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Question 1 (Multiple Choice) Monopoly or market power is the ability of a firm to: A) shift its demand curve to the

right. B) shift its demand curve to the left. C) set its price. D) achieve economies of scale. Correct Answer: C Question 2 (Multiple Choice) A contractionary fiscal policy is shown as a: A) rightward shift in the economy's aggregate demand curve. B) rightward shift in the economy's aggregate supply curve. C) movement along an existing aggregate demand curve. D) leftward shift in the economy's aggregate demand curve. Correct Answer: D Question 3 (True/False) During the Great Depression of the 1930s the economy was operating within the horizontal range of the aggregate supply curve. True False Correct Answer: true Question 4 (Multiple Choice) Menu costs: A) increase during recession. B) decrease during recession. C) are the costs to firms of changing prices and communicating them to customers. D) are sunk costs and therefore should be disregarded. Correct Answer: C Question 5 (Multiple Choice) Which of the following would not shift the aggregate supply curve? A) an increase in labor productivity B) a decline in the price of imported oil C) a decline in business taxes D) an increase in the price level Correct Answer: D Question 6 (Multiple Choice) If the economy has a full-employment budget surplus, this means that: A) the public sector is exerting an expansionary impact on the economy. B) tax revenues would exceed government expenditures if full employment were achieved. C) the actual budget is necessarily also in surplus. D) the economy is actually operating at full employment. Correct Answer: B Question 7 (Multiple Choice) Graphically, cost-push inflation is shown as a:

A) leftward shift of the AD curve. B) rightward shift of the AS curve. C) leftward shift of AS curve. D) rightward shift of the AD curve. Correct Answer: C Question 8 (Multiple Choice) Discretionary fiscal policy refers to: A) any change in government spending or taxes that destabilizes the economy. B) the authority that the President has to change personal income tax rates. C) changes in taxes and government expenditures made by Congress to stabilize the economy. D) the changes in taxes and transfers that occur as GDP changes. Correct Answer: C Question 9 (Multiple Choice) Suppose the government purposely changes the economy's full-employment budget from a deficit of 0 percent of real GDP to a deficit of 3 percent of real GDP. The government is engaging in a(n): A) expansionary fiscal policy. B) contractionary fiscal policy. C) neutral fiscal policy. D) low-interest rate policy. Correct Answer: A Question 10 (True/False) A decrease in per unit production costs will shift the aggregate supply curve leftward. True False Correct Answer: false Question 11 (Multiple Choice) The fear of unwanted price wars may explain why many firms are reluctant to: A) reduce wages when a decline in aggregate demand occurs. B) reduce prices when a decline in aggregate demand occurs. C) expand production capacity when an increase in aggregate demand occurs. D) provide wage increases when labor productivity rises. Correct Answer: B Question 12 (Multiple Choice) Suppose that higher taxes on businesses reduce spending on plant and equipment. How will this affect the aggregate expenditure (AE) and the aggregate demand (AD) schedules? A) AE shifts up; AD shifts to the left B) AE shifts down; AD shifts to the left C) AE shifts up; AD shifts to the right D) AE shifts down; AD shifts to the right Correct Answer: B Question 13 (Multiple Choice) The real-balances effect indicates that:

A) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending. B) a lower price level will decrease the real value of many financial assets and therefore reduce spending. C) a higher price level will increase the real value of many financial assets and therefore increase spending. D) a higher price level will decrease the real value of many financial assets and therefore reduce spending. Correct Answer: D Question 14 (Multiple Choice) Supply-side economists argue that tax rate cuts: A) will always reduce tax revenues. B) may increase tax revenues. C) will always increase budget deficits. D) will have no effect on tax revenues. Correct Answer: B Question 15 (Multiple Choice) If personal taxes were decreased and input productivity increased simultaneously, theequilibrium: A) output would rise. B) output would fall. C) price level would necessarily fall. D) price level would necessarily rise. Correct Answer: B Question 16 (Multiple Choice) The greatest anti-inflationary impact of a budget surplus will occur when the Federal government: A) uses the surplus funds to pay off its outstanding debt. B) impounds the surplus funds and lets them stand idle. C) uses the surplus funds to expand transfer payments. D) gives the surplus funds to the states through federal grants. Correct Answer: B Question 17 (Multiple Choice) Which of the following represents the most expansionary fiscal policy? A) a $10 billion tax cut B) a $10 billion increase in government spending C) a $10 billion tax increase D) a $10 billion decrease in government spending Correct Answer: B Question 18 (True/False) The crowding-out effect refers to the possibility that deficit spending may motivate people to increase their saving in anticipation of higher future taxes. True False Correct Answer: false

Question 19 (Multiple Choice) Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. All else being equal, if the price of each input increased from $4 to $6, productivity would: A) fall from 2 to 3. B) fall from .50 to .33. C) rise from 1 to 2. D) remain unchanged. Correct Answer: D Question 20 (Multiple Choice) If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by: A) increasing government spending by $25 billion. B) increasing government spending by $80 billion. C) decreasing taxes by $25 billion. D) decreasing taxes by $100 billion. Correct Answer: C Question 21 (True/False) Unemployment and inflation can coexist. True False Correct Answer: true Question 22 (Multiple Choice) Graphically, demand-pull inflation is shown as a: A) rightward shift of the AD curve in the horizontal range of aggregate supply. B) rightward shift of the AS curve in the intermediate range of aggregate demand. C) leftward shift of AS curve in the intermediate range of aggregate demand. D) rightward shift of the AD curve in the intermediate or vertical ranges of aggregate supply. Correct Answer: D Question 23 (Multiple Choice) Other things equal, an improvement in productivity will: A) shift the aggregate demand curve to the left. B) shift the aggregate supply curve to the left. C) shift the aggregate supply curve to the right. D) increase the price level. Correct Answer: C Question 24 (Multiple Choice) The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the: A) real-balances, interest-rate, and foreign purchases effects. B) determinants of aggregate supply. C) determinants of aggregate demand. D) sole determinants of the equilibrium price level and the equilibrium real output. Correct Answer: C

Question 25 (Multiple Choice) Other things equal, an improvement in productivity will: A) tend to increase the equilibrium price level. B) shift the aggregate supply curve to the left. C) tend to decrease the equilibrium price level. D) shift the aggregate demand curve to the left. Correct Answer: C Question 26 (Multiple Choice) A decrease in the interest rate would: A) increase Investment and increase aggregate demand. B) decrease Investment and increase aggregate demand. C) increase Consumption and decrease aggregate demand. D) decrease Consumption and decrease aggregate demand. Correct Answer: A Question 27 (Multiple Choice) Suppose the economy is operating within the intermediate range of the aggregate supply curve and government increases both expenditures and taxes by $20 billion. We would expect: A) no change in domestic output or the price level. B) both the domestic output and the price level to rise. C) the domestic output to fall, but the price level to rise. D) the domestic output to rise, but the price level to fall. Correct Answer: B Question 28 (Multiple Choice) If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion by: A) reducing government expenditures by $15 billion. B) reducing government expenditures by $60 billion. C) increasing taxes by $15 billion. D) increasing taxes by $25 billion. Correct Answer: A Question 29 (Multiple Choice) If the dollar price of foreign currencies falls (that is, the dollar appreciates), we would expect: A) aggregate demand to decrease and aggregate supply to increase. B) both aggregate demand and aggregate supply to decrease. C) both aggregate demand and aggregate supply to increase. D) aggregate demand to increase and aggregate supply to decrease. Correct Answer: B Question 30 (True/False) The operational lag of fiscal policy refers to the time that elapses between the beginning of a recession or inflation and the certain awareness that it is actually happening. True False

1. If the MPS (Marginal Propensity To Save) in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by: A. Increasing government spending by $4 billion B. Increasing government spending by $40 billion C. decreasing taxes by $4 billion D. Increasing taxes by $4 billion I answered A 2.If the MPC (Marginal Propensity to Consume) in an economy is .8, government should shift the aggregate demand curve rightward by $100 billion by: A. Increasing Government Spending by $25 billion B. Increasing Government Spending by $80 billion C. Decreasing taxes by $25 billion D. decreasing taxes by $100 billion I answered B 3. If the MPS is .4, government should shift the aggregate demand curve leftward by $50 billion by: A. Reducing government expenditures by $125 billion B. reducing government expenditures by $20 billion C. increasing taxes by $50 billion D. increasing taxes by $250 billion I answered B 4.If the MPC in an economy is .75, the government could shift the aggregate demand curve leftward by $60 billion by: A. reducing government expenditures by $12 billion B. reducing government expenditures by $60 billion C. increasing taxes by $15 billion D. increasing taxes by $20 billion I answered C 5.Suppose that in an economy with a MPC of .8 the government wanted to shift the aggregate demand curve leftward by $40 billion at each price level to remedy demand-pull inflation. It could: A. increase taxes by $10 billion B. reduce government spending by $40 billion C. reduce government spending by $5 billion D. increase taxes by $20 billion I answered C 6. Suppose the price level is fixed, the MPC is .5 and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should: A. Increase government expenditures by $100 billion B. Increase government expenditures by $50 billion C. reduce taxes by $50 billion D. reduce taxes by $200 billion

I answered B 7. Suppose the price level is fixed, the MPC is .8 and the GDP gap is a negative $200 billion. To achieve full-employment output (exactly), government should: A. Increase government expenditures by $200 billion B. reduce taxes by $200 billion C. increase government expenditures by $40 billion D. reduce taxes by $160 billion I answered C 8.Suppose the price level is fixed, the MPC is .8 and the GDP gap is a negative $320 billion. To achieve full-employment output (exactly), government should: A. Increase government expenditures by $320 billion B. increase government expenditures by $80 billion C. reduce taxes by $320 billion D. reduce taxes by $80 billion I answered B 9. If investment increases by $10 billion and the economy's MPC is .8 the aggregate demand curve will shit: A. Leftward by $40 billion at each price level B. rightward by $10 billion at each price level C. rightward by $50 billion at each price level D. leftward by $20 billion at each price level I answered B 10.If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift A. leftward by $40 billion at each price level B. rightward by $20 billion at each price level C. rightward by $40 billion at each price level D. leftward by $20 billion at each price level I answered D

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