Problem Set 1

Chapter 1: Overview of Macroeconomics

1. Which of the following is not a component of Aggregate Demand?
A. Consumption D. Net exports
B. Investment E. Government expenditures
C. Saving
2. An example of a government expenditure is
A. employing a public school teacher
B. a social security payment to an elderly person.
C. an AFDC (Aid to Families with Dependent Children) payment.
D. an unemployment insurance check.
E. All of the above
3. Which of the following items is an investment?
A. purchase of a stock.
B. purchase of a mutual fund.
C. purchase of a U.S. government bond.
D. purchase of a new farm tractor.
E. All of the above.
4. The international trade effect argues that an increase in the Price level reduces
Aggregate Demand because
A. consumers' wealth is eroded.
B. the price level increase makes the dollar weaker which decreases net exports.
C. the price level increase makes the dollar stronger which decreases net exports.
D. None of the Above
5. Which factor would shift the Aggregate Demand curve to the right?
A. an increase in real incomes due to a rise in GDP.
B. an increase in real wages.
C. a fall in interest rates which increases investment.
D. an appreciation of the dollar.
6. Which of the following statements about the long-run Aggregate Supply curve is true?
A. No matter how much prices increase, output remains the same.
B. Output is at its potential level.
C. The economy must be at its natural rate of unemployment.
D. All input costs have time to fully adjust.
E. All of the above.
7. Stagflation results from
A. a shift of the AD curve to the right.
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 B. a shift of the AD curve to the left.
C. a shift of the AS curve to the right.
D. a shift of the AS curve to the left.
8. Which of the following events will shift the Aggregate Supply curve to the left?
A. real wages rise.
B. inflation expectations decrease.
C. land costs fall.
D. a fall in interest rates.
E. None of the Above
9. The short-run Aggregate Supply curve is upward sloping only because we assume that
resource costs are held constant. True or False?
10. If Aggregate Demand exceeds Aggregate Supply, unwanted inventories will begin to
accumulate, forcing firms to reduce prices to get rid of those inventories. True or False?
11. Which of the following would NOT cause a shift in AD?
A. A reduction in income tax
B. A reduction in interest rates
C. An increase in government spending
D. A fall in the cost of production
12. Choose appropriate phrases from the drop down boxes below to complete the
explanation of shifts of an aggregate demand curve and movements along aggregate
demand curves.
Choos e ...
When the price level in the economy changes there will a      the
aggregate demand curve. If the price level increases, there will be a movement upwards
and to the left on the aggregate demand curve. If there is a decrease in the price level,
then there will be a movement downwards to the right. However, if factors other than the
price level change then the whole aggregate demand curve will shift, either to the right or
to the left. For example, if there is a reduction in income tax, then the aggregate demand
Choose ...
curve will shift to the     . If, however, the rate of income tax increases,
Choose ...
then the demand curve will shift to the     .
13. Which of the following would NOT cause a SHIFT in AS?
A. The level of government spending
B. The costs of the factors of production
C. Incentives
D. The structure of the economy
14. If the price of imports rose, caused by a change in the value of the pound then the AS
would shift to the:
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 A. Right B. Left C. Vertically D. Not at all
15. Which of the following might have caused the shift in aggregate supply shown in the
diagram below? Choose all the answers that apply.
A. An improvement in technology P
AS2
B. A depreciation of the exchange rate
C. An increase in costs
AS1
D. A reduction in government expenditure
E. A cut in income tax P2
F. An increase in wage levels P1
16. A key determinant of exports is:
A. The industrial base of the economy AD

B. The number of people in work Y2 Y1

C. The political beliefs of the government

D. The role of the central bank
17. Which of the following would cause the shift shown in the diagram below? Choose
all the answers that apply.
A. The government increase interest rates
B. The Chancellor increases tax-free allowances in his budget
C. The rate of value-added tax is increased
D. Controls on the level of bank lending are relaxed
E. The government allows tax relief on R&D spending
F. The rate if income tax is reduced

P
AS

P1

P2 AD1

AD2

3
 Y2 Y1 Y

18. When using AD/AS analysis to illustrate changes within an economy, which of the
following would NOT need to be considered when looking at changes to economic
growth?
A. Increased labour productivity
B. More efficient use of the capital stock
C. Increased availability of social capital
D. Developing a more efficient capital and finance sector
19. Which of the following is a major influence on AS?
A. Consumption
B. Government spending
C. The quality of the factors available
D. The advice of government
20. Why is the aggregate demand curve downward sloping?
A) because the more people buy, the fewer additional purchases they need
B) because people buy something else when the price goes up
C) because people feel poorer and buy less when prices go up
D) because the more people wish to consume, the lower the price is
21. All else equal, what happens as the price level falls?
A) The money supply falls.
B) Interest rates rise.
C) Dollars become more valuable.
D) Dollars become less valuable.
22. In which situation are people most likely to spend more?
A) when stock prices and interest rates rise
B) when their real wealth rises and interest rates fall
C) when stock prices fall and interest rates rise
D) when their real wealth and interest rates fall
23. What happens when the price level falls?
A) Interest rates rise, so firms increase investment.
B) Interest rates rise, so firms decrease investment.
C) Interest rates fall, so firms increase investment.
D) Interest rates fall, so firms decrease investment.
24. Which statement best characterizes the aggregate-demand curve?
A) It slopes downward because higher prices cause the exchange rate to depreciate.
B) It slopes downward because higher prices cause real wealth to decrease and
interest rates to increase.
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 C) It slopes upward because higher prices cause people to increase their production.
D) It slopes upward because higher prices cause real wealth to increase and interest
rates to decrease.
25. Which of the following shifts aggregate demand to the left?
A) an increase in exports B) an increase in taxes
C) a decrease in imports D) a decrease in interest rates
26. Which of the following does NOT determine the long-run level of real GDP?
A) the price level B) the supply of labor
C) available natural resources D) available technology
27. What happens to prices and output when the long-run aggregate-supply curve shifts
left?
A) Prices and output both increase.
B) Prices and output both decrease.
C) Prices increase and output decreases.
D) Prices decrease and output increases.
28. According to the sticky-wage theory, which statement is consistent with a more-than-
expected increase in the price level?
A) Real wages rise, so firms will hire more workers.
B) Real wages rise, so firms will hire fewer workers.
C) Real wages fall, so firms will hire more workers.