Disposable income (in billions)

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1 Section 4 version 2 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. An increase in the MPC: A. increases the multiplier. B. shifts the autonomous investment line upward. C. decreases the multiplier. D. shifts the autonomous investment line downward. E. decreases the slope of the consumption function. 2. The the, the the multiplier. A. smaller; level of wealth; greater B. greater; MPS; greater C. greater; MPC; smaller D. greater; MPC; greater E. smaller; MPC; greater 3. All else equal, the higher the current production capacity in the economy: A. the higher is planned investment spending. B. the lower is planned investment spending. C. the higher is actual production. D. the lower is current production. E. the lower is unplanned investment spending. GDP (in billions) Disposable income (in billions) Consumption (in billions) $0 $0 $400 $ ,000 1,000 1, ,500 1,500 1, ,000 2,000 1, ,500 2,500 1, ,000 3,000 2, Table 16-3: The Economy of Albernia Planned Investment (in billions) 4. Use Table What is the consumption function for Albernia? A. C = YD B. C = YD C. C = YD D. C = YD E. C = YD 5. Use Table If GDP is $1,500 billion, then the level of unplanned inventories will be equal to: A. $400 billion. B. $400 billion. C. $600 billion. D. $600 billion. E. zero.

2 6. Use Table If real GDP is $3,000 billion, then unplanned investment will be: A. zero. B. $100 billion. C. $200 billion. D. $300 billion. E. - $100 billion. 7. If the planned aggregate spending rises by $10 billion and the MPC is.75, then GDP changes by: A. $2.5 billion. B. - $10 billion. C. $10 billion. D. $40 billion. E. - $40 billion. 8. When Julie Ann's disposable income is $10,000, she spends $10,000 and when her disposable income is $15,000, her spending is $12,500. Julie Ann's autonomous consumption is and her. A. $5,000; MPC = 0.50 B. $10,000; MPS = 0.50 C. $0; MPC = 0.50 D. $0; MPS = 0.50 E. $5,000; MPC = 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. 10. 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. 11. Aggregate demand will increase if: A. the public becomes more optimistic about future income. B. the aggregate price level falls. C. government spending is reduced. D. household wealth decreases. E. interest rates rise. 12. When the aggregate price level falls, the purchasing power of assets rises which leads to: A. an increase in the quantity of aggregate output demanded. B. a decrease in the quantity of aggregate output demanded. C. a shift in the AD curve to the right. D. a shift in the AD curve to the left. E. a shift in the SRAS curve to the right. 13. The wealth effect explains why:

3 A. the aggregate demand curve slopes downward since changes in aggregate price levels change the purchasing power of peoples' assets. B. the short-run aggregate supply curve slopes upward since an increase in wealth leads to more consumption. C. the short-run aggregate supply curve shifts since changes in wealth affect production. D. the aggregate demand curve slopes upward since wealth allows consumers to purchase more regardless of the price level. E. the long-run aggregate supply curve is vertical as there is no relationship between aggregate price level and aggregate output in the long run. 14. Which of the following policies will shift the AD curve to the left? A. The government increases its level of spending in the economy. B. The government increases transfer payments to households. C. The Federal Reserve increases the money supply in the economy. D. The government decreases its level of taxation in the economy. E. The government increases its level of taxation in the economy. Figure 18-1: Aggregate Supply Movements 15. Use the Aggregate Supply Movements Figure Using the accompanying figure we can safely conclude that: A. an increase in the price level is responsible for pushing the SRAS curve to the right. B. a decrease in the price level is responsible for pushing the SRAS curve to the right. C. there has been an increase in the SRAS supply curve. D. there has been a decrease in the SRAS supply curve. E. an increase in the price level has caused an upward movement along the SRAS curve. 16. A rise in labor productivity is most likely to result in: A. an increase in aggregate demand. B. a decrease in aggregate demand. C. a decrease in short-run aggregate supply. D. a decrease in long-run aggregate supply. E. an increase in short-run aggregate supply.

4 17. The long run in macroeconomic analysis is a period: A. in which nominal wages and other prices are flexible. B. in which wages are sticky. C. of less than one year. D. of between one and two years. E. in which all input prices are fixed. 18. The point at which the long-run aggregate supply curve touches the X-axis is known as: A. the economy's potential output. B. the accelerator point. C. the multiplier point. D. the self-correcting economy point. E. the balanced budget output. 19. When the economy is on the short-run aggregate supply curve and to the left of the long-run aggregate supply curve, actual aggregate output will eventually equal potential output as: A. nominal wages fall and the long-run aggregate supply curve shifts to the left. B. the aggregate price level falls and the long-run aggregate supply curve shifts to the left. C. nominal wages fall and the short-run aggregate supply curve shifts to the right. D. the aggregate price level falls and the aggregate demand curve shifts to the right. E. nominal wages rise and the short-run aggregate supply curve shifts to the left. Figure 18-2: Aggregate Supply 20. Use the Aggregate Supply Figure If the economy is at point E, which of the following describes the likely adjustment process? A. Nominal wages decrease, and the short-run aggregate supply curve shifts left until potential output is equal to actual output. B. Nominal wages increase, and the short-run aggregate supply curve shifts right until potential output is greater than actual output. C. Nominal wages decrease, and the short-run aggregate supply curve shifts right until actual and potential output are equal.

5 D. Nominal wages decrease, and the short-run aggregate supply curve shifts right until potential output is less than actual output. E. Nominal wages increase, and the short-run aggregate supply curve shifts left until actual and potential output are equal. 21. Use the Aggregate Supply Figure At point F, potential output is: A. less than actual output and unemployment is high. B. less than actual output and unemployment is low. C. greater than actual output and unemployment is high. D. greater than actual output and unemployment is low. E. equal to actual output and unemployment is zero. Figure 19-5: Policy Alternatives 22. Use the Policy Alternatives Figure Assume that the economy depicted in Panel (a) is in short-run equilibrium with AD 1 and SRAS 1. If the economy is left to correct itself: A. real interest rates will fall which will shift SRAS rightward. B. lower wages will result in a gradual shift from SRAS 1 to SRAS 2. C. long-run equilibrium will be established at Y P and P 3. D. aggregate demand will shift leftward. E. aggregate demand will shift rightward to Y p and P 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. 24. A recessionary gap will be eliminated because there is pressure on wages, causing the. A. downward; short-run aggregate supply curve to shift rightward. B. downward; short-run aggregate supply curve to shift leftward. C. downward; aggregate demand curve to shift rightward. D. upward; aggregate demand curve to shift to leftward. E. upward; short-run aggregate supply curve to shift rightward.

6 25. As an inflationary gap is eliminated through self-correcting adjustment, the equilibrium price level and the equilibrium real output. A. increases; decreases B. increases; increases C. decreases; decreases D. decreases; increases E. remains constant; decreases 26. If actual GDP is less than potential output, then the economy is A. in an inflationary gap. B. in a recessionary gap. C. in a long-run equilibrium. D. at full employment. E. experiencing zero cyclical unemployment. 27. 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. 28. Suppose that the economy is in a recessionary gap. The policy makers in the government can: A. increase taxes and increase aggregate spending via the multiplier to remove the recessionary gap B. increase the money supply, lower the interest rate, increase investment and consumption spending and thus increase aggregate demand. C. cut government expenditure, decrease investment and consumption spending and thus increase aggregate supply. D. increase nominal wages, shift the short run aggregate supply to the left and thus remove the recessionary gap. E. decrease taxes and decrease aggregate spending via the multiplier to remove the recessionary gap 29. If an economy is currently in short-run equilibrium where the level of real GDP is greater than potential output, then in the long run, one will find: A. nominal wages will rise and the SRAS curve will shift left bringing the economy back to its potential real GDP. B. nominal wages will rise shifting the AD curve to the right and restoring real GDP to its potential level. C. nominal wages will fall and the SRAS curve will shift right bringing the economy back to its potential real GDP. D. nominal wages will fall shifting the AD curve to the left and bringing the economy back to its potential real GDP. E. nominal wages will rise and the LRAS curve will shift left bringing the economy back to its potential real GDP.

7 30. When actual output is above potential output, in the absence of deliberate monetary or fiscal policy: A. nominal wages will increase, and the short-run aggregate supply curve will shift to the right. B. nominal wages will increase, and the short-run aggregate supply curve will shift to the left. C. the aggregate demand curve will shift to the right. D. the short-run aggregate supply curve will shift to the right. E. nominal wages will increase, and the aggregate demand curve will shift to the left. 31. An expansionary fiscal policy: A. typically decreases a government budget deficit or increases a government budget surplus. B. may include decreases in government spending. C. may include increases in the money supply. D. may include decreases in taxes. E. may include a reduction in transfer payments. Figure 20-7: Fiscal Policy Choices 32. Use the Fiscal Policy Choices Figure Given the use of discretionary fiscal policy, government spending is likely to be and taxes are likely to be in Panel (a) if real GDP is currently Y 1. A. decreased; decreased B. increased; increased C. decreased; increased D. left unchanged; left unchanged E. increased; decreased 33. Use the Fiscal Policy Choices Figure Given the use of discretionary fiscal policy, government spending is likely to be and taxes are likely to be in Panel (b) if real GDP is currently Y 1. A. decreased; decreased B. increased; increased C. decreased; increased D. increased; decreased E. left unchanged; left unchanged 34. A contractionary fiscal policy is a policy that: A. reduces aggregate demand by decreasing government purchases. B. reduces aggregate demand by decreasing money supply. C. reduces aggregate demand by decreasing interest rates.

8 D. reduces aggregate demand by decreasing taxes. E. reduces aggregate demand by increasing transfer payments. 35. Suppose the government increases spending more than is necessary to close a recessionary gap. Which of the following is likely to be the end result? A. The economy will experience inflation. B. The price level will decline. C. The equilibrium real GDP will fall. D. The equilibrium real GDP will rise, but still fall short of potential GDP. E. The unemployment rate will continue to rise. 36. The existence of lags: A. makes fiscal policy more effective than monetary policy. B. makes monetary policy more effective than fiscal policy. C. makes discretionary fiscal policy more effective than automatic stabilizers. D. makes both fiscal and monetary policy more effective. E. makes both fiscal and monetary policy more challenging to implement. 37. The multiplier effect of changes in government purchases of goods and services is equal to: A. 1/(1 MPS). B. 1/(1 MPC). C. MPS/(1 MPC). D. MPC/(1 MPS). E. MPS/MPC. 38. If the MPC is 0.9, then the tax multiplier is: A B C. 9. D. 10. E The fact that tax receipts fall during a recession: A. makes the multiplier stronger. B. has no impact on the multiplier. C. reduces the adverse effect of the initial fall in aggregate demand. D. acts as an automatic contractionary fiscal policy. E. crowds out consumer spending. 40. Suppose the economy is currently experiencing a recessionary gap. Which of the following fiscal policy options is most likely to increase real GDP by the largest amount? A. a decrease in taxes B. an increase in government purchases C. an increase in transfer payments D. an increase in government purchases, paid for by an increase in taxes. E. an increase in taxes. 41. Assume that marginal propensity to consume is 0.8, and potential output is $800 billion. If current real GDP is $850, which of the following policies would bring the economy to potential output? A. Decrease government spending by $50 billion. B. Increase government spending by $50 billion. C. Decrease government transfers by $50 billion. D. Decrease government spending by $10 billion.

9 E. Decrease taxes by $12.5 billion. 42. Automatic stabilizers act like: A. automatic expansionary fiscal policy when the economy is in an inflation. B. automatic expansionary fiscal policy when the economy is in a recession. C. an additional multiplier effect. D. automatic contractionary policy when the economy is in a recession. E. automatic budget balancing policies when the economy is in a recession.

10 Section 4 version 2 Answer Section MULTIPLE CHOICE 1. ANS: A PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: D REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: D REF: Module ANS: A PTS: 1 DIF: D REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: E REF: Module 18 SKL: Definitional 18. ANS: A PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: D REF: Module ANS: B PTS: 1 DIF: D REF: Module 19

11 23. ANS: E PTS: 1 DIF: D REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: D REF: Module ANS: B PTS: 1 DIF: M REF: Module 19 SKL: Definitional 27. ANS: A PTS: 1 DIF: D REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: D REF: Module 19 SKL: Study Guide 30. ANS: B PTS: 1 DIF: D REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module 20 SKL: Fact-Based 35. ANS: A PTS: 1 DIF: D REF: Module ANS: E PTS: 1 DIF: M REF: Module 20 SKL: Fact-Based 37. ANS: B PTS: 1 DIF: E REF: Module 21 SKL: Definitional 38. ANS: C PTS: 1 DIF: D REF: Module ANS: C PTS: 1 DIF: D REF: Module ANS: B PTS: 1 DIF: D REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module 21

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