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Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) The graph that shows the relationship between the aggregate quantity of output supplied by all the

firms in an economy and the overall price level is

1)

A) the production possibilities frontier. B) the aggregate demand curve.C) the aggregate production function. D) the aggregate supply curve.

Answer: D

2) The quantity of output supplied at different price levels is represented by the 2)

A) aggregate expenditures curve. B) aggregate supply curve.

C) aggregate demand curve. D) production function.

Answer: B

3) The aggregate supply curve 3)

A) relates output with the price level.

B) embodies the same logic that lies behind an individual firm's supply curve.

C) is a market supply curve.

D) is the sum of the individual supply curves in the economy.

Answer: A

4) It is very important to distinguish between the short run and the long run when we are discussing 4)

A) the aggregate expenditures. B) changes in the price level.

C) the aggregate supply. D) the aggregate demand.

Answer: C

Refer t o the in formati on provi ded in Fi gure 13.3 below t o answ er t he questi ons that f oll ow .

Figure 13.3

5) Refer to Figure 13.3. Between the output levels of $500 billion and $1,000 billion, the relationship

between the price level and output is

5)

A) indeterminate. B) negative. C) constant. D) positive.

Answer: D

1



6) Refer to Figure 13.3. This economy reaches capacity at 6)

A) $500 billion.

B) $1,000 billion.

C) $1,500 billion.

D) an output level that is indeterminate from this information because aggregate demand is not

given.

Answer: C

7) Refer to Figure 13.3. At aggregate output levels below $500 billion, this economy is most likely

experiencing

7)

A) rapid increases in the growth rate of the money supply.

B) a boom.

C) excess capacity.

D) excess demand.

Answer: C

8) Refer to Figure 13.3. At aggregate output levels above $1,500 billion, firms in this economy are most

likely experiencing

8)

A) costs falling as prices output increase.

B) costs lagging behind increases in output prices.C) costs increasing as fast as output prices.

D) costs rising faster than output prices.

Answer: C


Figure 13.4

9) Refer to Figure 13.4. Between the output levels of $300 billion and $600 billion, the relationship

between the price level and output is

9)

A) positive.B) negative.

C) constant.

D) There is no relationship between the price level and output.

Answer: A

2



10) Refer to Figure 13.4. This economy reaches capacity at 10)

A) $300 billion.

B) $600 billion.

C) $900 billion.

D) an output level that is indeterminate from this information because aggregate demand is not

given.

Answer: C

11) What determines the slope of the aggregate supply curve is 11)

A) how much more the economy can produce without any change in the price level.

B) how fast the price of factors of production respond to changes in the price level.

C) how fast the output level changes after a technological advance.

D) none of the above

Answer: B

12) When the aggregate supply curve is horizontal, 12)

A) the price of factors of production is fixed, with little or no upward pressure on price.

B) resources are being utilized at full capacity.

C) the prices level increases with additional production.

D) the economy is close to full capacity.Answer: A

13) When the aggregate supply curve is vertical, which of the following is NOT true? 13)

A) The economy is at capacity.

B) The economy is expanding quickly.

C) Any increase in the price level will not cause an increase in aggregate output.

D) The economy is producing the maximum sustainable level of output.

Answer: B

14) If the economy is operating on the relatively vertical segment of the aggregate supply curve, an

increase in aggregate demand causes a ________ change in the price level and a ________ change in

output.

14)

A) big; big B) small; big C) big; small D) small; small

Answer: C

15) If the economy is operating way below capacity, an increase in aggregate demand causes a

________ change in the price level and ________ change in output.

15)

A) small; small B) big; big C) small; big D) big; small

Answer: C

16) An increase in aggregate demand when the economy is operating at high levels of output is likely

to result in

16)

A) an increase in the overall price level but little or no increase in output.B) little or no increase in either output or the overall price level.

C) a large increase in both output and the overall price level.

D) an increase in output but little or no increase in the overall price level.

Answer: A

3



17) An increase in aggregate demand when the economy is operating at full capacity is likely to result

in

17)

A) an increase in output but no increase in the overall price level.

B) an increase in the overall price level but no increase in output.

C) no increase in either output or the overall price level.

D) an increase in both output and the overall price level.

Answer: B

18) An increase in the price level is likely to increase the aggregate amount of output supplied in the

short run because

18)

A) interest rate is high in the short- run.

B) wages change in the short- run.

C) the aggregate supply curve is vertical in the short- run.

D) wages and interest rates are relatively fixed in the short- run.

Answer: D

19) When the economy is producing at full capacity, the aggregate supply curve becomes 19)

A) upward sloping. B) horizontal.

C) downward sloping. D) vertical.

Answer: D

20) If input prices changed at exactly the same rate as output prices, the aggregate supply curve would

be

20)

A) horizontal. B) downward sloping.

C) upward sloping. D) vertical.

Answer: D

21) A movement down the aggregate supply curve is caused by a(n) 21)

A) decrease in the price level. B) increase in aggregate supply.

C) decrease in aggregate supply. D) increase in the price level.

Answer: A

22) If there is a decrease in the percentage of employees whose wages adjust automatically with

changes in the price level, the aggregate supply curve will become

22)

A) vertical. B) steeper. C) horizontal. D) flatter.

Answer: D

23) If there is an increase in the percentage of employees whose wages adjust automatically with

changes in the price level, the aggregate supply curve will become

23)

A) horizontal. B) flatter. C) steeper. D) vertical.

Answer: C

24) Coal is used as a source of energy in many manufacturing processes. Assume a long strike by coalminers reduced the supply of coal and increased the price of coal. This would cause

24)

A) the short- run aggregate supply curve to become nearly vertical at all levels of output.

B) the short- run aggregate supply curve to shift to the left.

C) the short- run aggregate supply curve to become flatter.

D) the short- run aggregate supply curve to shift to the right.

Answer: B

4



25) If the United States were to pass legislation that would make it easier for people to emigrate to the

United States, this would cause

25)

A) the short- run aggregate supply curve to shift to the right.

B) the short- run aggregate supply curve to shift to the left.

C) the short- run aggregate supply curve to become nearly vertical at all levels of output.

D) the short- run aggregate supply curve to become flatter.

Answer: A

26) All of the following shift the short- run aggregate supply curve EXCEPT 26)

A) a change in wages as a result of a labor strike.

B) a change in the price of oil.

C) a change in the price level.

D) a change in the price of raw material.

Answer: C

27) Which of the following would cause the short- run aggregate supply curve to shift to the right? 27)

A) retired workers reentering the labor force B) higher energy prices

C) an increase in taxes D) increases in government regulation

Answer: A


Figure 13.5

28) Refer to Figure 13.5. Hurricane Katrina destroyed a large portion of the infrastructure along the

Gulf of Mexico coast. This caused

28)

A) the short- run aggregate supply curve to shift from AS1 to AS0.

B) the economy to move from Point B to Point A along AS1.

C) the economy to move from Point C to Point B along AS1.

D) the short- run aggregate supply curve to shift from AS1 to AS2.

Answer: D

29) Refer to Figure 13.5. An increase in aggregate supply is represented by 29)

A) a shift from AS1 to AS2.

B) a movement from Point B to Point A along AS1.

C) a shift from AS1 to AS0.

D) a movement from Point B to Point C along AS1.

Answer: C

5



30) Refer to Figure 13.5. During the 1980s, many firms in the United States were not investing in new

capital. This would have caused

30)

A) the short- run aggregate supply curve to shift from AS1 to AS0.

B) the economy to move from Point B to Point A along AS1.

C) the short- run aggregate supply curve to shift from AS1 to AS2.

D) the economy to move from Point C to Point B along AS1.

Answer: C

31) Refer to Figure 13.5. A decrease in aggregate supply is represented by 31)

A) a shift from AS1 to AS2.

B) a shift from AS1 to AS0.

C) a movement from Point B to Point A along AS1.

D) a movement from Point B to Point C along AS1.

Answer: A


Figure 13.6

32) Refer to Figure 13.6. Which of the following causes the economy to move from Point A to Point E? 32)A) an increase in the price level

B) technological progress

C) an influx of immigrants

D) an oil embargo that increases the price of oil

Answer: D

33) Refer to Figure 13.6. Suppose the economy is at Point A , an increase in the price level moves the

economy to Point

33)

A) E. B) B. C) C. D) D.

Answer: B

34) Refer to Figure 13.6. During the 1990s, many firms in the United States were investing in newcapital. If the economy was originally at Point A , this would have caused a movement to Point

34)

A) E. B) B. C) C. D) D.

Answer: D

6



35) Refer to Figure 13.6. Suppose the economy is at Point A , an increase in aggregate demand moves

the economy to Point

35)

A) E. B) B. C) C. D) D.

Answer: B

36) Refer to Figure 13.6. Suppose the economy is at Point A , an oil price increase could move the

economy to Point

36)

A) E. B) B. C) C. D) D.

Answer: A

37) The rationale underlying policies to deregulate the economy is that these policies would 37)

A) increase short- run aggregate supply. B) increase aggregate demand.

C) decrease short- run aggregate supply. D) decrease aggregate demand.

Answer: A

38) An oil price increase would 38)

A) increase aggregate demand. B) decrease aggregate demand.

C) increase short- run aggregate supply. D) decrease short- run aggregate supply.

Answer: D

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

39) If input prices change at exactly the same rate as output prices, the aggregate supply curve will be

vertical.

39)

Answer: True False

40) If the price level falls, the aggregate supply decreases as a result of the aggregate demand curve

shifting left.

40)

Answer: True False

41) An increase in the price of a key input in production, like oil, increases aggregate supply. 41)

Answer: True False

42) An increase in the price level will cause a decrease in the aggregate amount of output supplied. 42)

Answer: True False

43) A decrease in taxes on business investments will increase aggregate supply. 43)

Answer: True False

7





Figure 13.7

44) Refer to Figure 13.7. Suppose the equilibrium output is initially $600 billion. An expansionary

monetary policy ________ equilibrium output and ________ the price level.

44)

A) increases; increases B) increases; decreasesC) leaves unchanged; increases D) decreases; leaves unchanged

Answer: A

45) Refer to Figure 13.7. Suppose the equilibrium output is initially $600 billion. An oil embargo would

probably

45)

A) decrease both the equilibrium output and the price level.

B) increase both the equilibrium output and the price level.

C) increase the equilibrium output and decrease the price level.

D) decrease the equilibrium output and increase the price level.

Answer: D

46) Refer to Figure 13.7. Suppose the equilibrium output is initially $600 billion. A decrease in wages

and an increase in government spending will, for sure, increase

46)

A) the price level.

B) equilibrium output.

C) equilibrium output and decrease the price level.

D) both the equilibrium output and the price level.

Answer: B

47) Refer to Figure 13.7. Which of the following will, unambiguously, increase the price level? 47)

A) a decrease in personal income tax and an increase in corporate profit tax

B) an increase in money supply and an influx of immigrants

C) an increase in personal income tax and an oil embargoD) an increase in government spending and a decrease in the price of raw material

Answer: A

8



48) Refer to Figure 13.7. To unambiguously decrease the price level 48)

A) the Fed could sell bonds and the government could lower the corporate profit tax.

B) personal income taxes could decrease and corporate profit taxes could increase.

C) government spending could increase and the price of raw materials could decrease.

D) the Fed could buy bonds and the government could increase the corporate profit tax.

Answer: A

49) To increase the price level the government could adopt policies that 49)

A) increase aggregate supply and aggregate demand.

B) decrease aggregate supply and increase aggregate demand.

C) increase aggregate supply and decrease aggregate demand.

D) decrease aggregate supply and aggregate demand.

Answer: B

50) To increase output the government could adopt policies that 50)

A) increase aggregate supply and decrease aggregate demand.

B) increase aggregate supply and aggregate demand.

C) decrease aggregate supply and increase aggregate demand.

D) decrease aggregate supply and aggregate demand.

Answer: B

51) To decrease the price level the government could 51)

A) raise taxes on corporate profits and lower federal income taxes.

B) encourage education and increase government spending.

C) lower the corporate profits tax and have the Fed raise the discount rate.

D) adopt policies that increase input prices and increase net taxes.

Answer: C

52) To decrease output the government could 52)

A) encourage education and increase government spending.

B) adopt policies that increase input prices and increase net taxes.

C) raise taxes on corporate profits and lower federal income taxes.D) lower the corporate profits tax and have the Fed raise the discount rate.

Answer: B

53) To increase output the government could 53)

A) lower the corporate profits tax and have the Fed buy bonds in the open market.

B) encourage education and decrease net taxes.

C) lower payroll taxes and increase government spending.

D) all of the above

Answer: D


54) Whenever the aggregate supply curve intercepts the aggregate demand curve, the economy is

producing full employment output.

54)

Answer: True False

55) An increase in the price of inputs will most likely lead to a higher price level. 55)

Answer: True False

9



56) If the Fed sells securities on the open market, the price level will rise. 56)

Answer: True False

57) Decreasing government expenditures and decreasing taxes on corporate profits are two policies

that both work to decrease the price level.

57)

Answer: True False

58) Raising net taxes and and an oil embargo will both have an effect towards increasing the pricelevel.

58)

Answer: True False



Figure 13.8

59) Refer to Figure 13.8. Which of the following statements characterizes an output level of $800

billion?

59)

A) It is attainable in the short run but it is associated with increases in the price level.B) It is sustainable over the long run without inflation.

C) It is achievable only in the long run.

D) It can be achieved only if investment is independent of the interest rate.

Answer: A

60) Refer to Figure 13.8. Potential output 60)

A) is $400 million.

B) is $700 million.

C) is $800 million.

D) cannot be determined from this information because aggregate demand is not given.

Answer: B

61) Refer to Figure 13.8. The level of aggregate output that can be sustained in the long run without

inflation

61)

A) is $400 million.

B) is $700 million.

C) is $800 million.

D) cannot be determined from this information because aggregate demand is not given.

Answer: B

10



62) The level of aggregate output that can be sustained in the long run without inflation is known as 62)

A) nominal output. B) money output.

C) potential output. D) real output.

Answer: C

63) If ________ equilibrium output ________ , the price level rises. 63)

A) actual; exceeds potential GDP B) actual; is below potential GDP

C) potential; is equal to actual GDP D) potential; exceeds actual GDP

Answer: A

64) When the ________ increases, then potential output increases. 64)

A) long- run aggregate supply B) short- run aggregate demand

C) long- run aggregate demand D) short- run aggregate supply

Answer: A

65) Potential output is equal to 65)

A) long- run aggregate supply. B) long run aggregate demand.

C) short- run aggregate supply. D) short- run aggregate demand.

Answer: A

66) The long- run aggregate supply curve is vertical if 66)

A) wages and other costs fully adjust to changes in prices in the long- run.

B) the Fed follows optimal monetary policy.

C) technology is fixed.

D) the government follows optimal fiscal policy.

Answer: A


67) If the economy produces full employment output, an expansionary monetary policy increases

output but not the price level.

67)

Answer: True False

68) A recessionary gap means that aggregate planned expenditures are less than potential output. 68)

Answer: True False

69) An inflationary gap happens when aggregate planned expenditure is greater than full capacity. 69)

Answer: True False

70) Keynes believed that fiscal policy and monetary policy are effective. 70)

Answer: True False

71) Potential output is the most that can be produced in an economy at a particular point in time. 71)

Answer: True False

72) If wages do not fully adjust to changes in prices, the aggregate supply curve is vertical. 72)

Answer: True False

11




73) If a decrease in net taxes in the United States resulted in a very large increase in aggregate output

and a very small increase in the price level, then the U.S. economy must have been

73)

A) on the very steep part of the short- run aggregate demand curve.

B) on the very steep part of the short- run aggregate supply curve.

C) on the very flat part of the short- run aggregate demand curve.

D) on the very flat part of the short- run aggregate supply curve.

Answer: D

74) If a decrease in the U.S. money supply resulted in a very large change in the price level and a very

small change in aggregate output,

74)

A) then the U.S. economy must have been on the very steep part of its short- run aggregate

supply curve.

B) then in the U.S. economy investment demand must not be sensitive to the interest rate.

C) then the U.S. aggregate demand curve must be very steep.

D) then the U.S. economy must have been on the very flat part of its short- run aggregate supply

curve.

Answer: A

75) An increase in government spending will completely crowd out investment if 75)

A) the economy is operating well below capacity.

B) money supply is increased at the same time.

C) money demand is not sensitive to the interest rate.

D) the economy is operating at capacity.

Answer: D

76) Economic policies are ineffective concerning quantities of output directly when 76)

A) the aggregate supply curve is flat. B) the aggregate supply is vertical.

C) the economy is not producing at capacity. D) the aggregate demand is flat.

Answer: B

77) Economic policies are effective at changing output when 77)

A) the economy is not producing at capacity.

B) the unemployment rate is at the natural rate.

C) the economy is producing at its potential output.

D) the aggregate supply curve is vertical.

Answer: A

78) If the long- run aggregate supply curve is vertical, the multiplier effect of a change in net taxes on

aggregate output in the long run

78)

A) depends on the price level. B) is zero.

C) is one. D) is infinitely large.

Answer: B

79) A sustained increase in the overall price level is 79)

A) a price index. B) inflation. C) stagflation. D) a recession.

Answer: B

12




Figure 13.9

80) Refer to Figure 13.9. Suppose the economy is currently at Point A producing potential output Y 0. If

the government increases spending, the economy moves to Point ________ in the short- run and to

Point ________ in the long- run.

80)

A) C; B B) B; C C) B; D D) D; E

Answer: B

81) Refer to Figure 13.9. If the economy is currently at Point D producing output level Y 2 , which of the

following is NOT true?

81)

A) Input prices are likely to fall.

B) Aggregate supply shifts to the right and the economy ends up at Point E.

C) The economy is operating above full employment.

D) The economy is operating below full employment.

Answer: C

82) Refer to Figure 13.9. If the economy is at point A currently producing Y 0 and the Fed decreases the

money supply, the economy will move to Point ________ in the short run and to Point ________ inthe long run.

82)

A) D; E B) E; D C) C; B D) B; C

Answer: A

83) Refer to Figure 13.9. This economy cannot continue to produce Y 1 (or at point B) because 83)

A) the price of raw material and wages will increase shifting the aggregate supply curve to AS1.

B) the price of raw material will increase, shifting the aggregate demand curve to AD2.

C) the price of inputs will decrease, shifting the aggregate supply curve to AS2.

D) all of the above

Answer: A

84) Refer to Figure 13.9. For this economy to produce Y 1 and sustain it without inflation 84)

A) the price of oil must increase.

B) potential output must increase.

C) the government must implement an expansionary fiscal policy.

D) the government must implement an expansionary monetary policy.

Answer: B

13



85) Related to the Economics in Practice on p. 564: In the simple "Keynesian" view, maximum output is

NOT defined by the

85)

A) level of consumption. B) existing labor force.

C) current capital stock. D) existing state of technology.

Answer: A

86) Related to the Economics in Practice on p. 564: In the simple "Keynesian" view, the aggregate supply

curve

86)

A) is completely vertical. B) is horizontal in part, and vertical in part.

C) is completely horizontal. D) is downward sloping.

Answer: B


87) Expansionary economic policies are things the government can do to decrease aggregate demand

or aggregate supply.

87)

Answer: True False

88) If the economy is on the steep part of its aggregate supply curve, expansionary policy will mostly

increase the price level.

88)

Answer: True False

89) Decrease in net taxes, increase in the money supply and increase in government spending are

contractionary policies.

89)

Answer: True False

90) An earthquake and a foreign oil embargo would be contractionary policies. 90)

Answer: True False

91) If the aggregate supply curve is vertical in the long- run, then neither monetary nor fiscal policy

will affect aggregate output in the long- run.

91)

Answer: True False

14




Refer t o t he informat ion provided in Figure 13.10 below to answ er t he questi ons that foll ow .

Figure 13.10

92) Refer to Figure 13.10. Cost- push inflation occurs if 92)

A) the aggregate supply curve shifts from AS1 to AS2.

B) the economy moves from Point A to Point C on the aggregate supply curve AS1.

C) the economy moves from Point A to Point B on aggregate supply curve AS1.D) the aggregate supply curve shifts from AS1 to AS0.

Answer: A

93) Refer to Figure 13.10. Assume the economy is at Point A. Higher oil prices shift the aggregate

supply curve to AS2. If the government decides to counter the effects of higher oil prices by

increasing government spending, then the price level will be ________ than P2 and output will be

________ than Y 2.

93)

A) less; less B) less; greater C) greater; greater D) greater; less

Answer: C

94) Refer to Figure 13.10. Assume the economy is at Point A. Higher oil prices shift the aggregatesupply curve to AS2. If the government decides to counter the effects of higher oil prices by

increasing net taxes, then the price level will be ________ than P2 and output will be ________ than

Y 2.

94)

A) less; less B) greater; less C) greater; greater D) less; greater

Answer: A

95) Refer to Figure 13.10. Assume the economy is currently at Point A on aggregate supply curve AS1.

An increase in inflationary expectations that causes firms to increase their prices

95)

A) moves the economy to Point C on aggregate supply curve AS1.

B) shifts the aggregate supply curve to AS0.

C) shifts the aggregate supply curve to AS2.D) moves the economy to Point B on aggregate supply curve AS1.

Answer: C

15



96) A rightward shift in the aggregate demand curve generates a ________ inflation and ________

output.

96)

A) demand- pull; lower B) cost- push; lower

C) demand- pull; higher D) cost- push; higher

Answer: C

97) A sudden increase in the price of oil causes a ________ inflation and ________ output. 97)

A) cost- push; higher B) demand- pull; higher

C) demand- pull; lower D) cost- push; lower

Answer: D

98) An earthquake destroyed 50% of the Moldovian manufacturing base. The Moldovian government

decided to use a contractionary fiscal policy to counter the effects of the earthquake on the

economy. The use of the contractionary fiscal policy would have caused

98)

A) both the price level and the output level to be higher than they would have been without the

policy action.

B) both the price level and output level to be lower than what they would have been without the

policy action.

C) the price level to be higher and the output level to be lower than they would have been

without the policy action.D) the price level to be lower and the output level to be higher than they would have been

without the policy action.

Answer: B

99) For an economy to experience both a recession and inflation at the same time, 99)

A) the aggregate supply curve must shift to the left.

B) the aggregate demand curve must shift to the left.

C) the aggregate demand curve must shift to the right.

D) the aggregate supply curve must shift to the right.

Answer: A

100) A(n) ________ in inflationary expectations that causes firms to decrease their prices shifts theaggregate supply curve to the ________.

100)

A) increase; right B) decrease; right C) increase; left D) decrease; left

Answer: B

101) An increase in inflationary expectations that causes firms to increase their prices shifts the 101)

A) aggregate demand curve to the left. B) aggregate supply curve to the right.

C) aggregate supply curve to the left. D) aggregate demand curve to the right.

Answer: C

102) During the fall of 1993, prices were increasing by 1% an hour in Bosnia. This is an example of 102)

A) an expectations inflation. B) monetary inflation.C) hyperinflation. D) natural inflation.

Answer: C

103) During the early 1980s, prices were increasing by approximately 2,000% a year in Argentina. This is

an example of

103)

A) monetary inflation. B) moderate inflation.

C) an expectations inflation. D) hyperinflation.

Answer: D

16



104) Economists generally agree that for a sustained inflation to occur, 104)

A) the Federal Reserve must be accommodating it by decreasing the money supply.

B) the government must be accommodating it by increasing government spending.

C) the government must be accommodating it by decreasing taxes.

D) the Federal Reserve must be accommodating it by increasing the money supply.

Answer: D

105) For the Fed to keep the interest rate unchanged as the government increases spending, the Fed

must continue to

105)

A) decrease the money supply. B) increase the demand for money.

C) decrease the demand for money. D) increase the money supply.

Answer: D

106) Many economists believe that sustained inflation is accommodated by a(n) 106)

A) expansionary fiscal policy. B) contractionary monetary policy.

C) expansionary monetary policy. D) contractionary fiscal policy.

Answer: C

107) According to the "simple" Keynesian view, the aggregate supply curve is 107)

A) vertical until it reaches full capacity and then becomes horizontal.B) upward sloping over all levels of output.

C) horizontal until it reaches full capacity and then becomes vertical.

D) downward sloping over all levels of output.

Answer: C

108) According to the "simple" Keynesian view, if the economy is at capacity, an expansionary policy

will

108)

A) increase the price level, but not output.

B) increase neither the price level nor output.

C) increase output, but not the price level.

D) increase both the price level and output.

Answer: A

109) According to the "simple" Keynesian view, if the economy has excess capacity, an expansionary

policy will ________, given that the economy continues to have excess capacity even after the

policy.

109)

A) increase both the price level and output B) increase neither the price level nor output

C) increase output , but not the price level D) increase the price level, but not output

Answer: C

110) A(n) ________ gap occurs when planned aggregate expenditure is ________ capacity output. 110)

A) recessionary; equal to B) inflationary; equal to

C) recessionary; greater than D) inflationary; greater thanAnswer: D

17



111) According to the "simple" Keynesian view, if the economy is below full capacity, an increase in

aggregate demand will cause

111)

A) the price level to increase, but no change in output will occur in the short run.

B) both output and the price level to rise in the short run.

C) output to fall and the price level to increase in the short run.

D) the level of output to rise, but no change in the price level will occur in the short run.

Answer: D

112) Related to the Economics in Practice on p. 570: A survey conducted by Horizon Research

Consultancy Group found that many people in China had inflation expectations that were higher

than the official government expectations. Expectations of inflation will cause firms to raise prices,

shifting the

112)

A) AS curve to the right. B) AS curve to the left.

C) AD curve to the left. D) AD curve to the right.

Answer: B

113) Related to the Economics in Practice on p. 570: A survey conducted by Horizon Research

Consultancy Group found that many people in China had inflation expectations that were higher

than the official government expectations. If these expectations of inflation cause firms to change

prices, then ceteris paribus , the price level will ________ and aggregate output will ________.

113)

A) increase; decrease B) increase; increase

C) decrease; increase D) decrease; decrease

Answer: A


114) Inflation due to a decrease in aggregate demand is called demand- pull inflation. 114)

Answer: True False

115) Inflation is an increase in the overall price level. 115)

Answer: True False

116) Supply- side inflation is caused by increases in the aggregate supply curve. 116)

Answer: True False

117) Rising output coupled with falling prices is called stagflation. 117)

Answer: True False

118) Expectations of higher future prices cause firms to lower prices today to sell their product before

prices rise.

118)

Answer: True False

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Figure 15.3

119) Refer to Figure 15.3. If the economy is currently at the intersection of AS and AD , the Fed is most

likely to

119)

A) decrease the money supply to move the economy closer to capacity.B) increase the money supply to reduce unemployment.

C) increase the money supply to reduce inflationary pressures.

D) decrease the money supply to reduce the inflationary pressures.

Answer: B

120) Refer to Figure 15.3. If the economy is currently at the intersection of AS and AD , an expansionary

monetary policy which does not shift AD to the upward sloping portion of the AS curve will

120)

A) not be an inflationary policy.

B) not be effective.

C) increase the price level without increasing output.

D) be an inflationary policy.

Answer: A

121) Refer to Figure 15.3. If the economy is currently at the intersection of AS and AD , stagflation would

be caused by

121)

A) a decrease in AS. B) an increase in AD.

C) an increase in AS. D) a decrease in AD.

Answer: A

122) Refer to Figure 15.3. Stagflation would cause 122)

A) a lower price level and lower output. B) a lower price level and higher output.

C) a higher price level and lower output. D) a higher price level and higher output.

Answer: C

123) Refer to Figure 15.3. Stagflation would NOT be caused by a 123)

A) higher price level with lower output.

B) shift to the right of AD.

C) higher price level with higher unemployment.

D) decrease in AS.

Answer: B

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124) When there is stagflation, the policy choices facing the Fed are 124)

A) reducing monetary growth to reduce inflation, but that will make shortfall in aggregate

output worse.

B) increasing monetary growth to increase aggregate output and reduce inflation.

C) increasing monetary growth to increase aggregate output but that will make inflation worse.

D) A and C

Answer: D


Figure 15.4

125) Refer to Figure 15.4. If the economy is currently at the intersection of AS and AD , the Fed should 125)

A) increase money supply to move closer to capacity.

B) decrease money supply to reduce inflationary pressures.

C) decrease money supply to increase output.

D) increase money supply to reduce the unemployment rate.

Answer: B

126) Refer to Figure 15.4. If the economy is currently at the intersection of AS and AD , a contractionarymonetary policy which does not shift AD to the horizontal portion of the AS curve

126)

A) does not create a recession. B) is a recessionary policy.

C) is an inflationary policy. D) none of the above

Answer: A

127) The Federal Reserve's policy to "lean against the wind" means that 127)

A) interest rates are increased gradually as the economy expands.

B) reserve requirements are decreased as the economy expands.

C) interest rates are decreased as the economy expands.

D) reserve requirements are decreased significantly during an economic expansion.

Answer: A

128) The Federal Reserve's policy to "lean against the wind" means that 128)

A) the Fed raises required reserves as the economy slows.

B) the Fed slows money growth as the economy slows.

C) the Fed lowers taxes as the economy slows.

D) the Fed increases money growth as the economy slows.

Answer: D

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129) An economic condition characterized by high unemployment and excessive inflation is called 129)

A) expansionary growth. B) stagflation.

C) depression. D) recessionary downturn.

Answer: B

130) During periods of stagflation, a decrease in the money supply will 130)

A) increase exports. B) increase output.

C) increase prices. D) decrease prices.

Answer: D

131) During periods of stagflation, a decrease in the money supply will 131)

A) lower inflation and the level of output.

B) increase exports.

C) increase inflation and the level of output.

D) increase inflation and lower the level of output.

Answer: A

132) Related to the Economics in Practice on p. 573: In 2010, many economists revised their expectations

of when the Fed would raise interest rates. Raising interest rates is a way the Fed can implement

132)

A) contractionary fiscal policy. B) expansionary monetary policy.C) contractionary monetary policy. D) expansionary fiscal policy.

Answer: C

133) Related to the Economics in Practice on p. 573: In 2010, many economists revised their expectations

of when the Fed would raise interest rates. Raising interest rates will shift the ________ curve to the

________.

133)

A) AS; left B) AD; right C) AS; right D) AD; left

Answer: D


134) When it decreases the money supply during an inflation the Fed is "leaning against the wind." 134)

Answer: True False

135) An increase in aggregate demand causes stagflation. 135)

Answer: True False

136) The Fed is most likely to increase the money supply when there is excess capacity in the economy. 136)

Answer: True False

137) The danger with expansionary Fed policy is that it may bring on an inflation. 137)

Answer: True False

138) Contractionary Fed policy increases aggregate demand. 138)

Answer: True False

139) The Fed is leaning against the wind when it raises the discount rate during a recession. 139)

Answer: True False

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140) A decrease in money supply is an expansionary policy. 140)

Answer: True False

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