Macroeconomics Principles and Applications 5th Edition Hall Test Bank

Macroeconomics Principles and
Applications 5th Edition Hall Test Bank

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CHAPTER 8—THE CLASSICAL LONG-RUN MODEL
MULTIPLE CHOICE
1. Classical economists believed that production could be stuck below its full employment level for a
long period of time.
a. True
b. False
ANS: B PTS: 1 DIF: 1
NAT: Financial theories, analysis, reporting, and markets
LOC: Understanding and applying economic models
TOP: Macroeconomic Models: Classical versus Keynesian
2. One reason why economists often appear to disagree when asked about the impact of some bad
economic news is that
a. they do not understand the economy very well
b. economics is a very difficult science, and so there are many incorrect economic
projections being made
c. economists rarely disagree; people just think they are disagreeing because they do not
understand the language of economics
d. economists often appear to be disagreeing when one is talking about long-run impact
while the other is referring to short-run impacts
e. economists are by nature competitive individuals and they often disagree
ANS: D PTS: 1 DIF: 1
3. According to classical economics,

a. the economy moves to full employment in the long run
b. the economy is always at full employment in the short run
c. the economy is rarely at full employment
d. business cycles explain long-run fluctuations in the economy
e. the economy is at full employment in the short run, but in the long run, business cycle
movements lead the economy away from full employment
ANS: A PTS: 1 DIF: 2
4. Which of the following is more of a short-run than a long-run goal?

a. Increasing the capital stock
b. Encouraging investment in human capital
c. Moderating economic fluctuations
d. Stimulating economic growth
e. Increasing private investment
ANS: C PTS: 1 DIF: 1
5. What key observation did the classical model attempt to explain?
a. the economy performs well in the short run, but not so well in the long run
b. business cycles are the most important economic problem
c. over the short run, the economy performs rather poorly
d. markets do not clear without government intervention
e. over the long run, the economy performs rather well
ANS: E PTS: 1 DIF: 2
6. The short-run macro model

a. is an attempt to explain why the economy tends to perform better in the short run than in
the long run
b. was developed during the Great Depression to explain the economy's continuing poor
performance
c. lost its popularity during the 1950s
d. was developed during the early 19th century
e. explains the forces that work to drive the economy to full employment
7. What major historical event led to the most significant challenge to classical economic thinking?
a. The war on poverty
b. The American Revolution
c. World War II
d. The Great Depression
e. The oil shocks of the 1970s
8. John Maynard Keynes and his followers argued that

a. the classical model does a good job of explaining the economy's operation in both the
short run and long run
b. the short run is unimportant so economists should focus their attention on the long run
c. the economy should be allowed to function with minimal government interference
d. the economy operates the same way in both the short run and long run
e. while the classical model might explain economic performance in the long run, the long
run could take a long time to reach
9. According to Keynesian economists,

a. the economy will return quickly to full employment in most cases
b. if output is below its potential, the economy will soon return to full employment
c. production can be stuck below its full-employment level for extended periods of time
d. the Great Depression proved that classical economics does a good job of explaining how
the economy operates
e. he economy will achieve full employment in the short run but, in the long run, GDP will
fluctuate
10. Which of the following events triggered intense debate over the classical model of the economy?
a. The U.S. Civil War
b. World War I
c. the Baby Boom
e. World War II
11. Which economic phenomenon is the short-run macro model most useful in explaining?
a. The sources of employment in the long run
b. The trend of output in the long run
c. The sources of cyclical unemployment
d. The reasons why some workers become discouraged
e. The sources of long-run economic growth
12. The classical model

a. is another name for the short-run macro model
b. was developed to explain the long period of poor economic performance during the Great
Depression
c. is an attempt to explain why the economy tends to perform rather well over long periods
of time
d. is believed by most economists to be a better explanatory model for short-term, rather than
long-term, economic performance
e. was not really accepted as a legitimate economic theory until the 1950s
13. Which of the following statements about modern macroeconomic theory is most accurate?
a. Keynes' ideas help us understand movements in output around its long-run trend, while the
Classical model is more useful in explaining the long-run trend itself.
b. The classical model helps us understand movements in output around its long-run trend,
while the short-run macro model is more useful in explaining the long-run trend itself.
c. Both classical and short-run macro models help us understand movements in output
around its long-run trend, but neither model is effective at explaining the long-run trend
itself.
d. Neither the classical nor the short-run macro model helps us understand movements in
output around its long-run trend, but both are useful in explaining the long-run trend itself.
e. Only the short-run macro model is useful in understanding movements in output around its
long-run trend, and in explaining the long-run trend itself.
14. Which of the following is a definition of economic fluctuations?

a. Movements in prices around their long-run trend
b. Shifts in the long-run trend of output
c. Movements of the real wage over the long run
d. Shifts in the long-run trend of prices
e. Movements in output around its long-run trend
15. The Classical model

a. is now discredited
b. was developed by John Maynard Keynes
c. has been completely displaced by the short-run macro model
d. helps us to understand the performance of the economy in the long run
e. is most useful in helping us to predict when an economic downturn will occur
16. Which of the following real-world phenomena does the classical model ignore?
a. Frictional unemployment
b. Inflation
c. Real output growth
d. Cyclical unemployment
e. Structural unemployment
17. A critical assumption in the classical model is that markets are always clear.
a. True
b. False
TOP: Assumptions of the Classical Model
18. A critical assumption in the classical model is that

a. markets are perfectly competitive in the short run
b. markets clear in the long run
c. markets clear in the short run
d. markets are perfectly competitive in the long run
e. all variables are expressed in nominal terms
19. A key assumption of the classical model is that

a. government intervention is important to get markets to clear
b. prices adjust until quantity supplied equals quantity demanded
c. markets never clear in the long run
d. demand adjusts in order to meet supply
e. prices remain constant and supply and demand adjust
20. Which of the following is true for a market that clears?

a. An excess supply of anything traded will lead to a fall in its price.
b. An excess demand of anything traded will lead to a fall in its price.
c. An excess supply of anything traded will lead to a rise in its price.
d. An excess demand of anything traded will not lead to a price change.
e. A high price will lead to a high demand.
21. The market clearing assumption is

a. a central assumption of the short-run macro model
b. the idea that prices in every market will adjust until quantity supplied and quantity
demanded are equal
c. the idea that excess supply always leads to an increase in demand
d. the idea that markets only work when they are in equilibrium
e. believed by most economists today to be an unreasonable assumption
22. Markets clear

a. in the short run
b. when a depression occurs
c. when a recession occurs
d. roughly every ninety days
e. eventually
23. Because markets may not clear for several months or even several years, the classical model
a. is no longer considered valuable by mainstream economists
b. has no value when explaining a situation where excess supply exists
c. is irrelevant to any discussion of a market in which excess demand exists
d. does a better job of explaining short-term fluctuations than long-run growth
e. does a better job of explaining long-run growth than short-run fluctuations
24. The desire for goods and services is

a. created by a market economy
b. the ultimate explanation for all production
c. why it is so difficult to explain how our economy works
d. the cause of inflation
e. what causes the market wage for labor to continually increase
TOP: How Much Output Will We Produce?
25. In the classical long-run model,

a. we focus on labor resources, rather than capital or land
b. we study thousands of different resource markets
c. we concentrate our attention on three resource markets: land, labor, and capital
d. we focus on two markets: households and firms
e. the number of variables we include depends upon whether we are focusing on the short
run or the long run
26. The classical model

a. relies on the equivalency of the labor, capital, and land resource markets
b. includes a land market and a labor market
c. focuses primarily on capital markets
d. focuses primarily on labor markets
e. focuses on labor, capital, and land markets
27. If the actual real wage exceeds the equilibrium wage, there will be an excess supply of labor.
a. True
b. False
LOC: Understanding and applying economic models TOP: The Labor Market
28. In the classical view, all markets clear, except the labor market.
a. True
b. False
29. According to the classical model, there is no need for government intervention in the economy. if the
economy is left alone, full employment output will eventually occur.
a. True
b. False
30. The labor supply curve shows

a. how much output a firm will supply with a given amount of labor
b. how much labor a firm will want to hire at each wage rate
c. how much output people will want to buy if they supply a given amount of labor
d. how much labor a firm will need with a given amount of machinery and equipment
e. how many people will want jobs at each wage rate
31. The labor demand curve shows the

a. number of workers that firms will want to hire at any wage rate
b. number of people who will want jobs at any wage rate
c. amount of labor that a firm needs to produce a given amount of output
d. equilibrium wage rate and number of workers employed
e. amount of output workers will be able to buy for a given number of hours worked
32. Which of the following groups would be considered suppliers in the labor market?
a. Government agencies
b. Firms
c. Households
d. Stockholders
e. Landlords
33. The supply of labor

a. varies inversely with the price level
b. does not vary with the real wage rate
c. does not vary with the price level
d. varies directly with the price level
e. varies inversely with the nominal wage rate
34. The labor supply curve

a. slopes upward to illustrate that more people will want to work as the real wage increases
b. slopes upward to illustrate that changes in the real wage are directly proportional to
changes in the nominal wage
c. may slope either upward or downward, depending upon the real wage
d. slopes downward to illustrate that a decrease in the real wage decreases the number of
individuals willing to work
e. slopes downward to illustrate that the availability of workers is directly proportional to the
real wage
35. The labor demand curve slopes

a. upward to illustrate that the more productive the worker, the higher the real wage the
employer is willing to pay that worker
b. upward to illustrate that the higher the wage rate, the fewer workers are demanded
c. upward or downward in direct proportion to the rate of inflation
d. downward to illustrate that the lower the real wage, the more workers employers are
willing to hire
e. downward to illustrate that the availability of workers is directly proportional to the real
wage
36. Refer to Figure 8-1. According to the graph, the equilibrium real hourly wage and quantity of labor
employed, respectively, are
a. $10, 110 million workers
b. $8, 130 million workers
c. $8, 150 million workers
d. $6, 150 million workers
e. $6, 130 million workers
37. Refer to Figure 8-1. If the real hourly wage rate was $6, what would be the effect?
a. There would be a shortage of 40 million workers and the wage rate would rise.
b. There would be a shortage of 20 million workers and the wage rate would rise.
c. There would be a surplus of 40 million workers and the wage rate would fall.
d. There would be a surplus of 20 million workers and the wage rate would fall.
e. There would be unemployment.
38. Refer to Figure 8-1. What would be the effect if the real wage was $2 above the equilibrium wage?
a. There would be a shortage of 40 million workers and the wage rate would rise.
b. There would be a shortage of 20 million workers and the wage rate would rise.
c. There would be a surplus of 40 million workers and the wage rate would fall.
d. There would be a surplus of 20 million workers and the wage rate would fall.
e. The government would set a minimum wage.
39. Refer to Figure 8-1. If the labor market is in equilibrium, there is no

a. unemployment
b. frictional unemployment
c. structural unemployment
d. seasonal unemployment
e. cyclical unemployment
40. The labor demand curve slopes downward because

a. firms wish to hire fewer workers as the wage rate increases
b. households wish to hire fewer workers as the wage rate decreases
c. firms wish to hire more workers as the wage rate increases
d. firms wish to supply fewer workers as the wage rate increases
e. households wish to provide fewer hours of work as the wage rate decreases
41. In a labor market diagram, the point at which the labor supply curve crosses the labor demand curve is
a. the point at which all workers are employed at the salary at which they would prefer to be
employed
b. the point at which all jobs are filled at the wage employers prefer to pay
c. the point at which everyone who wants to work is able to find a job
d. a point at which we have excess labor supply, causing unemployment
e. the point at which excess demand for labor drives the wage rate upward
42. Which of the following is not an accurate description of the point at which the labor supply and labor
demand curves meet?
a. The point at which the market for labor has cleared
b. The real wage at which the quantity of labor demanded is equal to the quantity of labor
supplied
c. The point at which there is no frictional unemployment
d. The point at which there is no unemployment
e. The wage at which the number of workers firms want to hire is equal to the number of
people who want jobs
43. According to classical economists,

a. full employment means zero unemployment
b. as long as markets clear, no government action is needed to ensure full employment
c. even if all markets clear, government action is needed to correct labor market
imperfections if the economy is to reach full employment
d. as long as markets clear and government provides jobs to those who need them, the
economy will be at full employment
e. even if markets clear, cyclical unemployment will still persist in the long run
44. According to the classical model, if there are too many elementary school teachers in the labor market,
a. the government should institute a retraining program to give the unemployed teachers new
job skills
b. the wages for elementary teachers will fall, eventually causing the number of excess
teachers to shrink
c. the wage for elementary teachers will increase for those who are employed, but
unemployment of teachers will remain high
d. this situation provides an example of cyclical unemployment, which often occurs in the
long run
e. people will quit training to become elementary school teachers and soon there will be a
shortage in this labor market
45. If the labor supply and demand curves cross at a wage of $20,
a. a wage rate of $10 per hour would lead to an excess demand for labor
b. a wage rate of $10 per hour would lead to an excess supply of labor
c. that wage causes a high rate of cyclical unemployment
d. employees are overpaid
e. a wage rate of $10 per hour would mean there is a significant amount of structural
unemployment
46. It is possible for an economy to produce more than its potential level of output, at least for a short
period of time.
a. True
b. False
TOP: Determining the Economy's Output
47. The aggregate production function shows us that increasing the number of workers employed will
increase output at a constant rate.
a. True
b. False
48. Diminishing returns to labor occur for two primary reasons: 1) as we keep adding new workers, it
becomes increasingly difficult to obtain productivity gains through additional specialization; and 2)
each additional worker we add has less land and capital to work with.
a. True
b. False
49. A country's total output, or real GDP, is determined only by its aggregate production function.
a. True
b. False
50. The economy's level of output depends upon (1) the

a. amount of land and capital available for labor to use and (2) the state of technology and
types of inputs available
b. cost of land and capital and (2) the cost of labor
c. availability of land and (2) the availability of capital
d. state of technology and (2) the cost of land
e. state of technology and (2) the types of inputs available
51. The classical model assumes that

a. the supply of labor is fixed
b. the stock of capital and technology are fixed
c. the stock of capital and technology grows at a constant rate
d. the supply of labor grows at a constant rate
e. the supply of labor grows at an increasing rate.
52. The aggregate production function shows how much output the economy can produce
a. with different quantities of labor, land, capital and states of technology
b. with different quantities of labor and capital, for given amounts of land and a given state
of technology
c. with different quantities of labor, for given amounts of land and capital, and a given state
of technology
d. with a given amount of money
e. with different amounts of money and given amounts of land, labor, capital, and a given
state of technology
53. Which of the following is a definition of the aggregate production function?

a. the relationship describing which inputs an economy can use with different quantities of
labor
b. the relationship describing how much labor an economy can supply with different
quantities of capital
c. the relationship describing how much output an economy can produce with different
quantities of labor
d. the relationship describing what services an economy can produce with different quantities
of capital
e. the relationship describing how much output a firm can produce with different quantities
of capital
54. The aggregate production function is the

a. relationship between the amount of labor employed in the economy and the total amount
of output produced
b. relationship between available labor and the total amount of output produced
c. the relationship between land and capital and labor employed in the economy
d. long-run equilibrium of the macroeconomy
e. amount of output any worker can produce given existing land and capital constraints
55. Which of the following best describes the aggregate production function if output is measured on the
vertical axis and the number of workers employed is measured on the horizontal axis? The curve is
a. downward sloping and becomes flatter as the number of workers employed increases
b. downward sloping and becomes steeper as the number of workers employed increases
c. downward sloping with the same slope throughout
d. upward sloping and becomes steeper as the number of workers employed increases
e. upward sloping and becomes flatter as the number of workers employed increases
56. What is the effect of diminishing returns to labor on the slope of the aggregate production function
(where output is measured on the vertical axis and employment is measured on the horizontal axis)?
a. It implies that the slope of the curve increases as the number of workers employed
increases.
b. It implies that the slope of the curve becomes negative as the number of workers employed
increases.
c. It implies that the slope of the curve decreases (or becomes flatter) as the number of
workers employed increases.
d. It keeps the slope the same throughout.
e. It has nothing to do with the slope of the aggregate production function.
57. Refer to Figure 8-2. The economy's potential level of output on the graph
a. cannot be determined with this information, only actual output can be found
b. is rising
c. exceeds $8 trillion
d. is less than $8 trillion
e. equals $8 trillion
58. Refer to Figure 8-2. The economy is at full employment if
a. the quantity of labor supplied exceeds the quantity demanded
b. the quantity of labor demanded exceeds the quantity supplied
c. 130 million workers are employed
d. the real hourly wage is rising
e. we reach the maximum point on the production function
59. What is the full-employment output level?

a. The output level that results when the loanable funds market clears
b. The output level that results when the returns to labor are zero
c. The output level that results when factories are completely full
d. The output level that results when the labor market clears
e. The output level that would occur if the output level was positive.
60. An aggregate production function, when shown on a graph,

a. is linear and slopes upward
b. is linear and slopes downward
c. is horizontal
d. is vertical
e. slopes upward, and flattens out as more labor is used
61. The aggregate production function is the relationship between the

a. total cost of labor and the quantity of output in the economy
b. total cost of labor and the total real cost of inputs
c. quantity of labor employed in the economy and the total quantity of output produced
d. cost of labor and the supply of labor
e. quantity of labor and the quantity of capital
62. Say's Law states that by purchasing goods and services, buyers stimulate firms to produce goods and
services equal to what has been purchased: Demand creates its own supply.
a. True
b. False
TOP: Total Spending in a Very Simple Economy
63. According to Say's Law, supply creates its own demand.

a. True
b. False
64. Say's Law is the idea that

a. in the long run, the economy reaches full employment automatically
b. the aggregate production function, along with the labor market, determines the economy's
level of output
c. total output will always exceed total spending
d. whenever a good or service is produced, an equal amount of income is created
e. markets always clear
65. Refer to Figure 8-3. This figure is known as

a. the classical aggregate production function
b. the Keynesian aggregate production function
c. the full-employment model
d. the circular flow diagram
e. Say's diagram
66. After examining Figure 8-3, it is possible to conclude that
a. people do not save money nor pay taxes in this model
b. firms purchase resources from households and other firms in this model
c. households are the only ones who purchase and firms the only ones who sell in this model
d. completion of a sale represents a break in the flow of goods and services, and inputs in this
model
e. all households and firms individually receive the same amount of money in this model
67. Factor payments are

a. amounts paid to resource owners for the use of their resource
b. amounts paid for goods
c. another term for revenues
d. the amount households put into savings
e. payments made to workers who are employed only part time
68. According to Say's Law, in the aggregate

a. demand creates its own supply
b. the production of output will generate exactly enough income to purchase what has been
produced
c. the economy is incapable of producing output fast enough to ensure full employment
d. full employment cannot be sustained without government action
e. consumer saving prevents the economy from reaching full employment
69. The economist that gave us the proposition that "supply creates its own demand" was
a. Adam Smith
b. Jean Baptiste Say
c. Marc Lieberman
d. John Maynard Keynes
e. Robert Hall
70. Say's Law

a. is valid only in a simple economy without financial markets
b. led economists during the 1920s to encourage the government to adopt flawed economic
policies that led to the Great Depression
c. assures us that in the aggregate, firms are able to sell their output so that full employment
can be sustained
d. tells us that in the long run, markets clear
e. tell us that firms must carefully monitor consumer spending and saving in order not to
produce more than consumers are willing to purchase
71. Net taxes are

a. the total amount of taxes paid to the government
b. total tax revenues of the federal government
c. total tax revenues plus transfer payments
d. total tax revenues minus transfer payments
e. total tax revenues minus taxes paid by firms
TOP: Total Spending in a More Realistic Economy
72. Transfer payments, such as unemployment insurance and welfare, are included in the circular flow as
part of
a. government purchases
b. household saving
c. net taxes
d. planned investment spending
e. household consumption
73. Using the following information on a hypothetical economy in equilibrium, calculate total output for
2008.
Consumption Spending $3.5 trillion

Net Taxes $2.7 trillion
Household Saving $2.5 trillion
Investment Spending $2.2 trillion
Government Purchases $3.0 trillion
Exports $1.1 trillion
Imports $1.1 trillion
Total output for 2008 is

a. $5.2 trillion
b. $5.7 trillion
c. $8.4 trillion
d. $8.7 trillion
e. $13.9 trillion
74. What is the relationship between total taxes and net taxes?
a. total taxes = net taxes  transfer payments
b. net taxes = total taxes + local taxes
c. net taxes = transfer payments / total taxes
d. total taxes = net taxes - transfer payments
e. total taxes = net taxes + transfer payments
75. What is the relationship between household saving and taxes?

a. taxes = income - consumption - household saving
b. household saving = income + taxes - consumption
c. taxes = income + consumption + household saving
d. household saving = consumption + income - taxes
e. taxes = household saving - income + consumption
76. In a typical economy, the dollar value of the total output for a period will equal the sum of
consumption spending, planned investment spending, government spending, and net tax revenue.
a. True
b. False
LOC: Understanding and applying economic models TOP: Leakages and Injections
77. Saving and taxes are considered leakages from the spending stream.
a. True
b. False
78. Which of the following is a leakages from the circular flow?

a. Household saving and government spending
b. Business investment and household saving
c. Net taxes and household saving
d. Government spending and business investment
e. Net taxes and government spending
79. Which of the following statements is true when total spending equals total output?
a. Saving plus taxes equals investment plus government purchases.
b. Output equals investment plus government purchases plus saving plus taxes.
c. Output equals consumption spending plus investment plus government purchases plus
saving plus taxes.
d. Output equals consumption plus investment plus taxes.
e. Saving plus investment equals taxes plus government purchases.
80. Assuming the economy was in equilibrium, use the following information to calculate the total value
of leakages.

Total leakages are

a. $2.5 trillion
b. $2.7 trillion
c. $3.0 trillion
d. $5.2 trillion
e. $5.7 trillion
81. Which of the following is an injection into the circular flow?

a. household saving and government spending
b. business investment and household saving
c. net taxes and household saving
d. government spending and business investment
e. net taxes and government spending
82. Leakages are

a. negative tax revenues
b. government spending on nonessential goods and services
c. amounts of income earned, but not spent, by the household sector during a given year
d. a sign that an economy's total output is excessive
e. sums spent by sectors other than households
83. In an economy without international trade, we can expect total output to equal
a. consumption spending plus investment spending plus government purchases
b. consumption spending minus leakages
c. the sum of leakages and injections
d. consumption spending plus investment spending
e. total spending minus leakages and injections
84. If an economy's consumption spending is $5 trillion, investment is $2 trillion, government spending is

$1 trillion, net taxes are $1 trillion and household saving is $2 trillion, total income is
a. $3 trillion
b. $5 trillion
c. $7 trillion
d. $8 trillion
e. $11 trillion
85. In the long run, if an economy's consumption spending is $5 trillion, its planned investment is $2
trillion, government spending is $1 trillion, net tax revenue is $1 trillion, and household savings are $2
trillion, total output should be
a. $3 trillion
b. $5 trillion
c. $7 trillion
d. $8 trillion
e. $11 trillion
86. Total spending will equal total output

a. after inventory adjustments
b. only when total leakages are equal to total injections
c. by the end of every year
d. only when the sum of saving and investment equals the sum of net taxes and government
expenditures
e. saving is equal to net taxes
87. Households make their savings available to borrowers through

a. resource markets
b. the loanable funds market
c. the labor market
d. the taxes
e. spending
LOC: Understanding and applying economic models TOP: The Loanable Funds Market
88. Which of the following markets must clear if injections from the income-spending stream are to equal
leakages from the stream?
a. The resource market
b. The labor market
c. The goods market
d. The aggregate market
e. The loanable funds market
89. Assuming the economy was in equilibrium, use the following information to determine the
government's budget deficit.

The government's deficit (surplus) was

a. -$0.3 trillion deficit ($0.3 trillion surplus)
b. -$0.2 trillion deficit
c. $0.2 trillion deficit
d. $0.3 trillion deficit
e. $0.5 trillion deficit
90. The government budget deficit is

a. the difference between government purchases and government revenues from bonds and
taxes
b. caused by a lack of business sector investment
c. created when the government expenditures exceed net taxes
d. caused by leakages in the economy
e. is created by government injections
91. What is the relationship between the government's budget deficit and its tax revenue?
a. Budget deficit = government spending + tax revenue
b. Budget deficit = government spending - tax revenue
c. Government spending = budget deficit / tax revenue
d. Tax revenue = government spending + budget deficit
e. Budget deficit = tax revenue - government spending
92. What is the price of funds in the loanable funds market?

a. The real wage rate
b. The Consumer Price Index
c. The interest rate
d. The profit rate
e. The GDP price index
93. Assuming the economy was in equilibrium, use the following information to determine the amount of
funds supplied to the loanable funds market.

a. $2.2 trillion
b. $2.5 trillion
c. $2.7 trillion
d. $3.0 trillion
e. $5.2 trillion
94. Assuming the economy was in equilibrium, use the following information to determine the total
amount of funds demanded in the loanable funds market.

a. $0.3 trillion
b. $2.2 trillion
c. $2.5 trillion
d. $3.0 trillion
e. $5.2 trillion
95. In the classical model, the supply of funds to the loanable funds market comes from
a. household saving and the government's budget surplus, if any
b. net taxes
c. household saving and the government budget deficit, if any
d. planned investment
e. total income
96. In the classical model, the quantity of loanable funds supplied is

a. positively related to the level of income
b. negatively related to the price level
c. positively related to the price level
d. negatively related to the interest rate
e. positively related to the interest rate
LOC: Understanding and applying economic models TOP: The Supply of Funds Curve
97. The supply of loanable funds curve

a. is upward sloping
b. is downward sloping
c. is horizontal
d. begins sloping upward, then levels off
e. may slope either upward or downward, depending upon the interest rate
98. The supply of loanable funds curve is upward-sloping because a rise in the interest rate
a. decreases the opportunity cost of firms' investment spending
b. stimulates the economy
c. decreases the opportunity cost to households of consuming
d. increases the opportunity cost to households of consuming
e. increases the government's desire to run a budget deficit
99. The demand for funds in the financial market comes from one source: the business sector's investment
spending.
a. True
b. False
TOP: The Demand for Funds Curve
100. Investment spending is inversely related to the interest rate.

a. True
b. False
101. The investment demand curve

a. is upward sloping
b. is downward sloping
c. is horizontal
d. begins sloping upward then flattens out
e. begins sloping downward, then flattens out
102. In the classical model, investment spending is

a. positively related to the level of income
b. positively related to the interest rate
c. negatively related to the interest rate
d. unrelated to the interest rate
e. negatively related to the price level
103. In the classical model, which of the following is treated as independent of the interest rate?
a. the quantity of loanable funds demanded by government
b. the quantity of loanable funds demanded by businesses
c. the total quantity of loanable funds demanded
d. household saving
e. the total quantity of loanable funds supplied
104. When represented graphically, the government's demand for funds curve is
a. downward sloping
b. upward sloping
c. vertical
d. initially downward sloping, then upward sloping
e. initially rightward sloping, then downward sloping
105. If the interest rate rises, the

a. quantity of loanable funds demanded by firms decreases
b. quantity of loanable funds demanded by government decreases
c. quantity of loanable funds demanded by firms increases
d. quantity of loanable funds demanded by government increases
e. demand for loanable funds curve shifts to the right
106. Suppose there are no firms, only the government and households. What would the total demand for
funds curve look like in such a world?
a. Downward sloping
b. Perfectly horizontal
c. Upward sloping
d. There would be no such curve
e. Perfectly vertical
107. Because financial markets clear, we know that leakages in the economy will equal injections and,
therefore, there will be enough spending in the economy to purchase whatever amount of output level
produced.
a. True
b. False
TOP: Equilibrium in the Loanable Funds Market
108. Refer to Figure 8-4. Based on these graphs, what is the total quantity of loanable funds demanded at
an interest rate of 5 percent?
a. $0.8 trillion
b. $1.0 trillion
c. $1.4 trillion
d. $1.8 trillion
e. $2.2 trillion
109. Refer to Figure 8-4. Based on these graphs, what are the equilibrium interest rate and quantity of
loanable funds exchanged?
a. 5 percent and $1.4 trillion
b. 5 percent and $2.2 trillion
c. 8 percent and $1.8 trillion
d. 8 percent and $2.8 trillion
e. It cannot be determined with the information given.
110. Suppose there are no firms, only the government and households. What would be the result if for some
reason the supply of saving at every interest rate suddenly fell?
a. Interest rates would fall and the level of saving would fall.
b. Interest rates would fall and the level of saving would not change.
c. Interest rates would rise and the level of saving would not change.
d. Interest rates would rise and the level of saving would fall.
e. Interest rates would not change and the level of saving would fall.
111. Refer to Figure 8-5. What is the equilibrium interest rate?

a. 4 percent
b. 6 percent
c. 8 percent
d. 10 percent
e. It cannot be determined with the information given.
112. The relationship between household saving and business investment spending in equilibrium is:
Planned investment = household saving - government spending + taxes
a. True
b. False
TOP: The Loanable Funds Market and Say's Law
113. If at an interest rate of 7 percent, planned investment is $2 trillion, government spending is $3 trillion,
net taxes are $2.8 trillion, and household saving is $2.2 trillion, what is the quantity of funds demanded
at an interest rate of 7 percent?
a. $1.8 trillion
b. $2.2 trillion
c. $2.8 trillion
d. $5.0 trillion
e. $5.8 trillion
114. In the classical model, the loanable funds market will clear when saving
a. equals investment plus government purchases minus net taxes
b. equals net taxes
c. equals investment
d. equals investment plus government purchases
e. minus taxes equals investment plus government purchases
115. In the classical model, if the amount households wish to save exceeds the sum of the amount
businesses wish to invest plus the government's budget deficit, the loanable funds market
a. will be in disequilibrium, but this does not prevent equilibrium in the total economy
b. will be in disequilibrium, and we would expect the supply of funds to decrease
c. will be in disequilibrium, and we would expect the interest rate to rise
d. will be in disequilibrium, and we would expect the interest rate to fall
e. may be in equilibrium, because unplanned inventory changes have not been included
116. Say's Law

a. cannot be satisfied if there is excess supply or demand in individual markets in the long
run
b. ensures that every firm will sell all of its output
c. can be satisfied even if there is a general overproduction or underproduction of goods in
the economy
d. is satisfied only if every market clears in the short run
e. shows that the total value of spending in the economy will equal the total value of the
output produced
117. The classical model is based on the assumption that

a. all markets clear
b. all demand curves are horizontal
c. all supply curves are vertical
d. the government's budget is always balanced
e. the quantity of loanable funds demanded is independent of the interest rate
TOP: The Classical Model: A Summary
118. Market clearing in the loanable funds market

a. violates Say's Law
b. guarantees that total spending will be just sufficient to purchase whatever output is
produced
c. means that the interest rate never changes
d. guarantees that total spending will equal the quantity of loanable funds demanded
e. requires that the government run a budget deficit
119. According to Say's Law,

a. demand creates its own supply
b. interest rates never change
c. there is never too much or too little spending
d. prices never change
e. the market for loanable funds is always in equilibrium
120. According to the classical model, if the government wanted to increase employment, it could do so by
increasing its own spending. That would lead firms to produce more output, for which they would
need to hire more workers.
a. True
b. False
TOP: Using the Theory: Fiscal Policy in the Classical Model
121. Fiscal policy is a change in either government purchases or the money supply designed to change total
spending in the economy, thereby influencing the levels of employment and output.
a. True
b. False
122. If political influences, independent of any economic forces, lead to a larger government budget deficit,
what will be the effect on the loanable funds market?
a. The interest rate will rise and the amount of saving will increase.
b. The interest rate will fall and the amount of saving will increase.
c. The interest rate will rise and the amount of saving will decrease.
d. The interest rate will fall and the amount of saving will decrease.
e. The interest rate will rise but the change in saving will be ambiguous.
123. Changes in government spending or taxes designed to stimulate the economy are examples of
a. fiscal policy
b. monetary policy
c. supply management policy
d. classical policy
e. regulatory policy
124. If the government increases its spending or reduces its taxes in order to influence the level of economic
activity, it is engaging in
a. regulatory policy
b. antitrust policy
c. monetary policy
d. fiscal policy
e. supply-management policy
125. Refer to Figure 8-6. Suppose that a $1 trillion increase in government spending shifted the demand for
funds curve from D1 to D2. What would happen to the sum of investment and consumption spending?
That sum would
a. remain unchanged
b. rise by $0.6 trillion
c. rise by $1 trillion
d. fall by $1 trillion
e. fall by $0.4 trillion
TOP: Fiscal Policy with a Budget Deficit
126. In the classical model, if government tries to increase employment and output by increasing its own
purchases,
a. it will achieve its goal and economic conditions will improve
b. it will not attain its objective unless it also decreases taxes
c. its actions will cause the interest rate to rise, which will choke off investment spending
d. firms will be motivated to increase their output, thereby creating even more jobs
e. saving will also increase, as more people are employed
127. According to the classical model, an increase in government purchases will

a. lead to a change in the interest rate that encourages consumers to spend more
b. lead to a change in the interest rate that encourages private businesses to invest more
c. discourage private spending by increasing the price level
d. be partially offset by a decline in consumption and investment spending
e. leave total spending and output unchanged
128. Which of the following does not usually occur when there is an increase in government spending?
a. Government purchases crowd out private-sector spending.
b. Total spending decreases.
c. The interest rate increases.
d. Investment spending declines.
e. Household saving increases.
129. Crowding out refers to a(n)

a. decrease in the amount of goods produced after too many goods have crowded onto the
market
b. business tactic used to steal a competitor's customers
c. increase in one sector's spending caused by an increase in another sector's spending
d. decrease in the price level after too many goods have crowded onto the market
e. decline in one sector's spending caused by an increase in another sector's spending
130. A decrease in government spending would cause all but one of the following to happen. Which is the
exception?
a. The government's budget deficit would shrink.
b. The interest rate would decrease.
c. Consumption spending would increase.
d. Investment spending would increase.
e. Total output would decrease.
131. According to the classical model, if the government lowers its budget deficit, which of the following
will occur?
a. The interest rate will rise, and consumption, investment and output will all decrease.
b. The interest rate will fall, consumption and investment will increase, but output will not
change.
c. The interest rate will rise, and consumption, investment and output will all increase.
d. The interest rate will fall, and consumption, investment and output will all increase.
e. The interest rate will fall, consumption will not change, but investment and output will
both increase.
132. Which of the following is an implication of the classical model?

a. The supply of loanable funds curve is downward sloping.
b. The inflation rate is constantly rising.
c. Fiscal policy only changes the amount of consumption, investment and government
spending, not the amount of output produced.
d. Monetary policy can change both the interest rate and real output.
e. The interest rate can only be changed by monetary policy, not by changes in government
spending.
133. When the government is running a budget surplus,

a. the demand for loanable funds includes only business investment spending
b. the supply of loanable funds includes only business investment spending
c. the loanable funds market cannot be in equilibrium
d. the supply of loanable funds includes only household saving
e. there will be an excess supply of loanable funds
TOP: Fiscal Policy with a Budget Surplus
134. In the classical model, beginning from an equilibrium in which the government is running a budget
surplus
a. the supply of loanable funds will be horizontal
b. an increase in government spending will cause the interest rate to rise
c. the supply of loanable funds will be vertical
d. an increase in government spending will crowd out less than an equal amount of private
spending
e. a decrease in government spending will crowd out less than an equal amount of private
spending
surplus,
a. this will lower the wage rate
b. the demand for loanable funds will be horizontal
c. an increase in government spending will crowd out more than an equal amount of private
spending
d. an increase in government spending will crowd out an equal amount of private spending
e. an increase in government spending will crowd out less than an equal amount of private
spending
surplus, an increase in government spending will
a. lower the wage rate
b. increase the supply of loanable funds
c. cause total spending to decline
d. cause total spending to increase
e. leave total spending unchanged
137. Which of the following types of unemployment can the classical model not explain?
a. Structural unemployment
b. Cyclical unemployment
c. Seasonal unemployment
d. Frictional unemployment
e. Temporary unemployment
138. The classical model does a good job of explaining the _____ while doing poor a job of explaining the
_____.
a. short run; long run
b. business cycle; long run
c. short run; business cycle
d. unemployment rate; interest rates
e. long run; short run
139. Which of the following events led to the debate over the applicability of the classical model?
a. World War II
b. World War I
c. Korean War
e. The Great Society
140. Classical economists believed that the economy would always return to full employment.
a. True
b. False
141. Assume that markets clear. If in the labor market there is

a. an excess supply of labor, wages will rise
b. an excess demand for labor, wages will fall
c. an excess demand for labor, wages will rise
d. an excess supply of labor, wages stay constant
e. a decline in labor demand, wages will rise
142. In the classical model, markets clear

a. in the short run
b. every month
c. immediately
d. in the long run
e. as soon as any shock occurs
143. How do people in a market economy obtain income that is used to buy goods and services?
a. Supplying labor and other resources to firms
b. Trading goods and services in a barter system
c. Selling goods and services to each other
d. None of the above
e. b and c
144. Suppose the current equilibrium real wage is $15 an hour. Which of the following is true?
a. A real wage above $15 an hour would lead to an excess demand for labor
b. A real wage above $15 an hour would lead to an excess supply of labor
c. The real wage must fall to prevent unemployment
d. The real wage must rise to prevent unemployment
e. A real wage below $15 an hour would lead to an excess supply of labor
145. Diminishing marginal returns means that aggregate production function is

a. linear
b. downward sloping
c. upward sloping
d. concave
e. convex
146. The aggregate production function shows

a. the total output the economy can produce with different quantities of labor and
technology, holding land and capital constant
b. the total output the economy can produce with different quantities of land and labor,
holding capital and technology constant
c. the total output the economy can produce with different quantities of labor, holding land,
capital and technology constant
d. the total output the economy can produce with different quantities of labor and capital,
holding land and technology constant
e. the total output the economy can produce with different quantities of technology, holding
land, labor and capital constant
147. What condition must be met in order for total spending to equal total output?
a. The sum of saving and government purchases must equal the sum of planned investment
and net taxes.
b. The sum of saving and net taxes must equal the sum of planned investment and
government purchases.
c. The sum of saving and planned investment must equal the sum of government purchases
and net taxes.
d. Saving must equal net taxes.
e. The sum of saving and net taxes must equal planned investment minus government
purchases.
148. Which of the following lists represent leakages from the circular flow?
a. Government purchases, net taxes and household saving.
b. Planned investment, net taxes and government purchases.
c. Household saving and planned investment.
d. Planned investment and net taxes.
e. Household saving and net taxes.
149. Assume the economy is currently in equilibrium. Use the following information to calculate the total
value of injections
Consumption Spending $5 trillion

Total injections are

a. $10.7 trillion
b. $5.1 trillion
c. $5.9 trillion
d. $5.7 trillion
e. $5.3 trillion
150. Which of the following are examples of leakages?

a. government purchases, net taxes and imports
b. government purchases, exports and investment spending
c. net taxes, household saving and imports
d. net taxes, investment spending and exports
e. net exports, investment spending and net taxes
151. Assume a closed economy. If consumption spending is $6.2 trillion, investment spending is $2.5
trillion, net taxes are $1.5 trillion and total income is $11 trillion, how much must government
purchases be?
a. $2.3 trillion
b. $0.8 trillion
c. $3.3 trillion
d. $7 trillion
e. cannot be determined without more information
152. Which of the following are examples of injections?

a. government purchases, net taxes and exports
b. government purchases, investment spending and exports
c. net taxes, imports and household saving
d. household saving, imports and government purchases
e. exports, imports and household saving
153. Which of the following is the formula for the government’s budget deficit?
a. S - G
b. G -T
c. C + I + G
d. S + I
e. I + G
154. In the classical model, the demand for loanable funds comes from
a. consumption expenditures and the government deficit, if any
b. net taxes and government expenditures
c. government purchases
d. investment spending and the government deficit, if any
e. consumption expenditures, investment spending and government purchases
155. The supply of loanable funds curve is downward sloping.

a. True
b. False
156. On a graph, the private sector’s demand for loanable funds curve is
a. upward sloping
b. vertical
c. horizontal
d. downward sloping
e. horizontal then upward sloping
157. The demand for loanable funds curve is downward sloping because
a. as the interest rate falls business firms demand fewer loanable funds
b. as the interest rate falls business firms demand more loanable funds
c. as the interest rate rises business firms demand more loanable funds
d. as the interest rate rises, the government demands more loanable funds
e. as the interest rate rises, the government demands fewer loanable funds
158. In the loanable funds market, if the government is running a deficit

a. it is a supplier of funds as it is taking in more than it is spending
b. it is a demander of funds as it is taking in more than it is spending
c. it is a supplier of funds as it is spending more than it is taking in
d. it is neither be a supplier or demander
e. it is a demander of funds as it is spending more than it is taking in.
159. Refer to Figure 8-7. What is the equilibrium interest rate in the above figure?
a. 6% because that is where the total supply of funds equals the total demand.
b. 5% because business and the government want to borrow as much as possible.
c. 6% because that is where the amount of funds demanded is equal to the amount of funds
demanded.
d. 7% because households refuse to lend enough funds at a lower interest rate.
e. 5% because households refuse to lend enough funds at a higher interest rate.
160. What is the equilibrium condition in the loanable funds market?

a. S + G = IP - T
b. S = IP + T - G
c. S + IP = G - T
d. S - T = IP + G
e. S = IP + G - T
161. Say’s law assures us that in the classical model, total spending is always enough to purchase the
economy’s total output.
a. True
b. False
162. As long as the loanable funds market clears, Say’s law holds..
a. True
b. False
163. Fiscal policy is

a. a change in money supply designed to change total spending.
b. a change in interest rates designed to change total spending.
c. a change in government purchases or net taxes designed to change total spending.
d. a change in government regulations designed to change total spending.
e. a change in policy stance by the Federal Reserve designed to change total spending.
TOP: Fiscal Policy in the Classical Model
164. In the classical model, fiscal policy is both ineffective and unnecessary.
a. True
b. False
165. In the classical model, we assume there is no ongoing inflation, so there is no need to distinguish
between the nominal interest rate and the real interest rate.
a. True
b. False
TOP: The Supply of Loanable Funds
166. Say’s law promises that each and every firm in the economy will be able to sell all of the particular
output it produces.
a. True
b. False
167. What is the concept springs to mind when thinking of the classical model?.
a. Inflation.
b. Population growth.
c. Markets clear.
d. The microeconomy.
e. Money supply.
168. John Maynard Keynes was the author of

a. An Economic History of the Great Depression.
b. The General Theory of Employment, Interest, and Money.
c. The Wealth of Nations.
d. The Principles of Political Economy and Taxation.
e. Macroeconomic Policy.
TOP: The Classical Long-Run Model
169. The terms “long-run view” and “classical view” can be used interchangeably.
a. True
b. False
TOP: Why the Classical Model is Important.
170. The slope of the production function reflects

a. capital expenditures.
b. government expenditures.
c. Constant returns to labor.
d. Increasing returns to labor.
e. Diminishing returns to labor.
LOC: Understanding and applying economic models TOP: The Production Function
171. In the classical model, taxes and spending are treated as two separate variables.
a. True
b. False.
172. In the classical model, government purchases or tax cuts are appropriate policies to raise GDP.
a. True
b. False.
173. In the classical model, we include unintended inventory changes.

a. True
b. False.
174. In the classical model,

a. markets do not automatically clear.
b. business demand for loanable fund exceeds business planned investment spending.
c. business demand for loanable fund is equal to business planned investment spending.
d. businesses engage in interest-free borrowing.
e. the government’s demand for funds is downward sloping.
TOP: The Demand for Loanable Funds
175. In the classical model,

a. markets do not automatically clear.
b. business demand for loanable fund exceeds business planned investment spending.
c. there is no government sector, only private consumption and planned investment.
d. businesses engage in interest-free borrowing.
e. the government’s demand for funds is vertical.
TOP: The Demand for Loanable Funds
176. Household saving is the defined as consumption minus disposable income.

a. True
b. False.
177. When we talk about injections in the classical model, we refer to

a. taxes
b. total government purchases.
c. federal government purchases only.
d. state government purchases only.
e. local government purchases only.
178. In the classical model, the government needs to worry about employment.
a. True
b. False.
179. In the classical model, the government needs to worry about total spending.
a. True
b. False.
180. In the classical model, fiscal policy has no demand-side effects on output or employment..
a. True
b. False.

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Macroeconomics Principles and Applications 5th Edition Hall Test Bank

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Macroeconomics Principles and

Applications 5th Edition Hall Test Bank

3. According to classical economics,

4. Which of the following is more of a short-run than a long-run goal?

6. The short-run macro model

8. John Maynard Keynes and his followers argued that

9. According to Keynesian economists,

12. The classical model

14. Which of the following is a definition of economic fluctuations?

15. The Classical model

18. A critical assumption in the classical model is that

19. A key assumption of the classical model is that

20. Which of the following is true for a market that clears?

21. The market clearing assumption is

22. Markets clear

24. The desire for goods and services is

25. In the classical long-run model,

26. The classical model

30. The labor supply curve shows

31. The labor demand curve shows the

33. The supply of labor

34. The labor supply curve

35. The labor demand curve slopes

39. Refer to Figure 8-1. If the labor market is in equilibrium, there is no

40. The labor demand curve slopes downward because

43. According to classical economists,

50. The economy's level of output depends upon (1) the

51. The classical model assumes that

53. Which of the following is a definition of the aggregate production function?

54. The aggregate production function is the

59. What is the full-employment output level?

60. An aggregate production function, when shown on a graph,

61. The aggregate production function is the relationship between the

63. According to Say's Law, supply creates its own demand.

64. Say's Law is the idea that

65. Refer to Figure 8-3. This figure is known as

67. Factor payments are

68. According to Say's Law, in the aggregate

70. Say's Law

71. Net taxes are

Consumption Spending $3.5 trillion

Total output for 2008 is

75. What is the relationship between household saving and taxes?

78. Which of the following is a leakages from the circular flow?

Consumption Spending $3.5 trillion

Total leakages are

81. Which of the following is an injection into the circular flow?

82. Leakages are

84. If an economy's consumption spending is $5 trillion, investment is $2 trillion, government spending is

86. Total spending will equal total output

87. Households make their savings available to borrowers through

Consumption Spending $3.5 trillion

The government's deficit (surplus) was

90. The government budget deficit is

92. What is the price of funds in the loanable funds market?

Consumption Spending $3.5 trillion

Consumption Spending $3.5 trillion

96. In the classical model, the quantity of loanable funds supplied is

97. The supply of loanable funds curve

100. Investment spending is inversely related to the interest rate.

101. The investment demand curve

102. In the classical model, investment spending is

105. If the interest rate rises, the

111. Refer to Figure 8-5. What is the equilibrium interest rate?