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CHAPTER 9
AN INTRODUCTION TO BASIC
MACROECONOMIC MARKETS
1.
Which of the following is a correct statement?
a. Fiscal policy is the use of tax and spending policies by Congress and the president.
b. Fiscal policy involves the control of the money supply by the Federal Reserve Bank.
c. Monetary policy involves the control of the money supply by Congress and the
president.
d. Monetary policy is the use of tax and spending policies by the Federal Reserve Bank.
2.
The four key markets that coordinate the circular flow of income are
a. goods and services, resources, loanable funds, and foreign exchange.
b. consumption, investment, stock, and government.
c. government, household goods, bond, and business.
d. financial, corporate, stock, and loanable funds.
3.
If the price level in the current period is higher than what buyers and sellers anticipated,
a. profit margins will be unattractive and firms will expand output.
b. profit margins will be unattractive and firms will reduce output.
c. profit margins will be attractive and firms will expand output.
d. profit margins will be attractive and firms will reduce output.
4.
As the general price level in an economy rises, the aggregate quantity demanded of goods
and services falls because
a. the prices of domestic goods have risen relative to foreign goods, causing exports to
fall and imports to rise.
b. higher interest rates caused by an increase in the demand for money balances causes a
reduction in current investment and consumption.
c. the value of money will fall, reducing the real wealth and, thus, the consumption of
persons holding money balances.
d. all of the above are correct.
5.
(I) The short-run aggregate supply curve is upward sloping because the prices firms pay for
many resources are set by long-term contracts. Therefore, unexpected increases in product
prices lead to higher profits, which induce firms to expand output.
(II) The long-run aggregate supply curve is vertical because an economy’s sustainable
productive capacity is determined by its resource base, not by the price level.
a. I is true; II is false.
b. I is false; II is true.
c. Both I and II are true.
d. Both I and II are false.
6.
Long-run equilibrium in the goods and services market requires that
a. aggregate supply equals aggregate demand and that decision makers correctly
anticipate the level of prices.
b. the unemployment rate is zero.
c. prices are neither increasing nor decreasing.
d. aggregate supply be larger than aggregate demand.
7.
The resource market is important from a macroeconomic perspective because
a. it coordinates the allocation of productive resources and determines the costs of
production.
b. it determines the interest rates faced by borrowers and lenders.
c. inflation rates are set in the resource market by the government.
d. resource prices determine the position of the long-run aggregate supply curve.
8.
If the dollar price of the English pound goes from $1.50 to $1.75, the dollar has
a. appreciated, and Americans will find English goods cheaper.
b. appreciated, and Americans will find English goods more expensive.
c. depreciated, and Americans will find English goods cheaper.
d. depreciated, and Americans will find English goods more expensive.
9.
If the real interest rate in the domestic loanable funds market increases,
a. firms will have an added incentive to undertake investment projects.
b. households will save less.
c. the net inflow of foreign capital will tend to increase.
d. it will be cheaper to purchase goods and services now rather than in the future.
10.
When equilibrium is present in the foreign exchange market, which of the following will
tend to be in balance?
a. the value of goods exported and the value of goods imported
b. real and nominal interest rates
c. imports plus capital outflow and exports plus capital inflow
d. tax revenues and government expenditures
ANSWER KEY 1 THROUGH 10
1. (a), 2. (a), 3. (c), 4. (d), 5. (c), 6. (a), 7. (a), 8. (d), 9. (c), 10. (c)
CHAPTER 10
WORKING WITH OUR BASIC AGGREGATE
DEMAND AND AGGREGATE SUPPLY MODEL
1.
Which of the following would be most likely to cause an increase in current aggregate
demand in the United States?
a. increased fear that the U.S. economy was going into a recession
b. an increase in the real interest rate
c. sharp increase in the value of stocks owned by Americans
d. a recession in Canada, Mexico, and Western Europe
2.
Which of the following will most likely accompany an unanticipated increase in aggregate
demand?
a. an increase in real output
b. an increase in unemployment
c. a decrease in real GDP
d. a decrease in the demand for resources
3.
In the aggregate demand/aggregate supply model, when the output of an economy is less
than its long-run potential, the economy will experience
a. declining real wages and interest rates that will stimulate employment and real output.
b. rising interest rates that will stimulate aggregate demand and restore full employment.
c. a budget surplus that will stimulate demand and, thereby, help restore full employment.
d. rising real wages and real interest rates that will restore equilibrium at a higher price
level.
4.
Which of the following will most likely result from an unanticipated decrease in aggregate
supply due to unfavorable weather conditions in agricultural areas?
a. a decrease in inflation
b. a decrease in unemployment
c. an increase in the general level of prices
d. an increase in the natural rate of unemployment
5.
Which of the following will most likely increase aggregate supply in the long run?
a. unfavorable weather conditions in agricultural areas
b. an increase in the expected inflation rate
c. higher real interest rates
d. an increase in the rate of capital formation
6.
Within the AD/AS model, an unanticipated increase in short-run aggregate supply will
cause real output to
a. increase and the general level of prices to fall.
b. decrease and the general level of prices to rise.
c. increase and the general level of prices to rise.
d. decrease and the general level of prices to fall.
7.
An increase in the long-run aggregate supply curve indicates that
a. the natural rate of unemployment has increased.
b. unemployment has increased.
c. the general level of prices has increased.
d. potential real GDP has increased.
8.
If the general level of prices is lower than business decision makers anticipated when they
entered into long-term contracts for raw materials and other resources, which of the
following is most likely to occur?
a. an economic boom
b. highly attractive profit margins
c. output less than the economy’s long-run potential
d. a sharp increase in imports
9.
When output is less than the economy’s long-run capacity, which of the following is most
likely to occur?
a. an abnormally low rate of unemployment
b. reductions in real interest rates and real resource prices
c. a sharp increase in imports
d. a government budget surplus
10.
During the year 2000, there was a sharp reduction in stock prices and a sharp increase in the
world price of crude oil. Within the framework of the AD/AS model, how would these two
changes influence the U.S. economy?
a. The lower stock prices would increase SRAS, and the higher crude oil prices would
reduce AD; as a result, there would be downward pressure on the general level of
prices.
b. The lower stock prices would reduce SRAS, and the higher crude oil prices would
increase AD; as a result, there would be upward pressure on the general level of prices.
c. The lower stock prices would increase AD, and the higher crude oil prices would
increase SRAS; as a result, output would tend to increase.
d. The lower stock prices would reduce AD, and the higher crude oil prices would reduce
SRAS; as a result, output would tend to decline.
ANSWER KEY 1 THROUGH 10
1. (c), 2. (a), 3. (a), 4. (c), 5. (d), 6. (a), 7. (d), 8. (c), 9. (b), 10. (d)
CHAPTER 11
KEYNES AND THE EVOLUTION OF
MACROECONOMICS
1.
The multiplier principle indicates that if business decision makers become more optimistic about the
future and, as a result, increase their investment expenditures by $5 billion, real GDP will
a. increase by less than $5 billion if the economy was initially operating well below capacity.
b. increase by more than $5 billion if the economy was initially operating well below capacity.
c. increase by more than $5 billion if the economy was initially operating at full-employment
capacity.
d. decline if the marginal propensity to consume is less than 1.
2.
When the planned spending of consumers, businesses, government, and foreigners (net exports) is
less than the current level of output, the Keynesian model suggests that
a. the economy’s output will fall short of its potential.
b. prices will rise.
c. equilibrium real GDP will increase.
d. inventories will decline.
3.
Within the Keynesian model, if the output of an economy is less than the full-employment level,
a. a reduction in government expenditures will direct the economy back to full-employment
equilibrium.
b. a reduction in wage rates and resource prices will quickly restore full-employment equilibrium.
c. a reduction in the real interest rate will soon restore full-employment equilibrium.
d. output will tend to remain below full-employment capacity unless aggregate expenditures
increase.
4.
Which of the following is an important insight of Keynesian analysis?
a. Changes in output, as well as changes in prices, play a role in the macroeconomic adjustment
process.
b. When widespread unemployment is present, increases in aggregate demand will exert a larger
impact on real output than when the economy is operating at or near full employment.
c. Policies that effectively stabilize aggregate demand—that minimize abrupt changes in
demand—will substantially reduce economic instability.
d. All of the above are correct.
e. None of the above are correct.
5.
What is the major source of economic instability according to the Keynesian view of the business
cycle?
a. errors made by policymakers
b. wide fluctuations in private investment
c. wide fluctuations in private consumption
d. wide fluctuations in imports relative to exports
ANSWER KEY 1 THROUGH 10
1. (b), 2. (a), 3. (d), 4. (d), 5. (b)
CHAPTER 12
FISCAL POLICY
1.
When government expenditures exceed revenue from all sources,
a. a budget deficit is present.
b. the supply of money will increase.
c. the government’s outstanding debt will decline.
d. all of the above are true.
2.
According to the Keynesian view, which of the following would most likely decrease
aggregate demand?
a. a decrease in tax rates
b. a decrease in government expenditures
c. an increase in transfer payments
d. an increase in the budget deficit
3.
Automatic stabilizers are government programs that tend to
a. increase the ups and downs in aggregate demand without legislative action.
b. bring expenditures and revenues automatically into balance without legislative action.
c. shift the budget toward a deficit when the economy slows but shift it toward a surplus
during an expansion.
d. increase tax collections automatically during a recession.
4.
Keynesian analysis implies that a planned expansion in the size of the budget deficit is
a. always necessary to ensure full employment.
b. proper during slack economic conditions but highly inappropriate if the economy is
already operating at capacity.
c. of little consequence unless there is a corresponding change in the money supply.
d. an effective method of dealing with inflation.
5.
Which of the following is true?
a. Inability to forecast the future and political delays reduce the effectiveness of fiscal
policy as a stabilization tool.
b. Legislative action is necessary if automatic stabilizers are going to smooth the ups and
downs of the business cycle.
c. The crowding-out effect indicates that the expectation of higher future tax rates will
undermine the potency of expansionary fiscal policy.
d. The new classical theory indicates that higher real interest rates will undermine the
potency of expansionary fiscal policy.
6.
The crowding-out effect suggests that
a. expansionary fiscal policy causes inflation.
b. restrictive fiscal policy is an effective weapon against inflation.
c. a reduction in private spending that results from higher interest rates caused by a
budget deficit will largely offset the expansionary effects of the deficit.
d. a tax reduction financed by borrowing will increase the disposable income of
households and, thereby, lead to a strong expansion in aggregate demand, output, and
employment.
7.
The supply-side effects of a reduction in taxes are the result of
a. increases in the disposable income of households accompanying reductions in tax
rates.
b. the stimulus effects of increases in government expenditures.
c. increased attractiveness of productive activity relative to leisure and tax avoidance.
d. reductions in interest rates that generally accompany expansionary fiscal policy.
8.
The new classical model implies that substitution of debt for tax financing
a. increases aggregate demand and exerts an expansionary effect on real output.
b. is highly effective against inflation.
c. reduces savings because it increases both the current and future tax liability of
households.
d. leaves wealth, and therefore aggregate demand, unchanged because the debt will
require higher future tax rates.
9.
If a fiscal policy change is going to exert a stabilizing impact on the economy, it must
a. add demand stimulus during a slowdown but restraint during an economic boom.
b. exert an expansionary impact during all phases of the business cycle.
c. restrain aggregate demand during all phases of the business cycle.
d. keep the government’s budget in balance.
10.
Since 1986, the top marginal personal income tax rate has been 40 percent or less compared
to 70 percent or more prior to 1981. During the last 15 years, the share of personal income
taxes collected from high income taxpayers
a. has declined sharply.
b. has been virtually unchanged.
c. has increased.
d. rose prior to the capital gains tax cut of 1997, but has fallen sharply since that time.
ANSWER KEY 1 THROUGH 10
1. (a), 2. (b), 3. (c), 4. (b), 5. (a), 6. (c), 7. (c), 8. (d), 9. (a), 10. (c)