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Miami Dade College
2013.007 Principles of Macroeconomics - Spring 2016
Practice Test #3
Use the following to answer question 1:
Income
$0
$1,000
$2,000
$3,000
$4,000
Consumption
$500
$1,250
$2,000
$2,750
$3,500
1. (Table) The table shows data on consumption at various levels of income. The value of
the average propensity to consume at equilibrium is:
A) 1.25.
B) 1.
C) 0.917.
D) 0.875.
2. If consumption decreases from $600 billion to $575 billion and the marginal propensity to
consume is 0.8, then equilibrium income will:
A) fall by $25 billion.
B) fall by $125 billion.
C) rise by $25 billion.
D) rise by $125 billion.
3. If the marginal propensity to consume is 0.9 and income increases from $10,000 to
$11,000, by how much does consumption increase?
A) $11,000
B) $1,000
C) $900
D) $100
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4. Suppose the government believes consumers should spend $1 billion more to get the
economy out of a recession. The government wants to provide income to households by
providing them with jobs and paying them directly. If the marginal propensity to consume
is 0.8, the government should increase income by:
A) $0.8 billion
B) $1 billion.
C) $0.2 billion.
D) This cannot be determined with the information given.
5. If the marginal propensity to consume is 0.9, what is the size of the multiplier?
A) 9
B) 0.1
C) 1
D) 10
6. In the simple Keynesian model with no government and foreign sectors, suppose that
initially the economy is in equilibrium at an output of $10 trillion with a marginal
propensity to consume of 0.8. If investment spending increases by $0.5 trillion, what is
the new equilibrium output level?
A) $10.5 trillion
B) $12.5 trillion
C) $12.0 trillion
D) $10.8 trillion
7. Assume that the multiplier is 10. Full employment is considered to be at a GDP level of
$500 billion. The current GDP is $400 billion. According to Keynesian macroeconomics,
what should the government do to achieve full employment?
A) increase spending by $25 billion
B) increase spending by $10 billion
C) reduce spending by $25 billion
D) reduce spending by $100 billion
8. Disposable income equals:
A) income minus government spending.
B) income minus taxes.
C) income plus government spending.
D) income plus taxes.
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9. Suppose full employment real GDP is $12 trillion, current real GDP is $11 trillion, and
the marginal propensity to consume is 0.8. The recessionary gap is:
A) $1 trillion.
B) $0.8 trillion.
C) $0.2 trillion.
D) $0.5 trillion.
10. In the nation of Economia, the economy is overheating and there is danger of inflation.
The chief economist estimates that current income is $50 billion, while the optimal level
is $40 billion. The multiplier is 4. If government wants to close the inflationary gap, it
should reduce government spending by:
A) $10 billion.
B) $7.5 billion.
C) $40 billion.
D) $2.5 billion.
11. Which of the following events will shift the aggregate demand curve to the right?
A) a catastrophic hurricane hitting the northeastern United States
B) an increase in household debt
C) decreased taxes
D) decrease in military spending
12. Increased taxes will shift the aggregate demand curve to the _____ and _____ output
demanded.
A) left; decrease
B) left; increase
C) right; increase
D) right; decrease
13. The Potbelly Pothole Company is undertaking some investment in its plant. Suppose
interest rates fall and new technologies increase the return on its investment. What is
likely to happen?
A) The company's demand for investment will fall.
B) There will be no change in the company's demand for investment.
C) The company's demand for investment will first fall as interest rates fall and then rise
as technology improves.
D) The company's demand for investment will rise.
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14. A(n) _______ in oil prices and a(n) _______ in taxes will shift short-run aggregate supply
to the left.
A) increase; increase
B) increase; reduction
C) reduction; increase
D) reduction; reduction
15. (Figure: Determining SRAS Shifts)
If the government raises taxes or increases regulations, the short-run aggregate supply
curve will shift from SRAS0 to _____ and the price level will be at _____.
A) SRAS1; P0
B) SRAS1; P1
C) SRAS2; P1
D) SRAS2; P2
16. If a pill is discovered that allows people to work twice as fast as they would ordinarily
work, then the aggregate supply curve will:
A) shift to the left.
B) shift to the right.
C) not change.
D) become vertical.
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17. (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
18. Demand-pull inflation scenarios took place in the:
A) 1960s for the United States and from 1985 to 1995 for Japan.
B) 1930s for the United States and from 1985 to 1995 for Japan.
C) 1960s for the United States and in the 1930s for Japan.
D) 1930s for both the United States and Japan.
19. 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
20. What would cause the price level to decrease and employment to increase?
A) a shift to the left of the AD curve
B) a shift to the right of the AD curve
C) a shift to the left of the SRAS curve
D) a shift to the right of the SRAS curve
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21. __________ government spending, _____ transfer payments, and ____ taxes are all
examples of contractionary fiscal policy.
A) Reducing; increasing; raising
B) Reducing; reducing; raising
C) Reducing; reducing; reducing
D) Raising; increasing; raising
Use the following to answer question 22:
Figure: Effects of Policy Shifts
22. (Figure: Effects of Policy Shifts) If the economy starts below full employment, an
expansionary fiscal policy will move the aggregate demand curve from _____ to _____,
and the equilibrium will move from _____ to _____.
A) AD1; AD0; a; b
B) AD1; AD0; b; a
C) AD0; AD1; b; a
D) AD0; AD1; a; b
23. __________ government spending, _____ transfer payments, and ____ taxes are all
examples of expansionary fiscal policy.
A) Increasing; increasing; lowering
B) Increasing; reducing; raising
C) Reducing; increasing; lowering
D) Reducing; increasing; raising
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24. The Laffer curve has which variables on its axes?
A) price and quantity
B) CPI and GDP
C) tax rates and tax revenue
D) aggregate expenditure and income
25. Which economist promoted the idea that reducing tax rates can increase tax revenue?
A) Robert Solow
B) Adam Smith
C) James Buchanan
D) Arthur Laffer
26. Figure: Laffer Curve 3
(Figure: Laffer Curve 3) A supply-side economist is advocating reducing income tax
rates. She is probably assuming that the economy is at point ______ in the graph.
A) a
B) b
C) c
D) d
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27. 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.
28. Which economist promoted public choice theory?
A) Robert Solow
B) Adam Smith
C) James Buchanan
D) Arthur Laffer
29. As GDP decreases, tax revenues _____, causing a _______ to aggregate demand.
A) decline; restraint
B) decline; stimulus
C) increase; restraint
D) increase; stimulus
30. U.S. interest on its national debt, measured as a percentage of GDP, fell during ____ and
rose during the _____.
A) 1950s; 1980s
B) 1960s; 1990s
C) 1990s; 1980s
D) 1980s; 1990s
31. Automatic stabilizers are most associated with the ______ balanced budget.
A) cyclically
B) annually
C) continually
D) functionally
32. If interest rates fall, 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
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33. The crowding out effect recognizes that if the government sells bonds to finance
spending, it can cause interest rates to ___________ investment.
A) fall, reducing
B) fall, stimulating
C) rise, reducing
D) rise, stimulating
34. Which is an example of money being used as a store of value?
A) A customer buys a burger, fries, and medium diet cola for $6.95.
B) A restaurant's profits for the week of October 3 to October 10 are $1,250.
C) A customer receives $3.05 in change and returns the next day to make another
purchase.
D) A restaurant sells a large ice cream sundae and charges the customer's debit card.
35. The U.S. General Accounting Office (GAO) has concluded that ___________ would help
the introduction of a dollar coin be successful.
A) subsidizing businesses that accept bills to help them transfer over to coins
B) removing the dollar bill from circulation
C) choosing a well-known public figure for the heads side of the coin
D) rounding prices to the nearest dollar
36. If Jack Sparrow buries a chest of gold bullion on a deserted island and plans to come back
later, then the gold is functioning as a:
A) unit of account.
B) store of value.
C) medium of exchange.
D) barter tool.
37. Checking accounts are counted as part of:
A) M1 only.
B) M3 only.
C) M2 and M3.
D) M1 and M2.
38. Corporate bonds generally have a _____ return on investment than do checking deposits
because they are _____.
A) higher; less risky
B) higher; riskier
C) lower; less risky
D) lower; riskier
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39. The reward for saving is called ____, and this variable is placed on the _____ axis of the
loanable funds market graph.
A) interest; horizontal
B) interest; vertical
C) investment; horizontal
D) investment; vertical
40. Suppose while households are deciding to increase saving, the demand by firms for
investment funds falls. In the market for loanable funds the real interest rate will ___ and
the quantity of loanable funds will _____.
A) rise; fall
B) rise; rise
C) fall; rise, fall, or stay the same
D) rise, fall, or stay the same; rise.
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2013.007 Principles of Macroeconomics - Spring 2016
Practice Test #3 - Answer Key
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B
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