Page 8

Page 1

Name: __________________________ Date: _____________

1.

Which of the following will decrease the aggregate quantity of output supplied?

A)

a decrease in wages

B)

a decrease in the labor force

C)

a decrease in net exports

D)

a decrease in the price level

Use the following to answer questions 2-3:

Figure 8-5

Panel (a) shows an economy's aggregate production function, Panel (b) shows the labor market and Panel (c) shows the economy's long-run aggregate supply curve.

2.

Refer to Figure 8-5. An upward shift of the aggregate production function would lead to

A)

a decrease in the real wage and to a decrease in real GDP.

B)

an increase in the real wage and to a decrease in real GDP.

C)

a decrease in the real wage and to an increase in real GDP.

D)

an increase in the real wage and to an increase in real GDP.

3.

Refer to Figure 8-5. The real wage is the ratio of

A)

the price level to the nominal wage.

B)

the nominal wage to the quantity of labor employed.

C)

the nominal wage to the price level.

D)

real GDP to the nominal wage.

Use the following to answer question 4:

Figure 8-4

4.

Refer to Figure 8-4. Which of the following could cause the production function to shift upward?

A)

an increase in the quantity of labor employed

B)

an increase in the economy's average price level

C)

an increase in the availability of natural resources

D)

an increase in the real wage rate

5.

Over the past century, the average household income in the United States

A)

has increased in nominal terms but has decreased in real terms.

B)

has increased in nominal terms but has remained constant in real terms.

C)

has increased in real terms.

D)

has increased only marginally both in real and nominal terms.

6.

If the rate of growth of output is 10% and the rate of growth of per capita real GDP is 6%, what is the rate of growth of population?

A)

2

B)

4

C)

6

D)

8

7.

Expansionary fiscal policy includes

A)

increasing taxes and increasing government purchases.

B)

lowering interest rates, decreasing taxes and increasing transfer payments.

C)

decreasing taxes and increasing government expenditures.

D)

lowering the interest rates, decreasing taxes and decreasing government spending.

Use the following to answer question 8:

Figure 12-2

8.

Refer to Figure 12-2. Suppose real GDP is equal to Yr. If policymakers want to close the output gap with demand management policies, what should they do?

A)

lower corporate profit tax rates to encourage investments

B)

increase investment tax credits to businesses

C)

decrease government spending on transfer payments and on final goods and services

D)

lower interest rates

9.

An expansionary fiscal policy is likely to _____ a government budget surplus (or increase a budget deficit) and ______ borrowing by the Treasury which will _____ bonds.

A)

decrease; increase; sell more

B)

increase; decrease; buy more

C)

increase; increase; sell more

D)

decrease; decrease; buy more

10.

An expansionary fiscal policy

I.

includes an increase in government spending.

II.

includes tax cuts.

III.

increases a government budget deficit or reduces a government budget surplus.

A)

I, II, and III

B)

I and II only

C)

I and III only

D)

II and III only

11.

Government tax and expenditure policies affect real GDP are called

A)

automatic fiscal policy.

B)

discretionary fiscal policy.

C)

fiscal policy.

D)

supply-side policy.

12.

Suppose fiscal authorities raise state income tax rates. As a result, disposable income falls, thereby ____, and causing __________

A)

decreasing consumption spending; the aggregate demand curve to shift to the left.

B)

decreasing consumption spending; a movement along a given aggregate demand curve.

C)

increasing saving; the aggregate demand curve to shift to the left.

D)

increasing saving; a movement along a given aggregate demand curve.

13.

What is the relationship between average household income and standard of living?

A)

There is no relationship. Increasing average income says nothing about income distribution.

B)

Rising income enables households to acquire more of the goods and services that improve their material standard of living.

C)

Rising income tends to increase the crime rate and violence, thereby lowering a country's standard of living.

D)

There is no relationship. Standard of living depends on productivity not household income.

14.

An economy adjust on its own to close an inflationary gap because there is

A)

pressure on nominal wages to fall and this shifts the SRAS curve rightward.

B)

pressure on nominal wages to rise and this shifts the SRAS curve rightward.

C)

pressure on nominal wages to fall and this shifts the SRAS curve leftward.

D)

pressure on nominal wages to rise and this shifts the SRAS curve leftward.

15.

The interest rate effect suggests that the negative slope of the aggregate demand curve results in part because changes in the price level affect

A)

domestic purchases of foreign goods.

B)

the demand for money by households and firms.

C)

the real purchasing power of household wealth.

D)

the level of income.

Use the following to answer question 16:

Figure 7-7

16.

Refer to Figure 7-7. Suppose the economy is initially at K. Which of the following statements best explains how the economy responds to restore long-run macroeconomic equilibrium?

A)

Over time, the aggregate demand curve will shift to the right until long-run equilibrium is restored at J and the gap is closed.

B)

Rising unemployment puts pressure on nominal wages to fall. The SRAS curve shifts right to SRAS1 closing the gap at H.

C)

In response to rising prices, firms will increase production moving along SRAS2 until long- run equilibrium is restored at J and the gap is closed.

D)

Rising unemployment puts pressure on nominal wages to fall. Firms employ more workers moving along SRAS2 until long-run equilibrium is restored at J and the gap is closed.

17.

Using the aggregate demandaggregate supply model, predict what happens in the short run when the consumer confidence index falls as consumers become pessimistic about their economic prospects.

A)

The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.

B)

The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.

C)

The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.

D)

The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.

Use the following to answer question 18:

Figure 7-1

18.

Refer to Figure 7-1. A movement from point A to point B

A)

is a change in aggregate demand resulting from a lower price level.

B)

is change in aggregate quantity demanded resulting from a lower price level.

C)

could be due to an increase in investment demand.

D)

occurs because aggregate output supplied has increased.

Use the following to answer question 19:

Table 7-1

Price

Level

Aggregate

Quantity Demanded

($ trillion)

Aggregate

Quantity Supplied

($ trillion)

1.0

7.8

4.8

1.2

7.6

5.2

1.4

7.4

5.6

1.6

7.2

6.0

1.8

7

6.4

2.0

6.8

6.8

2.2

6.6

7.0

2.4

6.4

7.2

2.6

6.2

7.4

2.8

6

7.6

3.0

5.8

7.8

Table 7-1 shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion.

19.

Refer to Table 7-1. If policymakers choose to close the gap by using stabilization policy, they should use

A)

contractionary fiscal or monetary policies.

B)

expansionary fiscal or monetary policies.

C)

a combination of contractionary fiscal and expansionary monetary policies.

D)

a combination of expansionary fiscal and contractionary monetary policies.

20.

The sticky price explanation of the short-run aggregate supply curve says that when the average price level rises,

A)

some firms will immediately pass the higher prices to consumers.

B)

because of adjustment costs associated with changing prices, some firms will not raise their prices immediately which may temporarily boost their sales.

C)

firms will raise their output prices by more than the increase in the average price level to make up for the shortfall in sales.

D)

consumers are unwilling to pay higher prices resulting in a decrease in aggregate demand.

Use the following to answer question 21:

Figure 7-7

21.

Refer to Figure 7-7. Suppose the economy is initially in short-run equilibrium at K. Which of the following stabilization policies could be used to close the gap?

A)

decrease government welfare spending

B)

decrease personal income taxes

C)

decrease government spending on defense

D)

increase payroll taxes