Download Summer B 2015 Practice Test #3 - MDC Faculty Web Pages

Miami Dade College
ECO 2013 Principles of Macroeconomics - Summer B 2015
Practice Test #3
1. In the Keynesian model, the price level is ___________; in the aggregate demand and
supply model, the price level is _______________.
A) fixed; fixed
B) flexible; flexible
C) flexible; fixed
D) fixed; flexible
2. The collapse of home values that began in 2008 led to ____ in Americans' consumption
and _____ in their saving rates.
A) a decrease; a decrease
B) a decrease; an increase
C) an increase; a decrease
D) an increase; an increase
3. Because of the wealth effect, a rising aggregate price level ____ the purchasing power of
wealth and therefore _____ output demanded.
A) increases; increases
B) increases; reduces
C) reduces; increases
D) reduces; reduces
4. A(n) __________ in government spending, a __________ domestic currency, and
________ interest rates will shift a country's aggregate demand to the left.
A) decrease; stronger; higher
B) increase; weaker; higher
C) increase; stronger; lower
D) decrease; weaker; lower
5. In the long run, attempts to expand beyond an economy's natural rate of unemployment
tend to result in:
A) increased inflation.
B) increased output.
C) both increased output and increased inflation.
D) neither increased output nor increased inflation.
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6. If oil prices decrease, the short-run aggregate supply curve shifts _____ and output
supplied will be _____.
A) left; increased
B) left; reduced
C) right; increased
D) right; reduced
7. The short-run aggregate supply curve is positively sloped because:
A) a short-run increase in GDP usually is accompanied by an increased rise in the price
level.
B) many input prices are slow to change in the short run.
C) all variables are fixed in the short run.
D) a short-run increase in GDP usually is accompanied by a slower rise in the price
level.
8. Aggregate supply increases when:
A) input prices rise.
B) subsidies are reduced.
C) there is a decrease in firms' market power.
D) business expectations tend toward the negative.
9. Suppose consumers spend more than usual. In the short run, output will ____; in the long
run, output will _____ from its starting point.
A) increase; remain unchanged
B) increase; increase
C) remain unchanged; decrease
D) remain unchanged; increase
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Use the following to answer question 10:
Figure: Determining SRAS Shifts
10. (Figure: Determining SRAS Shifts) If there is a decrease in input prices, the short-run
aggregate supply curve will shift from SRAS0 to _____ and the price level will become
_____.
A) SRAS1; P0
B) SRAS1; P1
C) SRAS2; P1
D) SRAS2; P2
11. During the 1970s, some countries stopped oil sales to the United States. As petroleum
prices rose:
A) both aggregate supply and the aggregate price level fell.
B) aggregate demand fell and the aggregate price level fell.
C) aggregate supply fell and the aggregate price level rose.
D) both aggregate demand and the aggregate price level rose.
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12. If the marginal propensity to save is 0.25, the multiplier is:
A) 4.
B) 1.33.
C) 3.
D) 3.33.
13. (Figure: Shifting the AD and SRAS)
Starting in long-run equilibrium when the aggregate demand curve is AD0 and the
short-run aggregate supply curve is SRAS0, if there is a supply shock, such as a drastic
increase in the price of oil, this will cause _____ and a movement to a short-run
equilibrium at point _____.
A) a leftward shift in AD1; a
B) a rightward shift in AD1; c
C) a rightward shift in SRAS2; c
D) a leftward shift in SRAS2; a
14. Which three U.S. presidents implemented well-known tax cuts designed to stimulate
aggregate demand?
A) Bill Clinton, Ronald Reagan, and George H. W. Bush
B) John F. Kennedy, Ronald Reagan, and George W. Bush
C) John F. Kennedy, Ronald Reagan, and Bill Clinton
D) Bill Clinton, Ronald Reagan, and George W. Bush
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15. The $787 billion stimulus package passed in the United States in 2009 focused more on
spending than on taxes partly because:
A) increased spending leads to a larger increase in GDP than the same reduction in
taxes.
B) increased spending leads to a smaller increase in GDP than the same reduction in
taxes.
C) the government tax multiplier is more than the government spending multiplier.
D) the government revenue multiplier is about the same as the government tax
multiplier.
Use the following to answer question 16:
Figure: Effects of Policy Shifts
16. (Figure: Effects of Policy Shifts) If government spending increases, shifting aggregate
demand from _____ to _____, aggregate output will increase from _____ to _____.
A) AD1; AD0; Qf; Q0
B) AD1; AD0; Q0; Qf
C) AD0; AD1; Q0; Qf
D) AD0; AD1; Qf; Q0
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17. Which U.S. presidents reduced marginal tax rates to promote work and business risk
taking?
A) Obama and Reagan
B) Kennedy and Clinton
C) Reagan and Kennedy
D) Clinton and Obama
18. Figure: Laffer Curve
(Figure: Laffer Curve) The graph shows a hypothetical Laffer curve. If the tax rate is
80%:
A) the government should reduce the rate to about 50% to maximize tax revenue.
B) the tax rate should be increased to 100% (all income taken in taxes) to maximize tax
collection.
C) the tax rate is at its optimal level.
D) the tax rate should be reduced to zero to maximize tax revenue.
19. When a firm can _____ its capital equipment over a shorter period, it cuts its taxes _____.
A) appreciate; later
B) appreciate; now
C) depreciate; now
D) depreciate; later
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20. An automatic stabilizer:
A) injects money into the economy during booms.
B) extracts money from the economy during recessions.
C) is exemplified by a program such as unemployment compensation.
D) is exemplified by a program such as the Corps of Engineers dam-building program.
21. Which of the following illustrates the information lag?
A) The economy is predicted to increase at 0.1% in July, but the numbers are revised in
August to reflect an actual 2% decrease.
B) Current data have been provided to policymakers, but they decide to wait and see
what happens in the next quarter.
C) The government responds to the 2% decrease in the economy, and private
investment is crowded out of the investment market.
D) The government decides not to respond to the 2% decrease in the economy because
it is worried about the possibility of inflation.
22. Legislators debate for six months on which spending programs to utilize to manipulate the
business cycle. This is an example of the:
A) recognition lag.
B) information lag.
C) decision lag.
D) implementation lag.
23. The real life spending multiplier for the 2009 stimulus package was between:
A) 0 and 1.
B) 1 and 2.
C) 2 and 3.
D) 3 and 4.
24. The Federal Reserve can purchase ____ to fund fiscal policy, resulting in _____.
A) bonds; a decrease in the money supply
B) bonds; an increase in the money supply
C) money; a decrease in the bond supply
D) money; an increase in the bond supply
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25. Suppose the Treasury sells $10 billion worth of securities to the Social Security
Administration and $15 billion to the general public. This sale added ________ billion to
gross public debt and ________ billion to the debt held by the public.
A) $15; $15
B) $10; $15
C) $15; $25
D) $25; $15
26. Public debt owned by U.S. banks, corporations, mutual funds, pension plans, and
individuals is called ________ debt.
A) internally held
B) personal
C) proper
D) national
27. If interest rates rise, the burden of a nation's public debt will _____ and it will be _____
difficult to service its debt.
A) fall; less
B) fall; more
C) rise; less
D) rise; more
28. A higher interest rate __________ consumption, investment, and _____________, which
___________ aggregate demand
A) decreases; exports; decreases
B) decreases; imports; decreases
C) increases; exports; increases
D) increases; imports; increases
29. If the Fed pursues an expansionary monetary policy:
A) the dollar will rise.
B) U.S. imports from other countries will rise.
C) U.S. exports to other countries will rise.
D) aggregate supply will increase.
30. The housing bubble collapsed in:
A) 1988–1999.
B) 2001–2003.
C) 2004–2006.
D) 2007–2009.
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31. In times of economic downturn the Fed will engage in ____ monetary policy by ____
bonds.
A) contractionary; buying
B) contractionary; selling
C) expansionary; selling
D) expansionary; buying
32. Using the equation of exchange, if the money supply is $4 trillion, the price level is 2, and
the level of output (real GDP) is $6 trillion, then the velocity of money is ___.
A) 1.33
B) 2
C) 3
D) 12
33. In the equation of exchange, if M = $2 trillion, P = 1.5, and Q = $8 trillion:
A) the velocity of money (V) = 6.
B) nominal GDP is $16 trillion.
C) the velocity of money (V) = 4.
D) real GDP is $12 trillion.
34. Which of the following fiscal items is NOT a component in the equation of exchange in
classical economics?
A) price level
B) money supply
C) output of the economy
D) unemployment rate
35. The idea that a change in the money supply would affect prices but not real GDP is
associated with the:
A) monetary equivalence theory.
B) law of unintended consequences.
C) classical monetary transmission mechanism.
D) GDP impossibility rule.
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36. John has $100,000 in annual income but does not own his house or a car. Bob has
$100,000 in annual income and owns two houses and four cars. Which theorist would
predict that John spends a different proportion of his current income than Bob?
A) Milton Friedman
B) John Maynard Keynes
C) Irving Fisher
D) David Ricardo
37. The Fed engineered a recession to reduce out-of-control inflation under:
A) Arthur Burns.
B) Paul Volcker.
C) Alan Greenspan.
D) Ben Bernanke.
38. If the Federal Reserve tries to target inflation near 2%, the inflation rate is 2.1%, and
output is 4% below potential GDP, the target federal funds rate according to the Taylor
rule is:
A) 0.05%.
B) 2.1%.
C) 2.15%.
D) 4.15%.
39. If the Fed sets the federal funds rate equal to 2 plus the inflation rate plus one-half of the
inflation gap plus one-half of the output gap, it is following:
A) Friedman's monetary rule.
B) inflation targeting procedures.
C) monetary targeting procedures.
D) the Taylor rule.
40. _____ occurs when a central bank sets a target inflation rate and adjusts monetary policy
to keep inflation in that range.
A) Inflation targeting
B) The Friedman rule
C) The Taylor rule
D) A monetary rule
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ECO 2013 Principles of Macroeconomics - Summer B 2015
Practice Test #3 - Answer Key
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