7. Refer to the above graph. It depicts an economy in the: A. Immediate short run B. Short run C. Immediate long run D. Long run

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1 CHAPTER When the price level decreases: A. The demand for money falls and the interest rate falls B. Holders of financial assets with fixed money values decrease their spending C. Holders of financial assets with fixed money values have less purchasing power D. There is a decrease in consumer spending that is sensitive to changes in interest rates 2. Refer to the above 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 3. An increase in personal income tax rates will cause a(n): A. Decrease in the quantity of real domestic output demanded B. Increase in the quantity of real domestic output demanded C. Decrease in aggregate demand D. Increase in aggregate demand 4. An increase in expected future income will: A. Increase aggregate demand and aggregate supply B. Decrease aggregate demand and aggregate supply C. Increase aggregate supply D. Increase aggregate demand

2 5. Which of the following would be one of the factors that shift the aggregate demand curve? A change in: A. Productivity B. Prices of imported resources C. Domestic resource availability D. Profit expectations on investment projects 6. Refer to the above graph. This economy is at equilibrium: A. At point a B. At point b C. Price level P2 and output Q2 D. Price level P1 and output Q1 7. Refer to the above graph. It depicts an economy in the: A. Immediate short run B. Short run C. Immediate long run D. Long run 8. The economy experiences an increase in the price level and a decrease in real domestic output. Which of the following is a likely explanation? A. Productivity has increased B. Input prices have increased C. Increase in government spending D. Government regulations have been reduced

3 9. The so-called ratchet effect refers to the characteristic in the economy where product prices, wages, and per-unit production cost are flexible when: A. AD decreases but not when AD increases B. AD increases but not when AD decreases C. AS increases but not when AS decreases D. AD shifts but not when AS shifts 10. Refer to the above graph. Which of the following factors will shift AS1 to AS3? (remember the acronym RAP) A. An increase in productivity B. An increase in input prices C. A decrease in business taxes D. A decrease in household indebtedness 11. Refer to the above graph. Which of the following factors will shift AS1 to AS2? A. A decrease in the prices of products B. An increase in government spending C. A reduction in business taxes D. A decline in consumer confidence CHAPTER Suppose the price level is fixed, the MPC is.5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should: A. increase government expenditures by $100 billion. B. increase government expenditures by $50 billion. C. reduce taxes by $50 billion. D. reduce taxes by $200 billion.

4 13. Refer to the above diagram, in which Q f is the full-employment output. If the economy's current aggregate demand curve is AD 0, 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. 14. Refer to the above diagram, in which Q f is the full-employment output. If the economy's current aggregate demand curve is AD 0, it is experiencing: A. a positive GDP gap. B. a negative GDP gap. C. inflation. D. an adverse supply shock. 15. A tax reduction of a specific amount will be more expansionary, the: A. smaller is the economy's MPC. B. larger is the economy's MPC. C. smaller is the economy's multiplier. D. less the economy's built-in stability. 16. If Congress adjusted the U.S. tax system so that the MPC was reduced, the A. economy would become more inflation prone. B. economy would become less stable. C. stability of the economy would be unaffected. D. economy would become more stable. 17. Which of the following best describes the built-in stabilizers as they function in the United States? A. The size of the multiplier varies inversely with the level of GDP. B. Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises. C. Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. D. Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

5 18. A tax reduction of a specific amount will be more expansionary, the: A. smaller is the economy's MPC. B. larger is the economy's MPC. C. smaller is the economy's multiplier. D. less the economy's built-in stability. 19. A contractionary fiscal policy is shown as a: A. rightward shift in the economy's aggregate demand curve. B. rightward shift in the economy's aggregate supply curve. C. movement along an existing aggregate demand curve. D. leftward shift in the economy's aggregate demand curve. 20. Which of the following represents the most expansionary fiscal policy? A. a $10 billion tax cut B. a $10 billion increase in government spending C. a $10 billion tax increase D. a $10 billion decrease in government spending 21. In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will: A. shift the AD curve to the right. B. increase the equilibrium GDP. C. not affect the AD curve. D. shift the AD curve to the left. 22. An appropriate fiscal policy for severe demand-pull inflation is: A. an increase in government spending. B. depreciation of the dollar. C. a reduction in interest rates. D. a tax rate increase. 23. An appropriate fiscal policy for a severe recession is: A. a decrease in government spending. B. a decrease in tax rates. C. appreciation of the dollar. D. an increase in interest rates. 24. 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.

6 25. If the MPC in an economy is.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. 26. An economist who favored expanded government would recommend: A. tax cuts during recession and reductions in government spending during inflation. B. tax increases during recession and tax cuts during inflation. C. tax cuts during recession and tax increases during inflation. D. increases in government spending during recession and tax increases during inflation. 27. An economist who favors smaller government would recommend: A. tax cuts during recession and reductions in government spending during inflation. B. tax increases during recession and tax cuts during inflation. C. tax cuts during recession and tax increases during inflation. D. increases in government spending during recession and tax increases during inflation. 28. Discretionary fiscal policy refers to: A. any change in government spending or taxes that destabilizes the economy. B. the authority that the President has to change personal income tax rates. C. intentional changes in taxes and government expenditures made by Congress to stabilize the economy. D. the changes in taxes and transfers that occur as GDP changes. Answers on Next Page..

7 1. A 2. B 3. C 4. D 5. D 6. C 7. B 8. B 9. B 10. B 11. C 12. B 13. C 14. B 15. B 16. D 17. D 18. B 19. D 20. B 21. D 22. D 23. B 24. C 25. D 26. D 27. A 28. C