Lec19 iC Questions

Question 1

Consider the IS-MP-PC model. The central bank responds to high rates of unemployment by lowering interest rates. Which of the following is the most likely measured effect on the output gap?

a) Output gap changes from -5% to -7%
b) Output gap changes from 5% to 7%
c) Output gap changes from -5% to -2%
d) Output gap changes from 5% to 2%
e) None of the above is reasonable

Answer 1

c) Output gap changes from -5% to -2%

We are responding to high rates of unemployment meaning that the output gap is negative to begin with. We are lowering interest rates which will improve the output gap, to -2

Question 2

Which of the following will cause the aggregate demand curve to shift to the right?

a) A fall in the aggregate price level
b) A rise in the aggregate price level
c) A rise in interest rates
d) A fall in tax rates
e) A fall in net exports

Answer 2

d) A fall in tax rates

Question 3

Which of the following will shift the AS curve to the right?

a) Increase in the price of raw materials
b) Increase in government spending
c) Increase in real interest rates
d) Increase in productivity
e) None of the above

Answer 3

d) Increase in productivity

Question 4

All else equal, which of the following is most likely to lead to an increase in prices and a fall in GDP?

a) An increase in tax rates
b) An increase in interest rates
c) An increase in the minimum wage
d) An increase in government spending
e) None of the above

Answer 4

c) An increase in the minimum wage

Question 5

What happens in the economy if businesses become pessimistic about future profitability?

a) Lower GDP and lower prices
b) Lower GDP and higher prices
c) Higher GDP and lower prices
d) Higher GDP and higher prices
e) None of the above

Answer 5

a) Lower GDP and lower prices

Question 6

Assume that the US economy goes into a recession. In order to maintain current GDP and prices, the federal government and/or Bank of Canada could:

a) Lower interest rates or lower taxes
b) Lower interest rates or raise taxes
c) Raise interest rates or lower taxes
d) Raise interest rates or raise taxes
e) None of the above

Answer 6

a) Lower interest rates or lower taxes

Question 7

Consider the AD/AS curve. If the AS curve was steeper, then an increase in government spending would have a:

a) Smaller effect on prices and GDP
b) Smaller effect on prices and a larger effect on GDP
c) Larger effect on prices and a smaller effect on GDP
d) Larger effect on prices and a larger effect on GDP
e) None of the above

Answer 7

c) Larger effect on prices and a smaller effect on GDP