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Unit Seven
Practice Quiz
1. A graph of the LR aggregate supply curve is;
a. Down sloping, and a graph of the SRAS is up sloping.
b. Up sloping, and a graph of the SRAS is vertical.
c. Up sloping, and a graph of the SRAS is down sloping.
d. Vertical, a graph of the SRAS is up sloping.
e. Vertical, a graph of the SRAS is down sloping.
2. In the extended AS/AD model, demand pull inflation occurs because of;
a. An increase in AD, resulting in a decrease in the SRAS curve.
b. An increase in nominal wages, resulting in an increase in the SRAS
curve.
c. A decrease in nominal wages, resulting in a decrease in the SRAS
curve.
d. An increase in nominal wages, resulting in a decrease in the SRAS
curve.
e. None of the above are right.
3. Which condition best defines equilibrium in the extended AS/AD
model?
a. AD + SRAS = LRAS
b. AD > SRAS > LRAS > FE
c. AD< SRAS < LRAS < FE
d. AD + LRAS = SRAS
e. AD = SRAS = LRAS = FE
4. What will occur in the short run if there is cost push inflation and the
government adopts a hands-off approach to it?
a. High unemployment and a loss of real output.
b. An increase in LRAS.
c. A decrease in LRAS.
d. Low unemployment and a loss of real output.
e. Low unemployment an a gain in real output.
5. If prices and wages are flexible, then a recession due to decrease AD
will;
a. Increase the price level.
b. Decrease the price level.
c. Increase the interest rate.
d. Increase net exports.
e. Decrease the interest rate.
6. The traditional Phillips Curve is based on the idea that with a constant
SRAS curve, the larger the increase in AD;
a. The less the increase in real output and the higher the rate of inflation.
b. The greater the increase in real output and the higher the rate of
inflation.
c. The greater the increase in real output and the lower the rate of
inflation.
d. The less the increase in real output and the lower the rate of inflation.
e. The greater the rate of AS the greater the rate of unemployment.
7. A rightward shift of the Phillips Curve suggest that;
a. A higher rate of unemployment is associated with each inflation rate.
b. A lower rate of unemployment is associated with each inflation rate.
c. The SRAS curve has also shifted to the right.
d. The AD curve has shifted to the left.
e. The AD curve has also shifted to the right.
8. Adverse aggregate supply shocks would result in;
a. A lower rate of inflation and a higher rate of unemployment.
b. A higher rate of inflation and a lower rate of unemployment.
c. A higher rate of inflation and a higher rate of unemployment.
d. A lower rate of inflation and a lower rate of unemployment.
e. Expansionary fiscal policy or easy money monetary policy.
9. A decline in the per-unit cost of production will shift the;
a. SRAS curve rightward.
b. SRAS curve leftward.
c. LRAS curve leftward.
d. AD curve rightward.
e. AD curve leftward.
10. Assuming that contracts between workers and employers call for an
increase in the nominal wage rate of 5 percent, and that such request
are based on an expected inflation rate of 3 percent, then if inflation
was to actually rise 6 percent what would occur?
a. Nominal wages fall by 5 percent.
b. Real wages fall by 6 percent.
c. Nominal wages fall by 1 percent.
d. Real wages fall by 1 percent..
e. Nominal wages fall by 6 percent.
11. Supply-side economists contend that with the U.S. system
of taxation:
A) a rise in taxes will decrease unemployment.
B) a cut in taxes will increase incentives to save.
C) a cut in taxes will increase transfer payments.
D) a rise in taxes will increase real GDP.
E) a cut in taxes will have no effect upon govt.
revenue.
12. Assume that a person saves $50,000 and earns 7 percent
annual interest. If the marginal tax rate is 36 percent, then
the after-tax interest rate will be:
A) 3.5 percent.
B) 4.0 percent.
C) 4.9 percent.
D) 5.5 percent.
E) 6.5 percent.
13. A criticism of cuts in marginal tax rates is that they fail to:
A)
B)
C)
decrease disinflation in the economy.
decrease demand-pull inflation in the economy.
increase aggregate supply more rapidly than
aggregate demand.
D) increase aggregate demand more rapidly than
aggregate supply.
E) Increase cost push inflation in the economy.
14. How is the public debt calculated?
A) by adding up consumption, investment,
government purchases, and net exports and then
cumulating the annual totals over the years of the nation
B) by subtracting consumption and investment from
government spending each year and then cumulating the
annual totals over the years of the nation
C) by subtracting current government spending from current
government tax revenues
D) by adding up the difference between annual government
tax revenues and annual government spending and
cumulating the differences over the years of the nation
E) You know, I’m really tired of typing for this question.
15. A cyclically balanced budget philosophy would:
A)
lower taxes and increase government spending during a
recession.
B) raise taxes and increase government spending during a
recession.
C) raise taxes and decrease government spending during a
recession.
D) lower taxes and decrease government spending during a
recession.
E) lower taxes and decrease government spending during an
inflationary period.
16. One major criticism of the balanced-budget amendment is that the
amendment would:
A) give greater control of economic policy to the U.S.
Congress.
B) contribute to inflationary pressure in the economy.
C) undermine the built-in stability of the current fiscal system.
D) reduce the pressure on government to "tax and spend"
and "spend and tax.“
E) give greater control of economic policy to the Fed.
17. From 1995 to 2000, the public debt relative to GDP:
A)
B)
C)
D)
E)
Increased.
Decreased.
Increased then decreased.
Decreased then increased.
Stayed about the same.
18. Incurring an internal debt to finance a war does not pass the cost of
the war on to future generations because:
A) The opportunity cost of the wartime expenditures will be borne by
the generation that live during the war.
B) The Federal government can shift expenditures from military
goods to the production of other public goods.
C) The Federal government has the power to levy taxes to pay its
debts.
D) Wartime inflation reduces the relative size of the public debt.
E) Wartime economies tend to be larger thus more wealth and able to
absorb the extra debt.
19. A person states that: “A large public debt will bankrupt the United
States government.” An economist is likely to respond:
A) Yes, because a large public debt means that the U.S. government
will not be able to meet its financial obligations.
B) Yes, because the public debt will reduce our ability to borrow the
necessary funds from foreign nations.
C) No, because the government can refinance the public debt by
selling new bonds to pay off holders of maturing bonds.
D) No, because most of the public debt is held by foreign nations and
they would prefer to refinance the debt.
E) No, because most of the public debt is held by American citizens
who will forgive the debt in a time of crisis.
20. The crowding-out effect of borrowing to finance the public debt:
A) Decreases current spending for private investment.
B) Increases the privately owned stock of real capital.
C) Decreases the economic burden on future generations.
D) Increases incentives to work and save.
E) Increases foreign investors financing the public debt.
21. Assume that the multiplier is 2. If the amount of saving done at full
employment increased by $12 billion and the amount of private
borrowing increased by $5 billion, then to maintain full employment,
the public debt would have to increase by:
A) $2 billion.
B) $5 billion.
C) $7 billion.
D) $10 billion.
E) $24 billion.
22. One of the major changes in the Deficit Reduction Act of 1993 was to
increase:
A) Excise taxes by 30 percent on a range of products in the
economy.
B) Taxes on luxury items such as yachts, airplanes, and autos.
C) The marginal income tax rate on personal income from 31 to 39.6
percent.
D) The level of income subject to social security taxation and the rate
of social security taxation.
E) None of the above are correct.
23. Given a fixed money supply, paying down all or part of the public debt
would cause the demand for money to:
A) Increase and the real interest rate to fall.
B) Increase and the real interest rate to rise.
C) Decrease and the real interest rate to fall.
D) Decrease and the real interest rate to rise.
E) Decrease and the money supply to rise.
24. If the amount of money in circulation is $8 billion and the value of total
output is $40 billion in an economy, the:
A) Money supply is $40 billion.
B) Level of the price index is 320.
C) Equilibrium level of GDP is $320 billion.
D) M2 money is $8 billion.
E) Velocity of money is 5.
25. The problem with trying to balance the budget over the business
cycle is that:
A) The upswings and downswings of the business cycle may not be
of equal magnitude and duration to balance the budget over the
cycle.
B) This typically results in a budget surplus and becomes a drag on
the economy as it moves into recession.
C) This exerts a procyclical force on the economy that will have a
negative effect on unemployment or inflation.
D) The business cycle has to occur over only a one-year period so
that the budget will also be in annual balance.
E) It is extremely hard to predict the length of business cycles.