An increase in energy costs will most likely cause the price level and real GDP to change in which of the following ways?

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

a. increase increase
b. increase decrease
c. increase not change
d. decrease increase
e. decrease decrease

Answer: B

If crowding out only partially offsets the effects of a tax cut, which of the following changes in interest rates and GDP are most likely to occur.

If crowding out only partially offsets the effects of a tax cut, which of the following changes in interest rates and GDP are most likely to occur.

Interest Rates GDP


a. Increase Increase
b. Increase Remain unchanged
c. Increase Decrease
d. Remain unchanged Increase
e. Decrease Decrease

Answer: A

If there is a decrease in the short-run aggregate supply curve and no changes in monetary and fiscal policies are implemented, the economy over time will

If there is a decrease in the short-run aggregate supply curve and no changes in monetary and fiscal policies are implemented, the economy over time will

A. Remain at the new price and output level.
B. Continue to have rising prices and decreasing real GDP.
C. Experience increasing nominal wages.
D. Return to the original output and price level.
E. Experience a leftward shift in the aggregate demand curve.

Answer: D

One of the reasons the aggregate demand curve is downward sloping is that as the value of cash balances decreases, aggregate spending decreases. This is called

One of the reasons the aggregate demand curve is downward sloping is that as the value of cash balances decreases, aggregate spending decreases. This is called

(A) a positive externality.
(B) a negative spillover.
(C) the Pareto effect.
(D) the substitution effect.
(E) the real-balance effect.

Answer: E

An increase in personal income taxes will most likely result in which of the following changes in real GDP and the price level in the short-run?

An increase in personal income taxes will most likely result in which of the following changes in real GDP and the price level in the short-run?

Real GDP Price Level



A. Decrease Decrease
B. Decrease Increase
C. Increase No change
D. Increase Increase
E. Increase No change

Answer: A

If the marginal propensity to consume is two-thirds, then an increase in personal income taxes of $100 will most likely result in

If the marginal propensity to consume is two-thirds, then an increase in personal income taxes of $100 will most likely result in

A. A decrease in consumption of $100.
B. A decrease in autonomous investment of $100.
C. A decrease in consumption of $67 and an increase in savings of $33.
D. A decrease in consumption of $67 and a decrease in savings of $33.
E. An increase in government spending of more than $100.

Answer: E

A rapid increase in successful research and development projects for the nation will most likely result in which of the following changes in the short-run and the long-run aggregate supply curves and the production possibilities curve?

A rapid increase in successful research and development projects for the nation will most likely result in which of the following changes in the short-run and the long-run aggregate supply curves and the production possibilities curve?

SRAS LRAS Pro.Poss



A. Decrease No change No change
B. Decrease Decrease Shift inward
C. Increase No change Shift inward
D. Increase Increase No change
E. Increase Increase Shift outward

Answer: E

Which of the following will occur as a result of an improvement in technology?

Which of the following will occur as a result of an improvement in technology?

(A) The aggregate demand curve will shift to the right
(B) The aggregate demand curve will shift to the left
(C) The aggregate supply curve will shift to the right
(D) The aggregate supply curve will shift to the left
(E) The production possibilities curve will shift inward

Answer: C

Which of the following best explains how an economy could simultaneously experience high inflation and high unemployment?

Which of the following best explains how an economy could simultaneously experience high inflation and high unemployment?

(A) The government increases spending without increasing taxes.
(B) The government increases taxes without increasing spending.
(C) Inflationary expectations decline.
(D) Women and teen-agers stay out of the labor force.
(E) Negative supply shocks cause factor prices to increase.

Answer: E

The diagram above shows two aggregate supply curves, AS1 and AS2. Which of the following statements most accurately characterizes the AS1 curve relative to the AS2 curve?

The diagram above shows two aggregate supply curves, AS1 and AS2. Which of the following statements most accurately characterizes the AS1 curve relative to the AS2 curve?

(A) AS1 is Keynesian because it reflects greater wage and price flexibility.
(B) AS1 is classical because it reflects greater wage and price flexibility.
(C) AS1 is Keynesian because it reflects less wage and price flexibility.
(D) AS1 is classical because it reflects less wage and price flexibility.
(E) AS1 could be either classical or Keynesian because it reflects greater

Answer: C

Which of the following arguments is typically associated with classical economists?

Which of the following arguments is typically associated with classical economists?

(A) A market economy is self-correcting and thus will not remain in a recession indefinitely
(B) A market economy has stable prices and thus is usually free from inflation
(C) A market economy requires a strong government to ensure that the market meets the needs of the people
(D) A market economy needs only moderate assistance from the government to avoid an extended recession
(E) A market economy eventually results in monopolies in both the input and output markets

Answer: A

In the Keynesian aggregate-expenditure model, if the MPC is 0.75 and gross investment increases by $6 billion, equilibrium GDP will increase by

In the Keynesian aggregate-expenditure model, if the MPC is 0.75 and gross investment increases by $6 billion, equilibrium GDP will increase by

(A) $6 billion.
(B) $8 billion.
(C) $12 billion.
(D) $24 billion.
(E) $42 billion.

Answer: D

If Maria Escalera disposable income increases from $600 to $650 and her level of personal consumption expenditures increase from $480 to $520, you may conclude that her marginal propensity to

If Maria Escalera disposable income increases from $600 to $650 and her level of personal consumption expenditures increase from $480 to $520, you may conclude that her marginal propensity to

(A) consume is 0.8.
(B) consume is 0.4.
(C) consume is 0.25.
(D) save is 0.8.
(E) save is 0.25.

Answer: A

An increase in labor productivity would most likely cause real gross domestic product and the price level to change in which of the following ways?

An increase in labor productivity would most likely cause real gross domestic product and the price level to change in which of the following ways?

Real GDP, Price Level




(A) Increase, Increase
(B) Increase, Decrease
(C) Increase, No change
(D) Decrease, Increase
(E) Decrease, No change

Answer: B

If, in response to an increase in investment of $10 billion, equilibrium income rises by a total of $50 billion, then the marginal propensity to save is

If, in response to an increase in investment of $10 billion, equilibrium income rises by a total of $50 billion, then the marginal propensity to save is

(A) 0.1
(B) 0.2
(C) 0.5
(D) 0.8
(E) 0.9

Answer: B

Crowding out due to government borrowing occurs when

Crowding out due to government borrowing occurs when

a. lower interest rates increase private sector investment
b. lower interest rates decrease private sector investment
c. higher interest rates decrease private sector investment
d. a smaller money supply increases private sector investment
e. a larger money supply increases private sector investment

Answer: C

Assume the aggregate supply curve is upward sloping and the economy is in a recession. If the government increases both taxes and government spending by $25 billion, the price level and real GDP will most likely change in which of the following ways?

Assume the aggregate supply curve is upward sloping and the economy is in a recession. If the government increases both taxes and government spending by $25 billion, the price level and real GDP will most likely change in which of the following ways?

Price Level Real GDP





A. Increase Increase
B. Increase Decrease
C. Increase No change
D. Decrease Decrease
E. Decrease No change

Answer: A

In which of the following ways will increases in short-run aggregate supply change the price level and unemployment? Price Level Unemployment

In which of the following ways will increases in short-run aggregate supply change the price level and unemployment?
Price Level Unemployment

A. Increase No change
B. Decrease Decrease
C. Decrease Increase
D. Decrease No change
E. No change Increase

Answer: B

The value of the spending multiplier decreases when

The value of the spending multiplier decreases when

(A) tax rate are reduced
(B) exports decline
(C) imports decline
(D) government spending increases
(E) the marginal propensity to save increases

Answer: E

An aggregate supply curve may be horizontal over some range because within that range

An aggregate supply curve may be horizontal over some range because within that range

(A) a higher price level leads to higher interest rates, which reduce the money supply and consumer spending
(B) changes in the aggregate price level do not induce substitution
(C) output cannot be increased unless prices and interest rates increase
(D) rigid prices prevent employment from fluctuating
(E) resources are underemployed and an increase in demand will be satisfied without any pressure on the price level

Answer: E

In order to be called an automatic, or built-in, stabilizer, which of the following must taxes automatically do in a recessionary period and in an inflationary period? Recessionary Period Inflationary Period

In order to be called an automatic, or built-in, stabilizer, which of the following must taxes automatically do in a recessionary period and in an inflationary period?
Recessionary Period Inflationary Period

(A) Decrease, Decrease
(B) Decrease, Increase
(C) Increase, Decrease
(D) Increase, Increase
(E) No change, No change

Answer: B

Automatic stabilizers in the economy include which of the following?

Automatic stabilizers in the economy include which of the following?

I. A progressive personal income tax
II. Unemployment compensation
III. Congressional action that increases tax rates



(A) I only
(B) II only
(C) III only
(D) I and II only
(E) I and III only

Answer: D

Which of the following best explains why equilibrium income will rise by more than $100 in response to a $100 increase in government spending?

Which of the following best explains why equilibrium income will rise by more than $100 in response to a $100 increase in government spending?

(A) Incomes will rise, resulting in a tax decrease.
(B) Incomes will rise, resulting in higher consumption.
(C) The increased spending raises the aggregates price level.
(D) The increased spending increases the money supply, lowering interest rates.
(E) The higher budget deficit reduces investment.

Answer: B

A decrease in lump-sum personal income taxes will most likely result in an increase in real GDP because which of the following occurs?

A decrease in lump-sum personal income taxes will most likely result in an increase in real GDP because which of the following occurs?

I. Government spending decreases to maintain a balanced budget.
II. Consumption spending increases because disposable personal income increases.
III. Investment spending decreases because disposable personal income increases.



(A) I only
(B) II only
(C) III only
(D) I and III only
(E) I, II and III

Answer: B

A severe, sustained increase in oil prices would most likely cause short-run and long-run aggregate supply curves and the production possibilities curve to change in which of the following ways? SRASC LRASC PPC

A severe, sustained increase in oil prices would most likely cause short-run and long-run aggregate supply curves and the production possibilities curve to change in which of the following ways?
SRASC LRASC PPC

(A) Decrease No change Shift outward
(B) Decrease Decrease Shift outward
(C) Decrease Decrease Shift inward
(D) Increase No change No change
(E) Increase Increase Shift inward

Answer: C

As the average price level decreases, the purchasing power of people's cash balances increases. This results in an increase in spending. This effect is called

As the average price level decreases, the purchasing power of people's cash balances increases. This results in an increase in spending. This effect is called

(A) the Laffer effect
(B) the Keynesian effect
(C) the money illusion effect
(D) the real-balance effect
(E) the neutrality of money

Answer: D

If the primary goal is to reduce inflation, which of the following fiscal policy actions would be appropriate during a period of a rapidly increasing consumer price index?

If the primary goal is to reduce inflation, which of the following fiscal policy actions would be appropriate during a period of a rapidly increasing consumer price index?

I. Reduce government expenditures for defense and space research.
II. Increase transfer payments to those most severely affected by the rising price index.
III. Increase personal income tax rates.


(A) I only
(B) II only
(C) III only
(D) I and III only
(E) II and III only

Answer: D

Which of the following fiscal policy actions would be most effective in combating a recession? Government Taxes Government Spending

Which of the following fiscal policy actions would be most effective in combating a recession?
Government
Taxes Government Spending

(A) $25 billion decrease $25 billion decrease
(B) $25 billion decrease $25 billion increase
(C) $25 billion decrease No change
(D) $25 billion increase $25 billion decrease
(E) $25 billion increase $25 billion increase

Answer: A

If the economy is operating in the intermediate range of the aggregate supply curve and if aggregate demand increases due to an increase in net exports, then the price level, output, and the unemployment rate are most likely to change in which of the following ways? Price Level Output Unemployment Rate

If the economy is operating in the intermediate range of the aggregate supply curve and if aggregate demand increases due to an increase in net exports, then the price level, output, and the unemployment rate are most likely to change in which of the following ways?
Price Level Output Unemployment Rate

(A) Increase Increase Increase
(B) Increase Increase Decrease
(C) Increase Decrease Increase
(D)Increase Decrease Decrease
(E) Decrease Decrease Increase

Answer: B

Which of the following is a fiscal policy that would increase aggregate demand in the Keynesian model?

Which of the following is a fiscal policy that would increase aggregate demand in the Keynesian model?

(A) A decrease in personal income taxes
(B) A decrease in government spending
(C) An increase in corporate income taxes
(D) A purchase of government bonds by the Federal Reserve
(E) A sale of government bonds by the Federal Reserve

Answer: A

An increase in the capital stock will cause the:

An increase in the capital stock will cause the:

(A) Aggregate demand curve to shift leftward
(B) Production possibilities curve to shift in
(D) Long-run aggregate supply curve to shift rightward
(E) Consumption function to shift down

Answer: D

A rightward shift in the aggregate demand curve with horizontal aggregate supply curve will cause employment and the price level to change in which of the following ways? Employment Price Level

A rightward shift in the aggregate demand curve with horizontal aggregate supply curve will cause employment and the price level to change in which of the following ways?
Employment Price Level

(A) Increase Increase
(B) Increase Decrease
(C) Increase No change
(D) Decrease No change
(E) No change No change

Answer: C

A major advantage of automatic stabilizers in fiscal policy is that they

A major advantage of automatic stabilizers in fiscal policy is that they

(A) reduce the public debt
(B) increase the possibility of a balanced budget
(C) stabilize the unemployment rate
(D) go into effect without passage of new legislation
(E) automatically reduce the inflation rate

Answer: D

The short-run aggregate supply curve will shift to the right when:

The short-run aggregate supply curve will shift to the right when:

A. Energy prices increase
B. Government regulation increases
C. Prices of inputs decrease
D. Investment spending decreases
E. Productivity rates decrease

Answer: C

A change in which of the following will cause the aggregate demand curve to shift?

A change in which of the following will cause the aggregate demand curve to shift?

A. Energy prices
B. Productivity rates
C. Consumer wealth
D. Prices of inputs
E. Prices of consumer goods

Answer: C

Which of the following best describes aggregate supply?

Which of the following best describes aggregate supply?

A. The amount buyers plan to spend on output
B. A schedule showing the relationship between inputs and outputs
C. A schedule showing the trade-off between inflation and unemployment
D. A schedule indicating the level of real output that will be purchased at each possible price level
E. A schedule indicating the level of real output that will be produced at each possible price level

Answer: E