditures schedule upward (downward). d. an increase (decrease) in the price level shifts the aggregate expenditures schedule downward (upward).

an increase (decrease) in the price level shifts the aggregate expenditures schedule downward (upward).

Which one of the following might offset a crowding-out effect of financing a large public debt? a. a decline in net exports b. an increase in public investment c. a decrease in the money supply d. a decline in public investment

an increase in public investment

Which of the following events would most likely reduce aggregate demand? a. a reduction in the amount of existing capital stock b. a reduction in business and personal tax rates c. an increase in expected returns on investment d. an increase in real interest rates

an increase in real interest rates

The effect of a government surplus on the equilibrium level of GDP is substantially the same as a. a decrease in imports. b. an increase in saving. c. an increase in consumption. d. an increase in investment.

an increase in saving.

Which of the following would most likely shift the aggregate demand curve to the right? a. an increase in stock prices that increases consumer wealth b. increased fear that a recession will cause workers to lose their jobs c. an increase in personal income tax rates d. a reduction in household borrowing because of tighter lending practices

an increase in stock prices that increases consumer wealth

Refer to the given data. At the $200 level of disposable income, a. the marginal propensity to save is 2½ percent. b. dissaving is $5. c. the average propensity to save is 0.20. d. the average propensity to consume is 0.80.

dissaving is $5.

The production of durable goods varies more than the production of nondurable goods because a. durable purchases of durables are not postponable. b. durable purchases of durables are postponable. c. the producers of nondurables have monopoly power. d. producers of durables are highly competitive.

durable purchases of durables are postponable.

(Consider This) Deflation is most likely to occur a. during the expansionary phase of the business cycle. b. during the recessionary phase of the business cycle. c. when the central bank imposes negative nominal interest rates. d. when the inflation premium rises above 10 percent.

during the recessionary phase of the business cycle.

Dr. Homer Simpson, an economics professor, decided to take a year off from teaching to run a commercial fishing boat in Alaska. That year, Professor Simpson would be officially counted as a. structurally unemployed. b. frictionally unemployed. c. not in the labor force. d. employed.

employed

In the expansion phase of a business cycle, a. the inflation rate decreases, but productive capacity increases. b. the inflation rate and productive capacity decrease. c. employment increases, but output decreases. d. employment and output increase.

employment and output increase.

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n) a. supply-side fiscal policy b. expansionary fiscal policy. c. contractionary fiscal policy. d. nondiscretionary fiscal policy.

expansionary fiscal policy.

(Consider This) If wages were more downwardly flexible, then we would expect a. fewer layoffs during recessions b. more layoffs during recessions c. more severe recessions d. no business cycle fluctuations

fewer layoffs during recessions

The cyclically adjusted surplus as a percentage of GDP is 1 percent in Year 1. This surplus becomes a deficit of 2 percent of GDP in Year 2. It can be concluded that from Year 1 to Year 2, a. fiscal policy turned more expansionary. b. fiscal policy turned more contractionary. c. GDP increased. d. GDP decreased.

fiscal policy turned more expansionary.

Prices and wages tend to be a. flexible both upward and downward. b. inflexible both upward and downward. c. flexible downward but inflexible upward. d. flexible upward but inflexible downward.

flexible upward but inflexible downward.

Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2, a. the most appropriate fiscal policy is an increase of government expenditures or a reduction of taxes. b. the most appropriate fiscal policy is a reduction of government expenditures or an increase of taxes. c. government should undertake neither an expansionary nor a contractionary fiscal policy. d. the economy is achieving its maximum possible output.

government should undertake neither an expansionary nor a contractionary fiscal policy.

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will a. increase the amount of U.S. real output purchased. b. increase U.S. imports and decrease U.S. exports. c. increase both U.S. imports and U.S. exports. d. decrease both U.S. imports and U.S. exports.

increase U.S. imports and decrease U.S. exports.

An increase in productivity will a. increase aggregate demand b. increase aggregate supply c. increase aggregate supply and aggregate demand. d. decrease aggregate supply and aggregate demand.

increase aggregate supply.

Refer to the graph, which shows an aggregate demand curve. If the price level decreases from 200 to 100, the real output demanded will a. increase by $800 billion. b. increase by $200 billion. c. decrease by $600 billion. d. decrease by $200 billion.

increase by $200 billion.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it would be appropriate for the government to a. reduce government expenditures and taxes by equal-size amounts. b. reduce government expenditures or increase taxes. c. increase government expenditures or reduce taxes. d. reduce unemployment compensation benefits.

increase government expenditures or reduce taxes.

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should a. increase tax rates and/or reduce government spending. b. discourage personal saving by reducing the interest rate on government bonds. c. increase government expenditures. d. encourage private investment by reducing corporate income taxes.

increase tax rates and/or reduce government spending.

The crowding-out effect of expansionary fiscal policy suggests that a. tax increases are paid primarily out of saving and therefore are not an effective fiscal device. b. increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment. c.it is very difficult to have excessive aggregate spending in the U.S. economy. d. consumer and investment spending always vary inversely.

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

If the price level decreases, then the aggregate expenditures schedule will shift. This translates into a a. movement down along the aggregate demand curve. b. shift in aggregate demand to the right. c. movement up along the aggregate demand curve. d. shift in aggregate demand to the left.

movement down along the aggregate demand curve.

Refer to the given consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars. A $2 billion increase in consumption at each level of DI could be caused by a. a decrease in consumer wealth. b. new expectations of higher future income. c. an increase in taxation. d. an increase in saving.

new expectations of higher future income.

Demand-pull inflation a. occurs when prices of resources rise, pushing up costs and the price level. b. occurs when total spending exceeds the economy's ability to provide output at the existing price level. c. occurs only when the economy has reached its absolute production capacity. d. is also called cost-push inflation.

occurs when total spending exceeds the economy's ability to provide output at the existing price level.

Demand-pull inflation a. occurs when total spending in the economy is excessive. b. is measured differently than cost-push inflation. c. can be present even during an economic depression. d. is also called "hyperinflation."

occurs when total spending in the economy is excessive.

If consumers expect prices to rise and shortages to occur in the future, then there will be a shift a. upward of both the consumption and saving schedules. b. downward of both the consumption and saving schedules. c. the consumption schedule upward and of the saving schedule downward. d. of the consumption schedule downward and the saving schedule upward.

of the consumption schedule upward and of the saving schedule downward.

The aggregate demand curve or schedule shows the relationship between the total demand for output and the a. income level b. interest rate c. price level d. real GDP

price level

Refer to the diagram. If the equilibrium price level is P1, then a. aggregate demand is AD2. b. the equilibrium output level is Q3. c. the equilibrium output level is Q2. d. producers will supply output level Q1

producers will supply output level Q1.

One timing problem in using fiscal policy to counter a recession is the "recognition lag" that occurs between the a. start of the recession and the time it takes to recognize that the recession has started. b. start of a predicted recession and the actual start of the recession. c. time fiscal action is taken and the time that the action has its effect on the economy. d. time the need for the fiscal action is recognized and the time that the action is taken.

start of the recession and the time it takes to recognize that the recession has started.

If there is a decrease in disposable income in an economy, then a. both the APC and the APS rise. b. the APC rises and the APS falls. c. the APC falls and the APS rises. d. both the APC and the APS fall.

the APC rises and the APS falls.

The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes a. the supply-side effects of fiscal policy. b. built-in stability. c. the crowding-out effect. d. the net export effect.

the crowding-out effect.

A major concern with the Social Security trust fund is that a. surpluses for Social Security are too large. b. the Federal government buys too many government securities. c. costs for administering the fund are greater than the current revenue. d. the fund will be exhausted in a couple of decades.

the fund will be exhausted in a couple of decades.

In the figure, AD1 and AS1 represent the original aggregate supply and demand curves, and AD2 and AS2 show the new aggregate demand and supply curves. The change in aggregate supply from AS1 to AS2 could be caused by a. a reduction in the price level. b. the increase in productivity. c. an increase in business taxes. d. the real-balances, interest-rate, and foreign purchases effects.

the increase in productivity.

A public debt that is owed to foreigners can be burdensome because a. foreign interest rates are persistently higher than domestic interest rates. b. the payment of interest reduces the volume of goods and services available for domestic uses. c. the payment of interest will conflict with a nation's foreign aid programs. d. the payment of interest will necessarily have a deflationary effect on prices in the paying nation.

the payment of interest reduces the volume of goods and services available for domestic uses.

The real interest rate is a. the percentage increase in money that the lender receives on a loan. b. the percentage increase in purchasing power that the lender receives on a loan. c. also called the after-tax interest rate. d. usually higher than the nominal interest rate.

the percentage increase in purchasing power that the lender receives on a loan.

If aggregate demand decreases, and, as a result, real output and employment decline but the price level remains unchanged, it is most likely that a. the money supply has declined. b. the price level is inflexible downward and a recession has occurred. c. cost-push inflation has occurred. d. productivity has declined.

the price level is inflexible downward and a recession has occurred.

(Consider This) The ratchet effect is the tendency of a. the price level to increase but not to decrease. b. nominal GDP to increase more rapidly than real GDP. c. real interest rates to fall more rapidly than nominal interest rates. d. consumption to rise year after year regardless of what happens to disposable income.

the price level to increase but not to decrease.

Refer to the diagram. Discretionary fiscal policy designed to slow the economy is illustrated by a. the shift of curve T1 to T2. b. the shift of curve T2 to T1. c. a movement from a to c along curve T2. d. a movement from d to b along curve T1.a movement from d to b along curve T1.

the shift of curve T2 to T1.

The long-run aggregate supply curve is a. upward-sloping and becomes steeper at output levels above the full-employment output. b. upward-sloping and becomes flatter at output levels above the full-employment output. c. horizontal d. vertical

vertical

A worker would be hurt least by inflation when the a. worker anticipates inflation and increases savings at the bank. b. worker is protected by a cost-of-living adjustment clause in an employment contract. c. worker is protected by fixed annual increases in wages and benefits in an employment contract. d. government increases the level of Social Security retirement benefits to correct for the effects of anticipated inflation.

worker is protected by a cost-of-living adjustment clause in an employment contract.