Practice Exam Questions Macro Economics

If sales unexpectedly lag production, A) inventories will be unexpectedly falling. B) inventories will be unexpectedly rising. C) inventories will not change in response to the decline in sales. D) firms will increase production.

A

If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion by A) increasing government spending by $4 billion. B) increasing government spending by $40 billion. C) decreasing taxes by $4 billion. D) increasing taxes by $4 billion.

A

Net exports are A) exports minus imports. B) imports minus exports. C) exports plus imports. D) always some positive amount.

A

The massive stimulus checks sent out by the U.S. government in 2020 in an attempt to fight off the economic effects of the pandemic A) generated a large increase in disposable income and saving. B) increased disposable income but reduced saving. C) reduced disposable income but increased saving. D) decreased disposable income and saving.

A

With an MPS of 0.3, the MPC will be A) 1 − 0.3. B) 0.3 − 1. C) 1 ÷ 0.3. D) 0.3.

A

In the diagram, the economy's immediate-short-run aggregate supply curve is shown by line A) 1. B) 2. C) 3. D) 4.

C

The purchase of capital goods, like _________ consumer goods, can be postponed; it tends to contribute to _________ in investment spending. A) nondurable; instability B) nondurable; stability C) durable; instability D) durable; stability

C

The short-run aggregate supply curve represents circumstances where A) both input and output prices are fixed. B) both input and output prices are flexible. C) input prices are fixed, but output prices are flexible. D) input prices are flexible, but output prices are fixed.

C

A tax that collects a constant amount (the tax revenue of government is the same) at all levels of GDP is a(n) A) excise tax. B) progressive tax. C) regressive tax. D) lump-sum tax.

D

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.

D

A lump-sum tax will A) lower aggregate expenditures and GDP by the amount of the tax. B) lower consumption and saving by the amount of the tax. C) reduce disposable income by the amount of the tax. D) reduce imports by the amount of the tax.

B

Per-unit production cost is A) real output divided by inputs. B) total input cost divided by units of output. C) units of output divided by total input cost. D) a determinant of aggregate demand.

B

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by A) increasing government spending by $25 billion. B) increasing government spending by $80 billion. C) decreasing taxes by $25 billion. D) decreasing taxes by $100 billion.

C

If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is A) 18 percent. B) 24 percent. C) 12 percent. D) 6 percent.

C

In the diagram, the economy's short-run AS curve is line _________, and its long-run AS curve is line _________. A) 1; 3 B) 2; 4 C) 3; 4 D) 2; 1

D

The $2.2 trillion CARES Act was designed to A) boost aggregate expenditures. B) reduce the recessionary gap. C) increase real GDP and employment. D) All of these choices are correct.

D

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.

B

If there is an unexpectedly good selling environment and sales exceed production, A) inventories will be unexpectedly falling. B) inventories will be unexpectedly rising. C) inventories will not be changing in response to the increase in sales. D) firms will decrease production.

B

In the COVID recession in 2020, to try to eliminate the recessionary expenditure gap as quickly as possible, policy makers undertook various macroeconomic stimulus policies such as A) raising the interest rate to discourage investment. B) lowering the interest rate to encourage investment. C) keeping the interest rate steady in an effort to make things appear normal. D) raising the interest rate to encourage saving.

B

In the diagram, the economy's aggregate demand curve is line A) 3 B) 4 C) 2 D) 1

B

John Maynard Keynes created the aggregate-expenditures model based primarily on what historical event? A) Bank panic of 1907 B) Great Depression C) spectacular economic growth during World War 2 D) economic expansion of the 1920s

B

Refer to the diagram. Which of the following would shift the investment-demand curve from ID1 to ID3? A) a lower interest rate B) lower expected rates of return on investment C) a higher interest rate D) higher expected rates of return on investment

B

The economy's long-run aggregate supply curve A) slopes upward and to the right. B) is vertical. C) is horizontal. D) slopes downward and to the right.

B

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.

B

In the United States from 1929 to 1933, real GDP_________ and the unemployment rate_________. A) declined by 27 percent; rose to 25 percent B) increased by 21 percent; fell to 2 percent C) declined by 21 percent; rose to 27 percent D) declined by 40 percent; rose to 50 percent

A

Refer to the given graph. A shift of the consumption schedule from C1 to C2 might be caused by a(n) A) recession. B) wealth effect of an increase in stock market prices. C) increase in income tax rates. D) increase in saving.

A

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should A) increase government expenditures by $80 billion. B) reduce government expenditures by $40 billion. C) reduce taxes by $40 billion. D) reduce taxes by $80 billion.

A

The CARES Act, passed in response to the COVID recession in 2020, was used in an attempt to eliminate the A) recessionary gap by distributing money to individuals, businesses, and state and local governments. B) inflationary gap that was occurring in conjunction with the recession. C) spread of the COVID virus by providing money to buy masks and hand sanitizer for everyone. D) positive GDP gap.

A

The economy's long-run AS curve assumes that wages and other resource prices A) eventually rise and fall to match changes in the price level. B) are flexible upward but inflexible downward. C) rise and fall more rapidly than the price level. D) are relatively inflexible both upward and downward.

A

The group of three economists who provide fiscal policy recommendations to the president is the A) Council of Economic Advisers. B) Joint Economic Committee. C) Bureau of Economic Analysis. D) Federal Reserve Board of Governors.

A

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.

A

Which of the following may shift the consumption schedule upward? A) an increase in disposable income B) a decrease in interest rates C) a significant decrease in stock prices D) a decrease in people's ability to borrow

A

The amount of the CARES Act, passed during the COVID recession in 2020 was A) $2.2 million. B) $2.2 billion. C) $2.2 trillion. D) two hundred thousand dollars.

C

The definition of a lump-sum tax is A) A tax that is levied only on imports, a lump-sum tax is never levied on exports. B) A tax that generates revenues all at one time and only once; it does not reoccur. C) A tax that collects a constant amount (the tax revenue of government is the same) at all levels of GDP. D) A tax that varies with GDP; the higher the GDP, the higher the tax.

C

The investment-demand curve will shift to the right as a result of A) an increase in the excess production capacity available in industry. B) an increase in business taxes. C) technological progress. D) an increase in the acquisition and maintenance cost of capital goods.

C

The aggregate-demand curve A) is upsloping because a higher price level is necessary to make production profitable as production costs rise. B) is downward-sloping because production costs decline as real output increases. C) shows the amount of expenditures required to induce the production of each possible level of real output. D) shows the amount of real output that will be purchased at each possible price level.

D

The consumption schedule A) is a table showing the various amounts that households plan to consume at each level of disposable income. B) reflects a direct consumption-disposable income relationship. C) is also called the consumption function. D) All of the answers are correct.

D

The foreign purchases effect A) shifts the aggregate demand curve rightward. B) shifts the aggregate demand curve leftward. C) shifts the aggregate supply curve rightward. D) moves the economy along a fixed aggregate demand curve.

D

What is the term for the level of disposable income at which households plan to consume (spend) all their income and to save none of it? A) household income B) personal income C) aggregate income D) break-even income

D

Which of the following is incorrect? A) As the U.S. price level rises, U.S. goods become relatively more expensive so that U.S. exports fall and U.S. imports rise. B) As the price level falls, the demand for money declines, the interest rate declines, and interest-rate-sensitive spending increases. C) When the price level increases, real balances increase and businesses and households find themselves wealthier and therefore increase their spending. D) Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward-flexible prices, reduces the price level.

C

Which of the following would shift the consumption schedule upward? A) household assets decrease in value B) higher real interest rates C) households increase their borrowing D) an increase in the probability of a recession

C

You are given the following information about aggregate demand at the existing price level for an economy: 1. consumption = $400 billion, 2. investment = $40 billion, 3. government purchases = $90 billion, 4. net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP gap here? A) increase government spending and taxes B) decrease government spending and taxes C) decrease government spending and increase taxes D) increase government spending and decrease taxes

D

The immediate-short-run aggregate supply curve represents circumstances where A) both input and output prices are fixed. B) both input and output prices are flexible. C) input prices are fixed, but output prices are flexible. D) input prices are flexible, but output prices are fixed.

A

The investment-demand curve will shift to the left as the result of A) business pessimism about future economic conditions. B) limited available productive capacity. C) an increase in the interest rate. D) a decrease in business taxes.

A

Discretionary fiscal policy will likely cause budget A) surpluses during recessions and deficits during periods of demand-pull inflation. B) deficits during recessions and surpluses during periods of demand-pull inflation. C) surpluses during both recessions and periods of demand-pull inflation. D) deficits during both recessions and periods of demand-pull inflation.

B

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to A) increase taxes and reduce government spending to shift the aggregate demand curve rightward to AD2. B) reduce taxes on businesses to shift the aggregate supply curve leftward. C) reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2. D) do nothing since the economy appears to be achieving full-employment real GDP.

C

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD1 to AD2 is consistent with A) expansionary fiscal policy. B) a major recession. C) contractionary fiscal policy. D) severe demand-pull inflation.

C

Refer to the given graph. A shift of the consumption schedule from C2 to C1 might be caused by a(n) A) increase in real GDP. B) reverse wealth effect, caused by a decrease in stock market prices. C) decrease in income tax rates. D) decrease in saving.

B

Refer to the graph, which shows an aggregate demand curve. If the price level increases from 100 to 150, the real output demanded will A) increase by $50 billion. B) decrease by $100 billion. C) increase by $100 billion. D) decrease by $50 billion.

B

When government spending is increased, the amount of the increase in aggregate demand primarily depends on A) the average propensity to consume. B) the size of the multiplier. C) income taxes. D) exchange rates.

B

Which factor explains the variability of investment? A) the regularity of innovation B) the durability of capital goods C) the constancy of expectations D) the constancy of profits

B

The interest-rate effect suggests that A) a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. B) an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. C) an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending. D) an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.

C

You are given the following information about aggregate demand at the existing price level for an economy: 1. consumption = $500 billion, 2. investment = $50 billion, 3. government purchases = $100 billion, 4. net exports = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP gap here? A) increase government spending and taxes B) decrease government spending and taxes C) decrease government spending and increase taxes D) increase government spending and decrease taxes

C

The enormous relief bill that was passed in 2020 to address the recession caused by COVID was the A) American Recovery and Reinvestment Act. B) Keynes Act. C) Multiplier Act of 2020. D) CARES Act.

D

The real-balances effect indicates that A) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending. B) a lower price level will decrease the real value of many financial assets and therefore reduce spending. C) a higher price level will increase the real value of many financial assets and therefore increase spending. D) a higher price level will decrease the real value of many financial assets and therefore reduce spending.

D

Which of the following factors does not help explain the instability of investment? A) Business expectations can quickly change for unpredictable reasons. B) Innovations in the economy occur quite irregularly. C) Profits of firms are highly variable from one period to the next. D) Purchases of capital goods are usually nondiscretionary and cannot be postponed.

D

A private closed economy includes A) households, businesses, and government, but not international trade. B) households, businesses, and international trade, but not government. C) households and businesses, but not government or international trade. D) households only.

C

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 taxes and government spending undertaken expressly for stabilization at the option of Congress. D) is invoked secretly by the Council of Economic Advisers.

C

A table of numbers that shows the amounts households plan to save (plan not to spend for consumer goods), at different levels of disposable income is called a A) saving schedule. B) consumption schedule. C) consumer schedule. D) consumption function.

A

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. The per-unit cost of production in this economy is A) $0.05. B) $0.10. C) $0.50. D) $1.00.

B

Contractionary fiscal policy would tend to make a budget deficit become A) bigger. B) smaller. C) a trade deficit. D) a trade surplus.

B

Factors other than disposable income that can affect the amounts that households will consume and save include all but which of the following? A) the real interest rate B) household expectations C) household borrowing D) planned inventory changes

D

Higher interest rates may cause A) consumers to decide not to purchase a new house or new automobile. B) businesses to postpone a potential purchase of capital. C) an increase in the amount of investment spending. D) both A and B.

D

If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by A) reducing government expenditures by $12 billion. B) reducing government expenditures by $60 billion. C) increasing taxes by $15 billion. D) increasing taxes by $20 billion.

D

If the marginal propensity to consume is 0.5, then the marginal propensity to save must be A) 1.5. B) 0.8. C) 1.0 D) 0.5.

D

If the nominal interest rate is 28 percent and the real interest rate is 11 percent, the inflation rate is A) 39 percent. B) 28 percent. C) 11 percent. D) 17 percent.

D

Other things equal, if the real interest rate falls and business taxes rise, A) investment will rise until it is equal to saving. B) we will be uncertain as to the resulting change in investment. C) we can be certain that investment will rise. D) we can be certain that investment will fall.

D

Suppose that real domestic output in an economy is 100 units, the quantity of inputs is 10, and the price of each input is $5. The per-unit cost of production in the economy described is A) $20. B) $5. C) $50. D) $0.50.

D