1. Assume the economy is operating below the full employment level of output:
1. Congress votes to decrease business taxes on all small businesses in the United States. Using a correctly drawn AD/AS graph, show and explain how this change will affect each of the following in the short-run:
2. Using a correctly drawn and labeled Phillips curve, show and explain how this policy will affect each of the following as the economy approaches a new equilibrium:
- the Phillips curve
- the natural rate of unemployment
2. Assume the U.S. dollar and the Mexican peso are traded in flexible currency markets. Which of the following would cause the U.S. dollar to depreciate relative to the Mexican peso?
- Higher price level in Mexico relative to the United States.
- Higher interest rates in the United States relative to Mexico.
- Higher incomes in Mexico relative to the United States.
- Increasing price level in the United States relative to Mexico.
- Decreasing price level in the United States relative to Mexico.
3. After saving money in her piggy bank for 3 years, Beverly decided to deposit $5,000 of the money in the Millertown Bank. If the bank were fully "loaned out" and the required reserve ratio were 20%, then the maximum change in the money supply due to this deposit would be
- $25,000.
- $20,000.
- $5,000.
- $4,000.
- $1,000.
4. If an increase in government purchases of $5 billion causes national income to rise by a total of $25 billion, then the marginal propensity to consume is
5. In the circular flow diagram
- businesses pay wages, rent, interest, and profits to households in return for the use of factors of production.
- through the factor market businesses purchase goods and services from households in return for consumption dollars.
- through the factor market households pay wages, rent, interest, and profits to households in return for use of the factors of production.
- households purchase goods and services from businesses in return for profits.
- businesses sell goods and services to households in return for rent, wages, interest, and profits.
6. Stagflation (the simultaneous increase in unemployment and inflation) might be caused by
- an increase in technology.
- a decrease in the money supply.
- an increase in the money supply.
- an increase in the price of raw materials.
- a decrease in the price of raw materials.
7. Which of the following would prohibit a bank from creating the maximum amount of money when money is deposited in the bank?
I. A decrease in the reserve requirement.
II. An increase in the federal funds rate.
III. The bank holds excess reserves.
I only.
II only.
III only.
I and III only.
II and III only.
8. When making a decision, the next best alternative is called
- the comparative advantage.
- the absolute advantage.
- the opportunity cost.
- the production possibilities.
- a trade-off.
9. A production possibilities curve that shows the Law of Increasing Opportunity Costs would be
- concave from the origin.
- convex from the origin.
- a diagonal line.
- a vertical line.
- a horizontal line.
10. A basic belief of Classical Economists is that
- the economy is unstable in the long-run.
- prices and wages are "sticky."
- government intervention is needed to control problems in the economy.
- prices and wages are self-correcting.
- the economy may operate at less than full employment.
11. When a nation institutes a tariff on a trading partner,
- domestic producers gain, consumers lose, and the government gains revenue.
- domestic producers gain, consumers gain, and the government gains revenue.
- domestic producers lose, consumers gain, and the government gains revenue.
- domestic producers lose, consumers gain, and the government loses revenue.
- domestic producers lose, consumers lose, and the government gains revenue.
12. Which of the following is consistent with monetarism?
- Inflation is caused by high federal taxes.
- Recession is caused by high federal taxes.
- Inflation is caused when the Fed increases the money supply too rapidly.
- Recession is caused by the increased production of capital goods.
- Inflation is caused by the increased production of capital goods.
13. Which of the following is consistent with advocates of rational expectations? If consumers fully anticipate an increase in interest rates, then
- real GDP will increase by the value of the multiplier.
- real GDP will decrease by the value of the multiplier.
- real GDP will not change.
- price level will increase.
- unemployment will increase.
14. If, as part of supply side policy, Congress votes to decrease business taxes how will output, price level, and real interest rates be impacted?
- Output / Price Level / Interest Rates
- Increase / Increase / Increase
- Increase / Decrease / Increase
- Increase / Decrease / Decrease
- Decrease / Increase / Increase
- Decrease / Decrease / Decrease
15. If government spending increases or personal income taxes decrease, what are the likely effects on output, price level, and interest rates?
- Price Level / Output / Interest Rates
- Increase / Increase / Increase
- Increase / Increase / Decrease
- Decrease / Increase / Decrease
- Decrease / Decrease / Increase
- Decrease / Decrease / Decrease
16. If the economy is in a mild recession, which of the following policies will stimulate the economy without causing a budget deficit?
- Congress increases taxes by $5 billion.
- Congress decreases taxes by $5 billion.
- Congress votes to increase spending by $5 billion.
- Congress votes to increase government spending by $5 billion and increase taxes by $5 billion.
- Congress votes to increase government spending by $5 billion and decrease taxes by $5 billion.
17. When Congress increases taxes, private investment is
- crowded out causing AD to shift less than expected.
- crowded out causing AD to shift more than expected.
- crowded in causing AD to shift less than expected.
- crowded in causing AD to shift more than expected.
- indeterminate with the information given.
18. If Congress votes to increase spending and taxes by the same amount, what is the effect on employment and interest rates?
- Employment / Interest Rates
- Increase / Increase
- Increase / Decrease
- Increase / No Change
- Decrease / Decrease
- Decrease / No Change
19. All of the following are examples of automatic stabilizers except
- rapid growth decreases the number of people collecting unemployment.
- disposable income increases due to increased employment.
- Congress authorizes spending for new roads all across the nation.
- more people qualify for unemployment as a result of a recession.
- the minimum wage is increased by 20%; Congress collects more taxes.
20. Which of the following are examples of contractionary monetary policy?
1 increase discount rate
2 decrease reserve requirement
3 buy bonds
4 sell bonds
I and III only
II and III only
I and IV only
II and IV only
I, II, and III only
21. Which of the following reflects the order of operations when the Fed sells bonds on the open market?
- money supply increases, interest rates decrease, investment spending increases, AS shifts right.
- money supply decreases, interest rates increase, investment spending decreases, AD shifts left.
- money supply increases, interest rates increase, investment spending increases, AD shifts right.
- money supply decreases, interest rates increase, investment spending decreases, AS shifts left.
- money supply increases, interest rates decrease, investment spending increases, AD shifts right.
22. When the Fed uses expansionary monetary policy, which of the following is true?
- Consumer spending and autonomous government spending increase while investment spending decreases.
- Consumer spending, investment spending, and autonomous government spending decrease
- Interest sensitive consumer spending, investment spending, and autonomous government spending increase
- Interest sensitive consumer spending, investment spending, and autonomous government spending increase while net exports decreases due to the change in the value of the dollar
- Interest sensitive consumer spending, investment spending, and autonomous government spending decrease while net exports increases due to the change in the price level
23. If inflation increased to 8% and unemployment was listed at 3%, which of the following policies would an economist most likely recommend using?
- Decrease the reserve requirement and buy bonds.
- Increase defense spending and increase the discount rate.
- Increase personal income taxes and sell bonds.
- Decrease funding for road projects and decrease the discount rate.
- Sell bonds and decrease personal income taxes.
24. Which of the following combinations of fiscal and monetary policies will cause the greatest increase in real GDP?
- Fiscal Policy / Monetary Policy
- Increase personal income taxes / Buy bonds
- Increase government spending / Buy bonds
- Decrease personal income taxes / Increase the discount rate
- Decrease government spending / Increase the discount rate
- Decrease personal income taxes / Sell bonds
25. In an effort to increase employment by stimulating investment spending, policymakers would
- increase government spending.
- increase transfer payments.
- purchase US government bonds on the open market.
- sell bonds.
- increase the federal funds rate.
26. The Federal Reserve can decrease the money supply by
- buying gold reserves on the open market.
- buying foreign currency in the exchange market.
- buying government bonds on the open market.
- selling bonds on the open market.
- selling financial capital to foreign governments.
27. If the economy was operating in equilibrium, which of the following might cause a recession?
- An increase in transfer payments.
- The sale of bonds on the open market.
- A decrease in savings by consumers.
- A decrease in personal income taxes.
- Greater demand for American goods and services from trading partners.
28. The short-run Phillips Curve
- illustrates the relationship between interest rates and investment.
- is a vertical line at all levels.
- illustrates the relationship between inflation and interest rates.
- shows an increase in unemployment when inflation increases.
- illustrates the relationship between inflation and unemployment.
29. If government regulations require energy savings in all manufacturing sectors, we can expect that
- the short-run Phillips curve will shift left.
- the short-run Phillips curve will shift right.
- the long-run Phillips curve will shift right.
- there will be a movement to the right along the short-run Phillips curve.
- there will be a movement to the left along the short-run Phillips curve.
30. Assume that price level in the ABC Islands, a U.S. trading partner, increases signaling inflation in the ABC Island economy.
1 Using aggregate demand aggregate supply analysis, explain the impact of the increased price level on the United States economy.
2 If the Federal Reserve wants to repair the effects on the U.S. economy noted above, identify a policy action it might undertake.
3 Explain the impact of the Fed action on each of the following:
1 output
2 price level
3 the international value of the U.S. dollar