Archimedean Upper Conservatory Economics, October 2016

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1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The marginal propensity to consume is equal to: A. the proportion of consumer spending as a function of aggregate disposable income. B. the change in saving divided by the change in aggregate disposable income. C. one. D. the change in saving divided by the change in consumer spending. E. the change in consumer spending divided by the change in aggregate disposable income. 2. Inventory investment is: A. a part of the planned investment spending and is always positive. B. a part of the unplanned investment spending and may either be positive or negative. C. not a part of the investment spending by firms as it can't be properly planned ahead of time. D. a part of the consumption spending as these are unsold goods. E. a part of net exports because foreign consumers also purchase domestically produced goods. 3. If the interest rate rises, then: A. planned investment spending rises. B. more investment projects have a rate of return greater than the interest rate. C. the opportunity cost of investment is greater. D. investment spending will fall, causing an increase in GDP. E. households will decrease the amount of money saved. 4. If planned investment spending is $2 trillion and inventories decrease by $0.5 trillion then, actual investment spending is: A. $2.5 trillion. B. $1.5 trillion. C. $2 trillion. D. $3 trillion. E. - $1.5 trillion. 5. Alice's disposable income increases by $1,000, and she spends $600 of this increase in disposable income. For Alice, her: A. MPS is 0.40 and she saves $400. B. MPC is 0.40 and she saves $400. C. MPS is 0.40 and she saves $600. D. MPC is 0.60 and she consumes $400. E. MPC is 0.60 and she consumes $1, The wealth effect suggests: A. a positive relationship between the price level and consumption spending. B. that price level changes do not affect real wealth. C. a negative relationship between the price level and consumption spending. D. that when the price level increases, the real value of money increases also. E. that when the price level rises, the real value of wealth also rises. page 1

2 7. Suppose that the stock market crashes. Which of the following is most likely to occur? A. The aggregate demand curve shifts to the right. B. The aggregate demand curve shifts to the left. C. A movement up the aggregate demand curve. D. A movement down the aggregate demand curve. E. A movement down the aggregate demand curve, coupled with a shift to the left. 8. Suppose that a presidential candidate who promised large personal income tax cuts is elected. Which of the following is most likely to occur? A. A decrease in short-run aggregate supply. B. A decrease in aggregate demand. C. An increase in short-run aggregate supply. D. An increase in aggregate demand. E. A movement down the aggregate demand curve. 9. The only government policy that has a DIRECT effect on the aggregate demand curve is: A. changing the quantity of money. B. changing the tax rate. C. changing the level of government purchases of final goods and services. D. changing the level of government transfers. E. changing the interest rate. 10. Changes in aggregate demand can be caused by changes in: A. production technology. B. business costs. C. raw materials costs. D. worker productivity. E. government spending. 11. Which of the following will shift the AD curve to the right? A. an increase in wealth B. pessimism about the future of the economy C. a decrease in government spending. D. a decrease in productivity E. an increase in commodity prices. 12. Which of the following will cause short-run aggregate supply to increase? A. A law that requires employers to provide health insurance for all employees. B. An increase in the aggregate price level. C. A large decrease in the price of oil. D. An increase in the minimum wage. E. A decrease in government transfer payments. page 2

3 13. If nominal wages fall, then short-run aggregate: A. supply shifts to the right. B. supply shifts to the left. C. demand shifts to the right. D. demand shifts to the left. E. supply becomes vertical. 14. Changes in short-run aggregate supply can be caused by changes in: A. wages. B. wealth. C. government spending. D. consumption spending. E. investment spending. 15. Nominal wages are sticky because: A. in the short run these payments are slow to rise when there are labor shortages and slow to fall even when there is significant level of unemployment. B. in the long run these payments remain fixed thereby increasing the profitability of the firms. C. in the short run these payments are slow to fall when there are labor shortages and slow to rise even when there is significant level of unemployment. D. in the long run all wages become adjusted for inflation. E. workers will never ask for increases to their wages. 16. Because the aggregate price level has no effect on aggregate output in the long run, the long-run aggregate supply curve is: A. upward sloping. B. vertical. C. horizontal. D. downward sloping. E. backward bending. 17. An aggregate output level lower than potential output means: A. low inflation. B. high inflation. C. low unemployment. D. high unemployment. E. both high inflation and high unemployment. page 3

4 Figure 19-1: Shifts of the AD AS Curves 18. Use the Shifts of the AD AS Curves Figure In the short run, a decrease in wages is illustrated by: A. Panel (A). B. Panel (B). C. Panel (C). D. Panel (D). E. Panels (B) and (C). 19. Suppose that the U.S. government doubles its spending on health care. Which of the following is most likely to occur? A. The short-run aggregate supply curve shifts right, output increases, and prices decrease. B. The short-run aggregate supply curve shifts left, output decreases, and prices increase. C. The aggregate demand curve shifts left, output decreases, and prices decrease. D. The aggregate demand curve shifts right, output increases, and prices increase. E. The aggregate demand curve shifts right, output increases, and prices decrease. page 4

5 20. A positive demand shock leads to: A. higher prices and higher employment. B. higher prices and higher unemployment. C. higher prices and lower output. D. lower prices and lower output. E. higher prices and lower employment. 21. The intersection of the economy's aggregate demand and long-run aggregate supply curves: A. determines its equilibrium real GDP in both the long run and the short run. B. determines its equilibrium price level in both the long run and the short run. C. occurs at the economy's potential output. D. occurs at high levels of cyclical unemployment. E. occurs at the level of output that corresponds to an unemployment rate of 0%. 22. If the SRAS curve intersects the aggregate demand curve to the right of LRAS, the result will be: A. a recessionary gap. B. an inflationary gap. C. cyclical unemployment. D. long-run equilibrium. E. crowding out. 23. A recessionary gap occurs if: A. actual real GDP is less than potential output. B. actual real GDP is greater than potential output. C. actual real GDP is equal to potential output. D. unemployment is less than the natural rate. E. unemployment is equal to zero. page 5

6 Figure 19-4: An Increase in Aggregate Demand 24. Use the An Increase in Aggregate Demand Figure The short-run equilibrium at Y 2 and P 2 : A. creates pressure for nominal wages to fall as workers seek to restore lost purchasing power. B. creates pressure for prices to fall, since real GDP exceeds the potential real GDP. C. results in a recessionary gap. D. results in an inflationary gap. E. indicates that cyclical unemployment is unusually high. 25. An inflationary gap will be eliminated because there is pressure on wages, causing the. A. downward; long-run aggregate supply curve to shift to the right B. downward; long-run aggregate supply curve to shift to the left C. downward; aggregate demand curve to shift to the left D. upward; short-run aggregate supply curve to shift to the left E. upward; short-run aggregate supply curve to shift to the right 26. Suppose the economy is in a short-run equilibrium, where the actual output is greater than potential output, then the economy is in: A. an inflationary gap, nominal wages will increase and SRAS will shift to the left until the actual GDP is equal to the potential GDP in the long run. B. a recessionary gap, nominal wages will decrease and AD will shift to the left until the actual GDP is equal to the potential GDP in the long run. C. an inflationary gap, prices of goods will increase and AD will shift to the right until the economy is in long-run equilibrium. D. a recessionary gap, prices of goods will decrease and LRAS will shift to the left until the economy is in long-run equilibrium. E. a recessionary gap, nominal wages will increase and SRAS will shift to the right until the economy is in long-run equilibrium. page 6

7 Figure 19-8: AD AS 27. Use the AD AS Figure Assume that the economy is in long-run equilibrium. Suppose that the Federal Reserve lowers key interest rates, as a result of this action: A. there will be an upward movement along the aggregate demand curve AD 1. B. the aggregate demand curve will stay unchanged at AD 1. C. there will be a downward movement along the aggregate demand curve AD 1. D. the aggregate demand curve will shift to AD 3. E. the aggregate demand curve will shift to AD A negative demand shock, holding everything else constant: A. shifts AD to the left and results in lower aggregate price levels and lower real GDP in the short run. B. shifts SRAS to the left and results in lower aggregate price levels and lower real GDP in the short run. C. moves the economy downward along the AD curve. D. moves the economy upwards along the AD curve. E. shifts AD to the left and results in lower aggregate price levels and higher real GDP in the short run. 29. Fiscal policy refers to: A. the manipulation of interest rates. B. the manipulation of government spending and taxations. C. the manipulation of the quantity of money. D. the manipulation of interest rates and of government spending. E. the manipulation of imports and exports. page 7

8 Figure 20-1: Short-Run Equilibrium 30. Use the Short-Run Equilibrium Figure The accompanying graph shows the current short-run equilibrium in the economy. Appropriate fiscal policy action in this situation would be: A. a decrease in transfer payments. B. an increase in government purchases. C. a decrease in income tax rates. D. an increase in the investment tax credit. E. a reduction in the capital gains tax rate. 31. An increase in government transfers is considered to be an example of because it. A. expansionary fiscal policy; shifts the aggregate demand curve to the left, increasing aggregate output B. contractionary fiscal policy; shifts the aggregate demand curve to the left, decreasing aggregate output C. expansionary fiscal policy; shifts the aggregate demand curve to the right, increasing aggregate output D. contractionary fiscal policy; shifts the aggregate demand curve to the right, decreasing aggregate output E. expansionary fiscal policy; shifts the aggregate demand curve to the right, decreasing aggregate output 32. Consumer spending will rise if: A. government transfers rise. B. taxes increase. C. government transfers fall. D. taxes increase or if government transfers fall. E. the central bank reduces the money supply. page 8

9 Figure 20-4: Inflationary and Recessionary Gaps 33. Use the Inflationary and Recessionary Gaps Figure The movement from AD 1 to AD 3 could be caused by: A. increased government purchases. B. decreased government transfers. C. increased taxes. D. decreased government purchases E. decreasing the money supply. 34. Use the Inflationary and Recessionary Gaps Figure A recessionary gap would be: A. Y 3 -Y 1. B. Y 3 -Y 2. C. Y 2 -Y 1. D. Y 3 -Y 0. E. P 3 -P Decreasing funding to explore space: A. will shift the short-run aggregate supply curve to the left. B. will shift the short-run aggregate supply curve to the right. C. will shift the aggregate demand curve to the left. D. will shift the aggregate demand curve to the right. E. will shift the long-run aggregate supply curve to the right. page 9

10 Figure 20-7: Fiscal Policy Choices 36. Use the Fiscal Policy Choices Figure In Panel (b), if real GDP is equal to Y 1, there is: A. an inflationary gap. B. a recessionary gap. C. equilibrium at full employment. D. A foreign exchange gap. E. a trade gap. 37. When government decreases government spending, the: A. AD curve will shift to the left. B. SRAS curve will shift to the left. C. government's budget balance will move towards a deficit. D. government debt will increase. E. SRAS curve will shift to the right. 38. If the government decides to spend an extra $5 billion: A. GDP will increase by $5 billion. B. GDP will remain unchanged. C. GDP will increase by less than $5 billion. D. GDP will increase by more than $5 billion. E. GDP will decrease by more than $5 billion. page 10

11 Figure 21-1: Short-Run Equilibrium 39. Use the Short-Run Equilibrium Figure The accompanying graph shows the economy in short-run equilibrium. To move the economy to potential GDP, the government needs to reduce government spending by an amount equal to: A. (Y 1 Y P ) B. (Y 1 Y P )/(1 MPC) C. (Y 1 Y P )MPC D. (Y 1 Y P )(1 MPC) E. (1 MPC./(Y 1 Y P ) 40. Suppose that marginal propensity to consume is equal to 0.9, and the government increases its spending by $200 billion. This new increase in spending is financed by a fresh increase in taxes equal to $200 billion. As a result of this, GDP will: A. not change at all. B. decrease by $200 billion. C. increase by $2,000 billion. D. increase by $200 billion. E. increase by $1,800 billion. 41. Suppose the MPC = 0.8 and the government cuts taxes by $40 billion. Which of the following will be the likely effect? A. Real GDP will expand by $200 billion. B. Real GDP will contract by $200 billion. C. Real GDP will expand by $160 billion. D. Real GDP will contract by $160 billion. E. Real GDP will expand by $400 billion. page 11

12 42. An example of an automatic stabilizer is: A. tax receipts rising when GDP rises. B. a discretionary increase in taxes. C. government purchases rising when GDP rises. D. government transfers rising when GDP rises. E. government purchases falling when GDP falls. 43. A negative short-run supply shock: A. decreases aggregate output with no impact on the aggregate price level. B. increases aggregate output and decreases the aggregate price level. C. decreases both aggregate output and the aggregate price level. D. increases both aggregate output and the aggregate price level. E. decreases aggregate output and increases the aggregate price level. Figure 19-3: Inflationary and Recessionary Gaps 44. Use the Inflationary and Recessionary Gaps Figure In Panel (a), the intersection of SRAS with AD indicates: A. an economy experiencing a recessionary gap. B. an economy experiencing an inflationary gap. C. that the economy is in long-run equilibrium. D. that the economy has an unusually low unemployment rate. E. that the economy is operating at potential output. page 12

13 Figure 19-5: Policy Alternatives 45. Use the Policy Alternatives Figure Assume that the economy depicted in Panel (a) is in short-run equilibrium at a real GDP level of Y 1. Doing nothing and letting the economy correct itself: A. is called fiscal policy. B. occurs in the long run as wages rise. C. occurs in the short run as wages rise. D. occurs as the aggregate demand curve begins to increase. E. occurs in the long run as wages fall. 46. A negative supply shock often results in: A. a leftward shift of the AD curve. B. a decrease in the aggregate price level and a decrease in aggregate output. C. no change in the price level. D. a drop in the unemployment level. E. an increase in the aggregate price level and a decrease in aggregate output. 47. Keynesians argue that a lack of spending is: A. not possible in an economy. B. possible and can lead to prolonged recessions. C. not helped by monetary or fiscal policy efforts. D. only evident during expansions. E. a key indicator of an economic boom. 48. An inflationary gap occurs when: A. we need to increase prices. B. real output is too low. C. potential output exceeds actual output. D. actual output exceeds potential output. E. nominal interest rates exceed the inflation rate. page 13

14 49. Expansionary fiscal policy includes: A. decreasing taxes. B. increasing taxes. C. increasing the money supply. D. decreasing government expenditures. E. increasing the federal funds rate. 50. When potential output is less than actual aggregate output: A. the economy faces an inflationary gap. B. the SRAS curve intersects the AD curve to the left of the LRAS curve. C. government needs to follow an expansionary policy to correct this problem. D. a decrease in taxes would solve this problem. E. the SRAS curve intersects the AD curve on the LRAS curve. page 14

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