Quiz 10

Question 1

The size of the change in real GDP arising from an initial change in aggregate spending is equal to the:
Select one:

a. marginal propensity to consume.
b. value of the multiplier.
c. value of the multiplier times the equilibrium level of GDP.
d. value of the multiplier times the initial change in aggregate spending.

Answer 1

d. value of the multiplier times the initial change in aggregate spending.

Question 2

All of the following can shift the short-run aggregate supply curve EXCEPT for a change in:
Select one:

a. consumer confidence.
b. nominal wages.
c. productivity.
d. commodity prices.

Answer 2

a. consumer confidence.

Question 3

An increase in consumer confidence will shift aggregate demand to the:
Select one:

a. left, thereby lowering the price level.
b. right, thereby lowering the price level.
c. left, thereby raising the price level.
d. right, thereby raising the price level.

Answer 3

d. right, thereby raising the price level.

Question 4

An increase in the aggregate price level:
Select one:

a. increases long-run aggregate supply.
b. reduces the purchasing power of a given amount of money.
c. makes consumers feel wealthier with the incomes they have.
d. decreases short-run aggregate supply.

Answer 4

b. reduces the purchasing power of a given amount of money.

Question 5

As the aggregate price level rises, consumers hold:
Select one:

a. smaller money balances, and this raises the interest rate.
b. larger money balances, and this raises the interest rate.
c. larger money balances, and this lowers the interest rate.
d. smaller money balances, and this lowers the interest rate.

Answer 5

b. larger money balances, and this raises the interest rate.

Question 6

For producers, what is the effect of a fall in the aggregate price level?
Select one:

a. Profit per unit will fall.
b. They will seek to hire more workers.
c. Profit per unit will rise.
d. Nominal wages will fall by an equal amount.

Answer 6

a. Profit per unit will fall.

Question 7

f you were looking at a period in U.S. history when there was a decline in output, how could you determine whether this was caused by a supply shock or a demand shock?
Select one:

a. If the decline in output had been accompanied by an increase in employment, then it was a demand shock.
b. If the decline in output had been accompanied by an increase in prices, then it was a supply shock.
c. If the decline in output had been accompanied by an increase in prices, then it was a demand shock.
d. If the decline in output had been accompanied by an increase in employment, then it was a supply shock.

Answer 7

b. If the decline in output had been accompanied by an increase in prices, then it was a supply shock.

Question 8

Stagflation is:
Select one:

a. a combination of high interest rates and high levels of investment spending.
b. the pattern of fluctuations in economic activity over the course of the business cycle.
c. a combination of inflation and rising unemployment.
d. a combination of a government budget deficit and a trade deficit.

Answer 8

c. a combination of inflation and rising unemployment

Question 9

The long-run aggregate supply curve is drawn as a vertical line to reflect the fact that, in the long run, changes in:
Select one:

a. the stock of physical capital do not affect the level of potential real GDP.
b. productivity do not affect the level of potential real . .
C. the aggregate price level do not affect the level of potential real GDP.

Answer 9

C. the aggregate price level do not affect the level of potential real GDP.

Question 10

What is the long-run effect of producing beyond potential GDP in the short run?
Select one:

a. The economy will become permanently more productive.
b. Nominal wages will rise.
c. Nominal wages will fall.
d. The aggregate demand curve will become vertical.

Answer 10

b. Nominal wages will rise.

Question 11

When we look at movements up or down along the aggregate demand curve, we are considering a:
Select one:

a. change in the price of one good, with all other prices held constant.
b. simultaneous change in the prices of all final goods and services.
c. change in the price of one good, with real consumer wealth held constant.
d. change in the price of one good, with interest rates held constant.

Answer 11

b. simultaneous change in the prices of all final goods and services.

Question 12

Which of the following is NOT a component of aggregate demand?
Select one:

a. taxes
b. consumption spending
c. government expenditures
d. Investment spending

Answer 12

A. Taxes

Question 13

hich of the following statements is FALSE?
Select one:

a. Shifts in short-run aggregate supply affect both the price level and the quantity of output supplied.
b. A shift in long-run aggregate supply reflects a change in the level of potential real GDP.
c. Shifts in aggregate demand against long-run aggregate supply affect both the price level and the quantity of output supplied.
d. Shifts in aggregate demand against short-run aggregate supply affect both the price level and the quantity of output supplied.

Answer 13

c. Shifts in aggregate demand against long-run aggregate supply affect both the price level and the quantity of output supplied.

Question 14

A contractionary fiscal policy either _______ government spending or _______ taxes.
Select one:

a. decreases; decreases
b. decreases; increases
c. increases. decreases
d. increases; increases

Answer 14

b. decreases; increases

Question 15

An inflationary gap occurs when:
Select one:

a. actual output exceeds potential output.
b. we need to increase prices.
c. potential output exceeds actual output.
d. real output is too low.

Answer 15

a. actual output exceeds potential output.

Question 16

If there is a recessionary gap in the economy, discretionary fiscal policy would likely involve action to:
Select one:

a. leave aggregate demand alone and shift aggregate supply to the left.
b. shift aggregate demand to the left.
c. shift aggregate demand to the right.
d. shift aggregate demand to the right and shift aggregate supply to the left.

Question 17

One of the shortcomings of fiscal policy is that:
Select one:

a. it has significant time lags which make it more effective.
b. it affects aggregate demand indirectly through the interest rate.
c. it has time lags and sometimes it may end up destabilizing the economy as a result of these lags.
d. it takes effect immediately, thus it is the best policy to use at crunch time.

Answer 17

c. it has time lags and sometimes it may end up destabilizing the economy as a result of these lags.

Question 18

The multiplier effect of changes in government purchases of goods and services is equal to:
Select one:

a. MPC / (1 – MPS).
b. 1 / (1 – MPS).
c. 1 / (1 – MPC).
d. MPS / (1 – MPC).

Answer 18

c. 1 / (1 – MPC).

Question 19

When the government borrows funds in financial markets to pay for budget deficits:
Select one:

a. the multiplier effect of government purchases increases.
b. the interest rate and savings decrease.
c. planned aggregate spending decreases rather than increases.
d. private investment spending may be crowded out.

Answer 19

d. private investment spending may be crowded out.