Sample Final Exam

17. Refer to Figure: Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, it is in a(n): A. recessionary gap. B. inflationary gap. C. low level of unemployment. D. liquidity trap.

A

18. Use Figure: Aggregate Expenditures I. When real GDP is $700 billion, there will be a _____ in unplanned inventory investment. A. $125 million increase B. $125 million decline C. $200 million decline D. $200 million increase

A

21. Public debt is: A. the total debt owed by the gov to individuals and institutions outside of gov B. the total amount that the government owes during a given fiscal year. C. likely to increase when the government uses contractionary fiscal policy. D. the amount that the government owes itself.

A

22. Changes in aggregate demand can be caused by changes in: A. the stock of physical capital. B. business costs. C. raw materials costs. D. the expenses of complying with government regulations

A

28. Suppose the marginal propensity to consume is 0.8. If the government cut taxes by $100 billion, then real GDP would increase by $500 billion. A. True B. False

A

13. Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically contractionary when the economy contracts and automatically expansionary when the economy expands. A. True B. False

B

15. When the government decides to increase taxes to fight an inflationary gap, it is: A. most likely to increase the budget deficit. B. an example of discretionary fiscal policy. C. an example of an automatic stabilizer. D. likely to dampen the effects of inflation but not to lead to a correction

B

14. Use Table: Aggregate Expenditures Curve II. The equilibrium level of real GDP in the aggregate expenditures model shown in this figure is: A. $800. B. $1,000. C. $2,000. D. $4,000

C

16. A(n) _____ would likely shift the short-run aggregate supply curve to the left. A. decrease in consumer spending B. decrease in the price of oil C. increase in the price of oil D. increase in consumer spending

C

8. (Figure: Short-Run Equilibrium) Refer to Figure: Short-Run Equilibrium. The economy is in short-run equilibrium. To move the economy to potential GDP, the government should reduce its spending by an amount equal to: A. (Y1 - YP). B. (Y1 - YP) / (1 - MPC). C. (Y1 - YP)MPC. D. (Y1 - YP)(1 - MPC)

D

9. Use Figure: The Aggregate Consumption Function and Planned Aggregate Spending. If disposable income decreases, then the: A. aggregate expenditures curve will shift up. B. aggregate expenditures curve will shift down. C. economy will move upward along the aggregate expenditures curve. D. economy will move downward along the aggregate expenditures curve.

D

23. If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should _____ taxes by _____ . A. decrease; more than $25 billion B. decrease; less than $25 billion C. increase; more than $25 billion D. increase; less than $25 billion

A

27. Because the revenue from personal income taxes increases as disposable income increases: A. the multiplier effect decreases. B. the marginal propensity to consume decreases as income increases. C. the multiplier effect increases. D. the marginal propensity to save increases as income decreases.

A

3. In general, a change in the price level, all other things unchanged, causes: A. a movement along the aggregate demand curve. B. a shift of the aggregate demand curve. C. both a movement along the aggregate demand curve and a shift in the curve. D. no change in the purchasing power of assets.

A

33. In the long run, the aggregate price level falls. This could result from: A. a leftward shift in AD. B. a rightward shift in AD. C. a leftward shift in short-run AS. D. more spending by consumers

A

4. The point at which the long-run aggregate supply curve touches the x-axis is known As: A. potential output. B. the accelerator point. C. the multiplier point. D. the self-correcting economy point.

A

12. Positive unplanned inventory investment leads to: A. prices increasing. B. production increasing. C. firms hiring more workers. D. production decreasing.

D

2. If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is: A. a decrease in government transfers. B. an increase in government spending. C. a decrease in government spending. D. an increase in the money supply to decrease interest rates.

B

24. Use Figure: The Aggregate Consumption Function and Planned Aggregate Spending. If expected disposable income decreases in this economy, then the: A. aggregate expenditures curve will shift up. B. aggregate expenditures curve will shift down. C. economy will move upward along the aggregate expenditures curve. D. economy will move downward along the aggregate expenditures curve

B

25. Budget deficits almost always: A. decrease with inflation and increase with deflation. B. increase when unemployment rises and decrease when unemployment falls. C. decrease when unemployment rises and increase when unemployment falls. D. increase when the aggregate price level rises and decreases when the aggregate price level falls.

B

30. Suppose the equilibrium aggregate price level and the equilibrium level of real GDP are both rising. This is probably the effect of a(n) _____ in aggregate _____ . A. increase; supply B. increase; demand C. decrease; supply D. decrease; demand

B

31. Which fiscal policy would make a budget surplus larger or a budget deficit smaller? A. an increase in government purchases of goods and services B. lower government transfers C. lower taxes D. higher interest rates

B

32. Discretionary fiscal policy entails: A. changing the money supply to influence interest rates and investment spending. B. using government spending or tax policy to affect aggregate demand. C. lifting trade barriers on imports. D. setting policy to raise the natural rate of unemployment

B

1. The ________ curve shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied when wages and prices are not fully flexible. A. aggregate demand B. short-run aggregate supply C. aggregate spending D. long-run aggregate supply

B. short-run aggregate supply

19. If the Fed decreases the quantity of money in circulation, interest rates , investment spending , and the aggregate demand curve shifts to the . A. decrease; increases; right B. decrease; decreases; left C. increase; decreases; left D. increase; decreases; right

C

20. A change in taxes shifts the aggregate demand curve by _____ than a change in government spending for goods and services and has a _____ effect on real GDP. A. more; smaller B. more; larger C. less; smaller D. less; larger

C

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

C

34. Which statement is CORRECT? A. Automatic stabilizers indicate deliberate action by policy makers. B. Discretionary fiscal policy shows automatic adjustments without any specific effort by policy makers. C. Discretionary fiscal policy indicates deliberate action by policy makers. D. Automatic stabilizers are risky to use and sometimes can get the economy destabilized.

C

35. Contractionary fiscal policy includes: A. decreasing taxes. B. decreasing the money supply. C. decreasing government expenditures. D. increasing government expenditures.

C

6. Suppose the economy is operating at an output of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75______. would close this recessionary gap. A. A $25 billion increase in government spending B. A $25 billion increase in taxes C. A $250 billion increase in government spending D. A $1,000 billion increase in government spending

C

10. Reducing taxes in response to a recession is an example of _____ policy. A. monetary B. investment C. consumption D. fisca

D

11. A recessionary gap can be closed with: A. contractionary monetary policy. B. an increase in taxes. C. a decrease in government purchases. D. expansionary fiscal policy

D

26. An improvement in the business outlook of firms is a type of positive shock and therefore shifts the _____ curve to the _____ . A. supply; long-run aggregate supply; right B. demand; aggregate demand; left C. supply; short-run aggregate supply; right D. demand; aggregate demand; right

D

5. The national debt ________ when the federal government incurs a _______ . A. falls; deficit B. rises; surplus C. stays the same; surplus D. rises; deficit

D

7. Refer to Figure: Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is a decrease in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP. A. AD2; left; increase; decrease B. AD2; left; decrease; decrease C. AD1; right; increase; increase D. AD1; left; decrease; decrease

D