Download test ad as part i answers

Name: _____________________________
Date: _____________
Part I: Multiple Choice (2 points each)
1. Discretionary fiscal policy may fail to stabilize the economy or even make the economy less stable due to:
1. its ineffectiveness.
2. government waste.
3. lags in deciding and implementing policy changes.
4. the business cycle.
5. the absence of the multiplier.
2. If aggregate demand exceeds aggregate supply at a full-employment level of national income then according to
Keynesian theory
1. The economy is in an expansionary gap and the government should take action to increase aggregate demand
2. The economy is in an expansionary gap and the government should take action to decrease aggregate demand
3. The economy is in a contractionary gap and the government should take action to decrease aggregate demand
4. The economy is in a contractionary gap and the government should take action to increase aggregate demand
5. The economy is in long-run equilibrium and market forces should be allowed to function without interference
3. An increase in energy costs will most likely cause the price level and real GDP to change in which of the following
ways?
PRICE LEVEL
REAL GDP
1. increase
increase
2. increase
decrease
3. increase
not change
4. decrease
increase
5. decrease
decrease
4. If income increases by $100 and consumption increases by $75, the MPC equals
1. ¼
2. 1/5
3. ½
4. ¾
5. 3/5
5. If the government increases spending by $100 billion when the MPC is.8, total national expenditures should increase by
1. $100 billion
2. $800 billion
3. $500 billion
4. $125 billion
5. $600 billion
6. An increase in which of the following would cause an increase in aggregate supply?
1. labor productivity
2. the wage rate
3. prices of imports
4. consumer spending
5. interest rates
7. If the government wants to close an expansionary (inflationary) gap of $200 billion and the MPC is .5, how much should
the government reduce spending by?
1. $1 trillion
2. $ 200 billion
3. $ 300 billion
4. $100 billion
5. $ 50 billion
8. Under which of the following conditions would consumer spending most likely increase?
1. Consumers have large unpaid balances on their credit cards
2. Consumers’ wealth is increased by changes in the stock market
3. The government encourages consumers to increase their savings
4. Social Security taxes are increased
5. Consumers believe they will not receive pay increases next year
9. If the government wants to close a recessionary gap of $500 billion and the MPC is .8, how much should the government
cut taxes by?
1.
2.
3.
4.
5.
$1 trillion
$ 50 billion
$ 125 billion
$100 billion
$ 250 billion
10. Assume that the marginal propensity to consume is 0.8, and potential output is $800 billion. If current real GDP is $850
billion, which of the following policies would bring the economy to potential output.
1. Increase taxes by $50 billion.
2. Increase taxes by $10 billion.
3. Increase taxes by $12.5 billion.
4. Increase transfers by $12.5 billion.
5. Increase government spending by $10 billion.
11. In an economy at full employment, a presidential candidate proposes cutting the government debt in half in
four years by increasing income tax rates and reducing government expenditures. According to Keynesian theory,
implementation of these policies is most likely to increase
1.
2.
3.
4.
5.
unemployment
consumer prices
aggregate demand
aggregate supply
the rate of economic growth
12. The fact that tax receipts (taxes received) fall during a recession:
1. makes the multiplier stronger.
2. has no impact on the multiplier.
3. reduces the adverse effect of the initial fall in aggregate demand.
4. acts as an automatic contractionary fiscal policy.
5. reduces consumption and investment spending.
13. If the MPC is 0.9, then the tax multiplier is:
1. 0.1
2. 1.11
3. 9
4. 10
5. 5
14. Automatic stabilizers act like:
1. automatic expansionary fiscal policy when the economy is in an inflationary gap.
2. automatic expansionary fiscal policy when the economy is in a recessionary gap.
3. an additional multiplier effect.
4. automatic contractionary policy when the economy is in a recessionary gap.
5. automatic budget balancing policies when the economy is in a recession.
15. In the long run, nominal wages are:
1. sticky downward but flexible in an upward direction.
2. sticky upward but flexible in a downward direction.
3. sticky in both an upward and downward direction.
4. flexible because contracts and informal agreements are renegotiated in the long run.
5. flexible because the government adjusts disequilibrium in labor markets.
16. A adverse supply shock would most likely result in
1. an increase in aggregate demand
2. an increase in national income
3. an increase in GDP
4. a decrease in the general price level
5. a decrease in employment
17. Which of the following is true if the economy is producing at the full-employment level of output?
1. The unemployment rate is zero
2. No person is receiving unemployment compensation from the government
3. There is frictional unemployment
4. The government’s budget is balanced
5. The balance of trade is in equilibrium
18. What resulted from the increases in oil prices of the 1970s?
1. Aggregate demand decreased, causing cost-push inflation
2. Aggregate demand increased, causing demand-pull inflation
3. Aggregate supply increased, causing demand-pull inflation
4. Aggregate supply increased, causing cost-push inflation
5. Aggregate supply decreased, causing cost-push inflation
19. The classical economists argued that involuntary unemployment would be eliminated by
1. increasing government spending to increase aggregate demand
2. increasing the money supply to stimulate investment spending
3. self-correcting market forces stemming from flexible prices and wages
4. maintaining the growth of money at a constant rate
5. decreasing corporate income taxes to encourage investment
20. An increase in which of the following is consistent with a rightward shift in LRAS?
1. beneficial supply shock
2. new technology
3. early retirement incentives
4. increased demand
5. increased interest rates