Homework answers / question archive / 1) How might fiscal policy be used to correct a recessionary gap?               A) The exchange rate would be adjusted to encourage imports

1) How might fiscal policy be used to correct a recessionary gap?               A) The exchange rate would be adjusted to encourage imports

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1) How might fiscal policy be used to correct a recessionary gap?

 

            A) The exchange rate would be adjusted to encourage imports.

            B) The exchange rate would be adjusted to discourage imports.

            C) Government spending would be adjusted to increase aggregate demand.

            D) Business operations would be regulated by the government to become more efficient.

2) According to Keynes, involuntary unemployment is possible because of

 

            A) the existence of capital markets.

            B) long-term labor contracts and the existence of labor unions.

            C) government interference in the market economy.

            D) inflation.

 

3) Ignoring the government and foreign sectors, there is an unplanned decrease in inventories of $200 billion at the current level of real national income of $12 trillion. From this information, we know that

 

            A) saving equals $200 billion.

            B) consumption expenditures equal $12 trillion less saving less $200 billion.

            C) planned investment is $200 billion more than planned saving.

            D) planned investment is $200 billion less than planned saving.

 

 

4) If a shift in aggregate demand only affects real Gross Domestic Product (GDP), then the short-run aggregate supply (SRAS) curve must be

 

            A) vertical.

            B) upward sloping.

            C) horizontal.

            D) downward sloping.

 

5) In the classical model, what occurs if a wage of $20/hour results in unemployed workers?

 

            A) The workers will go on strike to demand that more jobs be created.

            B) Producers will quickly create more jobs and hire the unemployed workers, so    unemployment is short-lived.

            C) The wage rate will drop, more workers will be hired, and the unemployment rate falls.

            D) The government will step in and order firms to hire more workers.

6) The classical model uses the assumption that

 

            A) all wages and prices are flexible.

            B) monopoly is widespread in the economy.

            C) interest rates are not flexible.

            D) economic markets are fragile and have no tendency to move towards an equilibrium.

 

7) An economy in long-run equilibrium experiences an increase in aggregate demand. According to the classical model,

 

            A) the price level will rise first, then real GDP will increase.

            B) the price level and real GDP will increase at the same time.

            C) the price level will increase, but real GDP will not change.

            D) the price level will increase, but real GDP will decrease.

 

8) Suppose we observe rising nominal GDP, a rising price level, and constant unemployment as a result of an increase in aggregate demand. We would conclude that the aggregate supply curve is

 

            A) upward sloping.

            B) downward sloping.

            C) vertical.

            D) horizontal.

 

9) When total planned real expenditures change due to the changes in net exports, this is known as the

 

            A) interest rate effect.

            B) real-balance effect.

            C) open economy effect.

            D) aggregate balances effect.

 

10) Suppose that real GDP is initially $13 trillion and the government attempts to increase real GDP to $14 trillion.  The marginal propensity to consume is 0.75, and every $1.00 increase in real government spending crowds out $0.50 in real planned investment expenditures.  How much increase in real government spending could lead to the desired level of real GDP?

 

            A) $200 billion

            B) $250 billion

            C) $500 billion

            D) $1 trillion

11) If the price level kept increasing, the short-run aggregate supply (SRAS) curve would get

steeper because

 

            A) all the unemployed would eventually be hired.

            B) there are limits to how long workers can work long hours and capital can go without

            proper maintenance.

            C) the rate at which capacity can be expanded increases indefinitely.

            D) the long-run aggregate supply curve is horizontal.

 

12) Which of the following is NOT a reason for the slope of the aggregate demand curve?

 

            A) The substitution effect

            B) The real balance effect

            C) The interest rate effect

            D) The open-economy effect

 

13) If you feel you are better off because you receive a 20 percent raise even when the price level also increases by 20 percent, then you are a victim of the

 

            A) real income effect.

            B) money income effect.

            C) money illusion.

            D) real purchasing power effect.

 

14) Holding nominal money balances constant, a decrease in the price level

           

            A) causes the real value of the money balances to increase, in turn increasing total planned real expenditures.

            B) causes the real value of the money balances to decrease, in turn decreasing total            planned real expenditures.

            C) causes the real value of the money balances to increase, thereby increasing the interest rate.

            D) generates a reduction in the value of the money balances, leading to higher interest       rates and a decrease in total planned real expenditures.

 

15) Other things being equal, the economy's aggregate demand curve shows that

 

            A) as the price level falls, total planned expenditures fall as well.

            B) a change in the general price level causes the curve to shift.

            C) a change in the general price level causes a change in the quantity of final goods and    services purchased.

            D) real Gross Domestic Product (GDP) and the price level are not related.

 

16)  If the MPS is one-third, a $100 increase in net exports will

 

            A) reduce real Gross Domestic Product (GDP) by $100.

            B) reduce real Gross Domestic Product (GDP) by $300.

            C) increase real Gross Domestic Product (GDP) by $33.

            D) increase real Gross Domestic Product (GDP) by $300.

 

17) According to the Laffer curve, increases in the tax rate will lead to a(n)

 

            A) steady decrease in tax revenues.

            B) steady increase in tax revenues.

            C) initial decrease in tax revenues and then an increase in tax revenues.

            D) initial increase in tax revenues and then a decrease in tax revenues.

 

 

 

 

 

18) According to the above table, if real Gross Domestic Product (GDP) is $30,000, planned saving equals

           

            A) $2,000.

            B) $3,000.

            C) $4,000.

            D) $5,000.

 

 

 

 

 

 

19) Refer to the above figure. If real Gross Domestic Product (GDP) is $2 trillion, then

 

            A) the level of total planned expenditures is less than real GDP.

            B) the level of total planned expenditures equals real GDP.

            C) the level of total planned expenditures is greater than real GDP.

            D) the level of total planned expenditures equals zero.

 

20) The long-run aggregate supply when resources are fully employed

 

            A) has no relationship with the production possibilities curve.

            B) will always be associated with a point outside the production possibilities curve.

            C) will always be associated with a point on the production possibilities curve.

            D) is determined by demand.

 

21) If persistent inflation was due to declines in long-run aggregate supply, what pattern would be observed?

           

            A) Increases in the price level would occur simultaneously with decreases in real GDP.

            B) Increases in the price level would occur simultaneously with increases in real GDP.

            C) Only prices of goods would increase; prices of services would remain constant.

            D) Only prices of services would increase; prices of goods would remain constant.

 

22) The crowding-out effect is

           

            A) the tendency of contractionary fiscal policy to cause an increase in planned investment             or planned consumption in the U.S. private sector.

            B) the tendency of expansionary fiscal policy to cause an increase in planned investment   but not in planned consumption in the U.S. private sector.

            C) the tendency of expansionary fiscal policy to cause a decrease in planned investment    or planned consumption in the U.S. private sector.

            D) the tendency of contractionary fiscal policy to cause an increase in planned investment             but a decrease in planned consumption in the U.S. private sector.

 

23)  A rightward shift of long-run aggregate supply without any change in aggregate demand

 

            A) will leave real GDP unchanged.

            B) results in a lower price level.

            C) increases the price level without any change in real GDP.

            D) increases the price level along with an increase in real GDP

 

24) Which of the following is true?

 

            A) MPC - MPS = 1

            B) MPC + MPS = 1

            C) MPC * MPS = 1

            D) MPC / MPS = 1

 

 

 

 

25) Consider the above figure. Autonomous consumption, in this scenario, is equal to

 

            A) $30.

            B) $40.

            C) $60.

            D) $80.

 

26) According to the Ricardian equivalence theorem, a tax cut that increases the government budget deficit will have

 

            A) no effect on aggregate demand because people realize that there will be a future tax     liability so that there is no increase in consumption expenditures.

            B) no effect on aggregate demand because people only look at changes in taxes or             government spending in the present.

            C) a positive effect on aggregate demand because people look at changes in taxes or          government spending in the present.

            D) an effect on aggregate demand. The magnitude the effect will have depends upon        whether the increase is caused by a reduction in taxes or an increase in government        spending.

 

 

 

 

 

27) Which point or points on the above figure illustrate a short-run equilibrium?

           

            A) Point A

            B) Point B

            C) Point C

            D) Points A and C

 

 

 

28) Refer to the above figure. The figure represents the consumption function for a consumer. The distance between C and D represents

 

            A) the amount of autonomous consumption.

            B) the amount of saving.

            C) the amount of dissaving.

            D) the point where saving equals zero.

 

29) Which one of the following statements is true?

           

            A) The investment function is positively sloped to reflect the fact that higher interest rates            cause more people to invest their funds.

            B) The investment function is positively sloped to reflect the fact that lower interest rates cause more firms to expand their operations.

            C) Along a given investment function, higher interest rates result in more investment         projects being undertaken.

            D) Along a given investment function, higher interest rates result in fewer investment        projects being undertaken.

 

30) If the marginal propensity to consume (MPC) is 0.75 and government purchases increase by $200 billion, then

 

            A) equilibrium real Gross Domestic Product (GDP) will increase by $800 billion.

            B) equilibrium real Gross Domestic Product (GDP) will increase by $200 billion.

            C) equilibrium real Gross Domestic Product (GDP) will increase by $50 billion.

            D) the effect on equilibrium real Gross Domestic Product (GDP) cannot be determined     from the given information.