question
Potential GDP (aka income or output) is that level of GDP that:
the economy always produces.
toward which the economy gravitates in the short-run.
an economy is capable of producing without generating skyrocketing high inflation.
an economy is capable of producing without generating unemployment.
the economy always produces.
toward which the economy gravitates in the short-run.
an economy is capable of producing without generating skyrocketing high inflation.
an economy is capable of producing without generating unemployment.
answer
an economy is capable of producing without generating skyrocketing high inflation.
question
According to Keynes, market economies:
never experience significant declines in aggregate demand.
quickly recover after they experience a significant decline in aggregate demand.
may recover slowly after they experience a significant decline in aggregate demand.
are constantly experiencing a significant declines in aggregate demand.
never experience significant declines in aggregate demand.
quickly recover after they experience a significant decline in aggregate demand.
may recover slowly after they experience a significant decline in aggregate demand.
are constantly experiencing a significant declines in aggregate demand.
answer
Keynes believed that the adjustment process for an entire economy differed from the adjustment process for a single market in that the level of aggregate spending was a public good that could be underprovided, especially during a recession or depression, making it difficult for an economy to recover by itself.
may recover slowly after they experience a significant decline in aggregate demand.
may recover slowly after they experience a significant decline in aggregate demand.
question
From 2007 to 2012, the U.S. personal savings rate rose. The personal savings rate is the percent of after-tax income saved and not spent. If the additional savings were not translated into investment with the help of financial institutions, Keynes would predict that the nation's GDP would:
decline and remain there.
rise indefinitely.
grow at a faster than expected rate.
rise and remain there.
decline and remain there.
rise indefinitely.
grow at a faster than expected rate.
rise and remain there.
answer
Keynes believed that if increased savings did not get translated into an equal amount of investment, a downward spiral would begin, resulting in lower GDP.
decline and remain there.
decline and remain there.
question
The paradox of thrift will not arise if:
increases in saving are translated into identical increases in investment.
increases in saving are translated into identical decreases in consumption.
decreases in saving are translated into identical increases in investment.
decreases in saving are translated into identical decreases in consumption.
increases in saving are translated into identical increases in investment.
increases in saving are translated into identical decreases in consumption.
decreases in saving are translated into identical increases in investment.
decreases in saving are translated into identical decreases in consumption.
answer
If increases in saving are translated into identical increases in investment, as Say's Law implies, then any decline in consumption will be offset by the higher level of investment, leaving aggregate demand and output unchanged.
increases in saving are translated into identical increases in investment.
increases in saving are translated into identical increases in investment.
question
An increase in the overall price level of goods & services:
increases the purchasing power of money, leading to lower interest rates, which increases investment.
increases the purchasing power of money, leading to higher interest rates, which decreases investment.
decreases the purchasing power of money, leading to lower interest rates, which increases investment.
decreases the purchasing power of money, leading to higher interest rates, which decreases investment.
increases the purchasing power of money, leading to lower interest rates, which increases investment.
increases the purchasing power of money, leading to higher interest rates, which decreases investment.
decreases the purchasing power of money, leading to lower interest rates, which increases investment.
decreases the purchasing power of money, leading to higher interest rates, which decreases investment.
answer
An increase in the price level reduces the purchasing power of money by making goods and services more expensive. With less purchasing power, businesses will attempt to borrow more, causing an increase in interest rates. Higher interest rates will increase the cost of borrowing, which will reduce the amount of business investment.
decreases the purchasing power of money, leading to higher interest rates, which decreases investment.
decreases the purchasing power of money, leading to higher interest rates, which decreases investment.
question
A fall in the U.S. price level will cause foreigners to:
substitute U.S. goods for their own domestically-produced goods.
substitute their own domestically-produced goods for U.S. goods.
buy more of their own domestically-produced goods.
buy fewer U.S. goods.
substitute U.S. goods for their own domestically-produced goods.
substitute their own domestically-produced goods for U.S. goods.
buy more of their own domestically-produced goods.
buy fewer U.S. goods.
answer
As the price level falls, U.S. goods become relatively cheaper, causing foreigners to substitute away from foreign goods toward U.S. good
substitute U.S. goods for their own domestically-produced goods.
substitute U.S. goods for their own domestically-produced goods.
question
In the 1990s, the price level in Japan fell relative to the price level in the United States. If the exchange rate did not change, one would expect that:
U.S. exports to Japan would rise and U.S. imports from Japan would decline.
U.S. exports to Japan would decline and U.S. imports from Japan would rise.
both U.S. exports to Japan and U.S. imports from Japan would rise.
both U.S. exports to Japan and U.S. imports from Japan would fall.
U.S. exports to Japan would rise and U.S. imports from Japan would decline.
U.S. exports to Japan would decline and U.S. imports from Japan would rise.
both U.S. exports to Japan and U.S. imports from Japan would rise.
both U.S. exports to Japan and U.S. imports from Japan would fall.
answer
Since the U.S. price level has risen relative to the price level in Japan, one would expect U.S. citizens to substitute toward Japanese goods and Japanese citizens to substitute away from U.S. goods.
U.S. exports to Japan would decline and U.S. imports from Japan would rise.
U.S. exports to Japan would decline and U.S. imports from Japan would rise.
question
The multiplier effect exists because:
production and expenditures are interdependent, that is, the components of GDP are inter-related.
when one person increases expenditures, everyone decreases expenditures.
production and expenditures are independent, that is, there is no inter-relationship between the components of GDP.
production lowers expenditures.
production and expenditures are interdependent, that is, the components of GDP are inter-related.
when one person increases expenditures, everyone decreases expenditures.
production and expenditures are independent, that is, there is no inter-relationship between the components of GDP.
production lowers expenditures.
answer
The multiplier effect takes into account the fact that an increase in expenditure raises production, which in turn leads to higher levels of expenditure, making the two interdependent.
production and expenditures are interdependent, that is, the components of GDP are inter-related.
production and expenditures are interdependent, that is, the components of GDP are inter-related.
question
Which of the following would shift the aggregate demand curve outward?
An increase in foreign income
An appreciation of the value of a country's currency
A lower future expected price level
An increase in imports
An increase in foreign income
An appreciation of the value of a country's currency
A lower future expected price level
An increase in imports
answer
Only an increase in foreign income shifts the AD curve to the right. The others shift it left.
An increase in foreign income
An increase in foreign income
question
Which of the following would shift the aggregate demand curve inward?
An increase in foreign income
A depreciation in the value of the country's own currency
A higher future expected price level
A decrease in exports
An increase in foreign income
A depreciation in the value of the country's own currency
A higher future expected price level
A decrease in exports
answer
Only a decrease in exports shifts the AD curve to the left. The others shift it right.
A decrease in exports
A decrease in exports
question
A fall in the value of the dollar relative to other currencies will:
increase foreign demand for U.S. goods, shifting the U.S. aggregate demand curve outward.
increase foreign demand for U.S. goods, shifting the U.S. aggregate demand curve inward.
decrease foreign demand for U.S. goods, shifting the U.S. aggregate demand curve outward.
decrease foreign demand for U.S. goods, shifting the U.S. aggregate demand curve inward.
increase foreign demand for U.S. goods, shifting the U.S. aggregate demand curve outward.
increase foreign demand for U.S. goods, shifting the U.S. aggregate demand curve inward.
decrease foreign demand for U.S. goods, shifting the U.S. aggregate demand curve outward.
decrease foreign demand for U.S. goods, shifting the U.S. aggregate demand curve inward.
answer
A fall in the value of the dollar makes U.S. goods cheaper to foreigners and foreign goods more expensive to U.S. citizens. This shifts the U.S. aggregate demand curve to the right.
increase foreign demand for U.S. goods, shifting the U.S. aggregate demand curve outward.
increase foreign demand for U.S. goods, shifting the U.S. aggregate demand curve outward.
question
Refer to the graph shown. In 1975 U.S. President Gerald Ford instituted a large tax cut. At the same time, the Fed expanded the money supply. The effect of these policies on the AD curve is best shown as a movement from:
A to B.
D to A.
A to D.
B to A.
A decrease in taxes and an increase in the money supply both increase economic activity and are likely to shift the AD curve to the
A to B.
D to A.
A to D.
B to A.
A decrease in taxes and an increase in the money supply both increase economic activity and are likely to shift the AD curve to the
answer
D to A. ya
question
Refer to the graph shown. From 1980 to 1985, the U.S. dollar appreciated over 60 percent. The effect of this appreciation on the AD curve can be shown by a movement from:
A to B.
A to C.
A to D.
B to A.
An appreciation of a country's currency makes its goods more expensive relative to foreign goods. This reduces its exports and increases its imports, shifting its AD curve to the left.
A to B.
A to C.
A to D.
B to A.
An appreciation of a country's currency makes its goods more expensive relative to foreign goods. This reduces its exports and increases its imports, shifting its AD curve to the left.
answer
A to D ya
question
According to the short-run aggregate supply curve, firms are most likely to respond to an increase in aggregate demand by raising:
prices.
production.
both production and prices.
neither production nor prices.
prices.
production.
both production and prices.
neither production nor prices.
answer
The short-run aggregate supply curve is upward sloping because increases in aggregate demand lead to both higher prices and increased output in the short run.
both production and prices.
both production and prices.
question
An increase in production costs is most likely to shift the:
short-run aggregate supply curve up (to the left).
short-run aggregate supply curve down (to the right).
aggregate demand curve to the left.
aggregate demand curve to the right.
short-run aggregate supply curve up (to the left).
short-run aggregate supply curve down (to the right).
aggregate demand curve to the left.
aggregate demand curve to the right.
answer
The SAS curve shifts up when firms face cost increases that cause them to raise prices at each output level.
short-run aggregate supply curve up (to the left)
short-run aggregate supply curve up (to the left)
question
In early 2000s, oil prices were rising because of concern about the Iraqi and other situations, along with rapid growth in demand in the Far East. Prices eventually reached over $100 a barrel. How would most economists predict these high prices should affect the U.S. economy in terms of the AD/AS model?
They would have no effect because oil prices are a microeconomic phenomenon.
They do not change anything, but are evidence of a shift in the aggregated demand curve to the right.
Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve up (to the left).
Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve down (to the right).
They would have no effect because oil prices are a microeconomic phenomenon.
They do not change anything, but are evidence of a shift in the aggregated demand curve to the right.
Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve up (to the left).
Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve down (to the right).
answer
Anything that raises input costs will shift the short-run aggregate supply curve up.
Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve up (to the left).
Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve up (to the left).
question
If productivity increases by 2 percent but wages increase by 3 percent, then it is most likely that the:
short-run aggregate supply curve will shift up (to the left).
short-run aggregate supply curve will shift down (to the right).
short-run aggregate supply curve will not shift.
aggregate demand curve will shift left.
short-run aggregate supply curve will shift up (to the left).
short-run aggregate supply curve will shift down (to the right).
short-run aggregate supply curve will not shift.
aggregate demand curve will shift left.
answer
This combination increases production costs since productivity is growing slower than wages. Firms raise prices as a result, causing the short-run aggregate supply curve to shift up.
short-run aggregate supply curve will shift up (to the left).
short-run aggregate supply curve will shift up (to the left).
question
Which of the following factors will not shift the long-run aggregate supply curve, also known as an economy's Potential?
An increase in capital accumulation, that is, funds for plant and equipment.
An increase in available resources
An increase in the price level
An improvement in production technology
An increase in capital accumulation, that is, funds for plant and equipment.
An increase in available resources
An increase in the price level
An improvement in production technology
answer
An increase in the price level has no impact on an economy's potential supply. All the other changes increase potential inputs, causing the long-run aggregate supply curve (POTENTIAL) to shift out.
An increase in the price level
An increase in the price level
question
If actual output exceeds potential output for a prolonged period of time, we would eventually expect factor (input) prices to:
rise, causing the SAS curve to shift up (or inward).
fall, causing the SAS curve to shift down (or outward).
rise, causing the LAS curve (Potential) to shift out.
fall, causing the LAS curve (Potential) to shift inward.
rise, causing the SAS curve to shift up (or inward).
fall, causing the SAS curve to shift down (or outward).
rise, causing the LAS curve (Potential) to shift out.
fall, causing the LAS curve (Potential) to shift inward.
answer
Once actual output rises above potential output, resources will be over-utilized, eventually causing an increase in factor prices. As factor prices rise, firms will increase their output prices at each output level, causing the SAS curve to shift up (to the left).
rise, causing the SAS curve to shift up (or inward).
rise, causing the SAS curve to shift up (or inward).
question
The short-run aggregate supply is most likely to shift down when an economy is currently operating
at its potential GDP.
at less than its potential GDP
above its potential GDP.
not equal to its potential GDP, regardless of whether it is above or below.
at its potential GDP.
at less than its potential GDP
above its potential GDP.
not equal to its potential GDP, regardless of whether it is above or below.
answer
If the economy is at a point where output is less than potential output, then resources are being under-utilized. This will eventually result in lower input prices and a downward shift of the short-run aggregate supply curve.
at less than its potential GDP
at less than its potential GDP
question
An inflationary gap exists when:
aggregate demand exceeds output.
actual output exceeds potential output.
output exceeds aggregate demand.
potential output exceeds actual output.
aggregate demand exceeds output.
actual output exceeds potential output.
output exceeds aggregate demand.
potential output exceeds actual output.
answer
actual output exceeds potential output.
question
A recessionary gap exists when:
aggregate demand exceeds output.
actual output exceeds potential output.
output exceeds aggregate demand.
potential output exceeds actual output.
aggregate demand exceeds output.
actual output exceeds potential output.
output exceeds aggregate demand.
potential output exceeds actual output.
answer
potential output exceeds actual output.
question
If potential output is less than actual output, eventually the short-run aggregate supply curve will shift:
up and eliminate the recessionary gap.
down and eliminate the recessionary gap.
up and eliminate the inflationary gap.
down and eliminate the inflationary gap.
up and eliminate the recessionary gap.
down and eliminate the recessionary gap.
up and eliminate the inflationary gap.
down and eliminate the inflationary gap.
answer
In this case, input prices will be bid up, raising production costs and forcing firms to increase output prices. As this occurs, the short-run aggregate supply curve shifts up.
up and eliminate the inflationary gap.
up and eliminate the inflationary gap.
question
Suppose the economy is in a recessionary gap. In the absence of any policy intervention, the short-run aggregate supply curve will eventually shift:
down (to the right), causing the price level to fall and output to rise.
down (to the right), causing the price level to fall and output to fall.
down (to the right), causing the price level to rise and output to fall.
up (to the left), causing the price level to fall and output to rise.
down (to the right), causing the price level to fall and output to rise.
down (to the right), causing the price level to fall and output to fall.
down (to the right), causing the price level to rise and output to fall.
up (to the left), causing the price level to fall and output to rise.
answer
In this case, input prices will be bid down, reducing production costs and causing firms to decrease output prices. As this occurs, the short-run aggregate supply curve shifts down and aggregate demand and output will rise.
down (to the right), causing the price level to fall and output to rise.
down (to the right), causing the price level to fall and output to rise.
question
An economy's resources:
can never be over-utilized.
can always be over-utilized.
are always fully employed.
can be over-utilized, but only temporarily.
can never be over-utilized.
can always be over-utilized.
are always fully employed.
can be over-utilized, but only temporarily.
answer
Resources can be over-utilized temporarily by adding shifts and running equipment longer, but eventually workers tire and machines break down, so overutilization cannot be sustained.
can be over-utilized, but only temporarily.
can be over-utilized, but only temporarily.
question
Refer to the graph shown. An expansionary fiscal policy would be most appropriate when the economy is at point:
E.
B.
C.
D.
An expansionary fiscal policy is most appropriate when an economy is experiencing a recessionary gap, which is true only at points A and D.
E.
B.
C.
D.
An expansionary fiscal policy is most appropriate when an economy is experiencing a recessionary gap, which is true only at points A and D.
answer
D cee
question
Refer to the graph shown. A policy that cuts government spending would be most appropriate when the economy is at point:
A.
B.
C.
D.
A contractionary fiscal policy is most appropriate when an economy is experiencing an inflationary gap, which is only true at points B and E.
A.
B.
C.
D.
A contractionary fiscal policy is most appropriate when an economy is experiencing an inflationary gap, which is only true at points B and E.
answer
B cee
question
Suppose the target rate of unemployment is 5 percent but the actual rate of unemployment is 4 percent. Given this information, which of the following policies is most appropriate according to the AS/AD model?
A tax cut
An increase in government spending
A tax increase
No change in taxes or government spending
A tax cut
An increase in government spending
A tax increase
No change in taxes or government spending
answer
Because the unemployment rate is beneath the target rate, output is most likely above potential, so a contractionary policy is most appropriate.
A tax increase
A tax increase
question
The presence of wage and price controls in the United States during WWII:
had little impact on inflation because of the Depression.
helped to reduce the inflationary pressures created by expansionary fiscal policy.
helped to reduce the inflationary pressures created by contractionary fiscal policy.
was not successful in reducing inflation during this period.
had little impact on inflation because of the Depression.
helped to reduce the inflationary pressures created by expansionary fiscal policy.
helped to reduce the inflationary pressures created by contractionary fiscal policy.
was not successful in reducing inflation during this period.
answer
The huge increase in defense spending would have created an inflationary gap, leading ultimately to a higher price level but no increase in output.
helped to reduce the inflationary pressures created by expansionary fiscal policy.
helped to reduce the inflationary pressures created by expansionary fiscal policy.
question
Housing prices in the United States fell sharply in 2007 and 2008, contributing to a severe recession as the AD curve shifted leftward. The ordinary AS/AD model would predict that falling short-run aggregate supply would bring deflation and move the economy back to potential output. Which of the following describes the impact of dynamic feedback effects on this return to potential output?
Falling house prices could cause people to buy more houses than they really need, creating a further crisis as another wave of foreclosures and bankruptcies occurs.
As the SAS curve shifts downward, firms respond by increasing their investment in capital equipment, but rehire few of the laid-off workers, so that employment does not return to normal.
Expectations that prices might fall further could cause people to reduce spending, shifting the AD curve further to the left.
The deflation will be counteracted by increases in the money supply from the Federal Reserve, preventing the price adjustment and keeping the economy below potential output.
Falling house prices could cause people to buy more houses than they really need, creating a further crisis as another wave of foreclosures and bankruptcies occurs.
As the SAS curve shifts downward, firms respond by increasing their investment in capital equipment, but rehire few of the laid-off workers, so that employment does not return to normal.
Expectations that prices might fall further could cause people to reduce spending, shifting the AD curve further to the left.
The deflation will be counteracted by increases in the money supply from the Federal Reserve, preventing the price adjustment and keeping the economy below potential output.
answer
Expectations that prices might fall further could cause people to reduce spending, shifting the AD curve further to the left.
question
One reason the decline in asset prices just before and during the 2008 recession undermined the health of the economy is that they:
raised the value of the dollar making U.S. goods more expensive to foreigners.
raised the trade deficit when foreigners reduce purchases of U.S. assets.
led to a contraction in consumer loans because the value of collateral declined.
undermined consumer and business confidence.
raised the value of the dollar making U.S. goods more expensive to foreigners.
raised the trade deficit when foreigners reduce purchases of U.S. assets.
led to a contraction in consumer loans because the value of collateral declined.
undermined consumer and business confidence.
answer
The decline in asset prices reduced availability of consumer loans, and therefore spending.
undermined consumer and business confidence.
undermined consumer and business confidence.
question
Fiscal policy is:
easy to enact and quick to affect the economy.
easy to enact but slow to affect the economy .
difficult to enact but quick to affect the economy.
difficult to enact and slow to affect the economy.
easy to enact and quick to affect the economy.
easy to enact but slow to affect the economy .
difficult to enact but quick to affect the economy.
difficult to enact and slow to affect the economy.
answer
Fiscal policy takes time to enact because it is often politically motivateD) It also takes time to affect the economy because it takes time to adjust government spending and taxes once a policy is enacted.
difficult to enact and slow to affect the economy.
difficult to enact and slow to affect the economy.
question
An example of countercyclical fiscal policy is:
raising government spending when the economy is above potential.
raising government spending when the economy is at potential.
reducing government spending when the economy is above potential.
reducing government spending when the economy is below potential.
raising government spending when the economy is above potential.
raising government spending when the economy is at potential.
reducing government spending when the economy is above potential.
reducing government spending when the economy is below potential.
answer
Countercyclical fiscal policy contracts the economy when equilibrium income is above potential income or stimulates it when it is below potential.
reducing government spending when the economy is above potential.
reducing government spending when the economy is above potential.
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