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Chapter 8 – Economic Fluctuations_ Unemployment_ and Inflation

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Chapter 8 – Economic Fluctuations_ Unemployment_ and Inflation Powered By Docstoc
					      Chapter 9
224.Within the aggregate demand/aggregate supply framework, the quantity on the horizontal axis in the
      aggregate goods and services market represents the
      a. total amount of government spending.
      b. total real output (real GDP) of the economy.
      c. total unemployment of the economy.
      d. price level of the economy.
      ANS: B

225. In the loanable funds market, the true burden of borrowers and the true yield to lenders is the
     a. real (inflation adjusted) interest rate.
     b. nominal (money) interest rate.
     c. inflation rate.
     d. inflation premium rate (in money terms).
      ANS: A

226. When AD is equal to SRAS at an output level equal to the LRAS curve,
     a. we are at long-run macroeconomic equilibrium.
     b. we are at the natural rate of unemployment.
     c. both a and b are true.
     d. neither a nor b is true.
      ANS: C

227. Your grandmother gives you a $100 savings bond that will mature in fifteen years. The bank tells you that
     they will buy it from you today at a price of $24. If interest rates rise in the near future, the value of your
     bond
     a. will fall and it will be worth less than $24.
     b. will rise and it will be worth more than $24.
     c. will remain unchanged at $24.
     d. This is a trick question; the value of a $100 bond is always $100.
     ANS: A
228. If the expected rate of inflation is zero, the
     a. real interest rate must also equal zero.
     b. money (nominal) interest rate must also equal zero.
     c. real interest rate must equal the money interest rate.
     d. economy is likely to experience high inflation in the near future.
      ANS: C

229. Which of the following is the primary factor that coordinates the actions of borrowers and lenders in the
     loanable funds market?
     a. inflation rate
     b. unemployment rate
     c. the government
     d. interest rate
      ANS: D



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230. Which of the following statements about the circular flow diagram is not correct?
     a. Households receive income from the resource market; they save some of it and spend the
        rest of it on domestic or foreign goods and services.
     b. The loanable funds market takes net household savings and channels it in part to the
        government and in part to businesses for investment.
     c. Expenditures on GDP are equal to consumption plus government purchases plus
        investment plus net exports (exports minus imports).
     d. The net inflow of capital from foreign economies must always be positive and equal to the
        amount of business investment.
      ANS: D

231. The circular flow of income is coordinated by the
     a. goods and services market, resources market, foreign exchange market, and loanable funds
        market.
     b. consumption market, investment market, stock market, and government market.
     c. government market, household goods market, bond market, and business market.
     d. financial market, corporate market, stock market, and loanable funds market.
      ANS: A

232. As prices rise, a fixed money supply will be able to buy fewer goods and services. This effect is due to
     a(n)
     a. reduction in the interest rate.
     b. increase in aggregate demand.
     c. decline in the purchasing power of money.
     d. increase in income.
      ANS: C

233. The aggregate demand curve slopes downward to the right because
     a. as prices decrease, the real value of the fixed quantity of money increases and thereby
        stimulates consumer spending.
     b. a lower price level reduces the price of domestic goods relative to foreign goods,
        increasing net exports (the international substitution effect).
     c. a lower price level reduces the demand for money and lowers the real interest rate,
        stimulating consumption and investment spending (the interest rate effect).
     d. all of the above are correct.
      ANS: D

234. Which of the following is true regarding an unanticipated increase in inflation?
     a. Both borrowers and lenders will be better off.
     b. Both borrowers and lenders will be worse off.
     c. Borrowers will be better off and lenders will be worse off.
     d. Borrowers will be worse off and lenders will be better off.
      ANS: C

235. Suppose people anticipate that inflation will be 4 percent during the next several years. If the real rate of
     interest is 5 percent, the money rate of interest must be
     a. 1 percent.
     b. 4 percent.
      c. 5 percent.
      d. 9 percent.
      ANS: D

236. Suppose you are earning 5 percent nominal interest on your savings account. If the rate of inflation is 3
     percent, the real rate of interest you are earning is
     a. 2 percent.
     b. 3 percent.
     c. 5 percent.
     d. 8 percent.
      ANS: A

237. In 1999, the nominal interest rate on a 30-year bond was around 5.85 percent. Assuming that investors
     have set these contracts expecting a real interest rate of 3 percent, what is the average rate of inflation that
     investors in the market are expecting over the next thirty years?
     a. 2.85 percent
     b. 3 percent
     c. 5.85 percent
     d. 8.85 percent
      ANS: A

238. Which of the following situations would you prefer if you planned to borrow money?
     a. The nominal interest rate is 5 percent, and future prices are expected to be stable.
     b. The nominal interest rate is 9 percent, and expected inflation is 7 percent.
     c. The nominal interest rate is 4 percent, and expected inflation is 1 percent.
     d. The nominal interest rate is 25 percent, and expected inflation is 22 percent.
      ANS: B

239. If the dollar price of the English pound goes from $1.50 to $2.00, the dollar has
     a. appreciated, and the English will find U.S. goods cheaper.
     b. appreciated, and the English will find U.S. goods more expensive.
     c. depreciated, and the English will find U.S. goods cheaper.
     d. depreciated, and the English will find U.S. goods more expensive.
      ANS: C

240. A depreciation of a nation's currency would cause
     a. the nation's imports to increase and exports to decline.
     b. the nation's exports to increase and imports to decline.
     c. both imports and exports to decline.
     d. both imports and exports to rise.
      ANS: B

241. If the value of a nation's imports exceeds exports, the nation has a
     a. government budget deficit.
     b. trade surplus.
     c. trade deficit.
     d. negative net capital flow.
      Test 3 Review


      ANS: C

242. The long-run aggregate supply curve is vertical, reflecting the fact that
     a. changes in price have no effect on output in the long run. In the long run, the price of
        goods and the price of resources move together and firms have no incentive to change
        their output.
     b. fluctuations in inflation cannot be anticipated in the long run, so future prices have no
        effect on output.
     c. changes in price affect output a lot in the long run because in the long run firms can adjust
        factory sizes to meet changing demand conditions.
     d. changes in price have a large effect on output because they lead to highly variable interest
        rates, and business is hard to conduct under those circumstances.
      ANS: A

243. Which of the following accurately indicates the relationship between the short-run and long-run aggregate
     supply curves?
     a. In the short run, aggregate supply is sloped upward to the right, and in the long run, it is
        vertical.
     b. In the short run, aggregate supply is vertical, and in the long run, it is sloped upward to the
        right.
     c. In the short run, aggregate supply is downward sloping, but in the long run, it is sloped
        upward to the right.
     d. In the short run, aggregate supply is sloped upward to the right, but in the long run, it is
        downward sloping.
      ANS: A

244. If the current price level in the goods and services market is higher than what was expected, output will be
     a. at the economy's long-run capacity.
     b. below the economy's long-run capacity.
     c. above the economy's long-run capacity.
     d. equal to the expected rate of inflation minus net exports.
      ANS: C

245. (I) If long-run equilibrium is present in the goods and services market, the current price level will equal
     the price level buyers and sellers anticipated.
     (II) When an economy is in long-run equilibrium, the actual rate of unemployment will equal the natural
     rate of unemployment.
     a. Both I and II are true.
     b. Both I and II are false.
     c. I is true; II is false.
     d. I is false; II is true.
      ANS: A

246. A trade surplus is when
     a. imports are greater than exports of goods and services.
     b. exports are greater than imports of goods and services.
     c. imports are equal to exports of goods and services.
     d. there is a positive net inflow of foreign capital.
      ANS: B

247. (I) Fiscal policy involves altering government tax and spending policies.
     (II) Monetary policy encompasses those actions that alter the money supply.
     a. Both I and II are true.
     b. Both I and II are false.
     c. I is true; II is false.
     d. I is false; II is true.
      ANS: A

248. Suppose business decision makers become more optimistic about future economic conditions and desire
     additional funds to expand their plant capacity. What is the likely effect on the loanable funds market?
     a. The demand for loanable funds will rise and the interest rate will rise.
     b. The demand for loanable funds will fall and the interest rate will fall.
     c. The supply for loanable funds will rise and the interest rate will fall.
     d. The supply for loanable funds will fall and the interest rate will rise.
      ANS: A




      CHAPTER 10
180. Which of the following will reduce aggregate demand?
     a. an increase in real wealth
     b. lower real incomes of the country’s foreign trade partners
     c. increased consumer and business optimism about the future
     d. an increase in the expected rate of inflation
      ANS: B

181. An increase in the long-run aggregate supply curve shifts
     a. both LRAS and AD to the right.
     b. both LRAS and SRAS to the right.
     c. both LRAS and AD to the left.
     d. only LRAS to the right.
      ANS: B

182. During recessions, interest rates tend to fall because
     a. consumers attempt to borrow money to make up for their falling income.
     b. business borrowing for investment purposes tends to fall during recessions.
     c. lower real resource prices create profit opportunities for banks.
     d. recessions shift the economy's long-run aggregate supply curve to the left.
      ANS: B

183. In the short run, equilibrium output in the goods and services market may be either above or below the
     full-employment level, but in the long run, it
     a. must be less than full-employment output.
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      b. must be greater than full-employment output.
      c. will move to full-employment output.
      d. depends on aggregate demand, not just long-run aggregate supply.
      ANS: C

184. Which of the following is most likely to result from an unanticipated increase in short-run aggregate
     supply due to favorable weather conditions in agricultural areas?
     a. an increase in the inflation rate
     b. an increase in the unemployment rate
     c. a decrease in the price level
     d. a decrease in the natural rate of unemployment
      ANS: C

185. Which of the following is most likely to accompany an unanticipated reduction in aggregate demand?
     a. an increase in the price level
     b. a decrease in unemployment
     c. an increase in real GDP
     d. an increase in the unemployment rate
     ANS: D
186. Which of the following is most likely to accompany an unanticipated increase in short-run aggregate
     supply?
     a. an increase in real GDP
     b. a decrease in real GDP
     c. an increase in the price level
     d. an increase in the unemployment rate
      ANS: A

187. In the aggregate demand/aggregate supply model, an economy operating below its long-run potential
     capacity will experience
     a. falling real wages and resource prices that will increase SRAS, moving the economy back
          toward full employment.
     b. rising interest rates that will increase SRAS, moving the economy back toward full
          employment.
     c. inflation that will stimulate additional spending and thereby restore full employment.
     d. a prolonged economic depression unless consumer optimism is increased.
      ANS: A
      For the following question(s), assume that the economy is in long-run equilibrium in the aggregate
      demand/aggregate supply model and that some sort of event takes place. In each case, mark the most
      likely impact of the event on the aggregate demand/aggregate supply diagram given below.

      Figure 10-19




188. Refer to Figure 10-19. Good weather allows agricultural output to double.
     a. The aggregate demand curve would shift to the right.
     b. The aggregate demand curve would shift to the left.
     c. The short-run aggregate supply curve would shift to the right.
     d. The short-run aggregate supply curve would shift to the left.
      ANS: C

189. Refer to Figure 10-19. There is an increase in the expected rate of inflation.
     a. The aggregate demand curve would shift to the right.
     b. The short-run aggregate supply curve would shift to the left.
     c. The price level would rise and real GDP would remain the same.
     d. All of the above are correct.
      ANS: D

190. Refer to Figure 10-19. Consumers and businesses all suddenly decide that the future looks much better
     than it previously had.
     a. The aggregate demand curve would shift to the right.
     b. The aggregate demand curve would shift to the left.
     c. The short-run aggregate supply curve would shift to the right.
     d. The short-run aggregate supply curve would shift to the left.
      ANS: A

191. Refer to Figure 10-19. A major technological advance occurs.
     a. The aggregate demand curve would shift to the right.
     b. The aggregate demand curve would shift to the left.
     c. Both the short-run and the long-run aggregate supply curves would shift to the right.
     d. Both the short-run and the long-run aggregate supply curves would shift to the left.
      ANS: C
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192. Which of the following would not cause a shift in the short-run aggregate supply curve?
     a. a major technological advance
     b. a decrease in the real interest rate
     c. a decrease in the expected rate of inflation
     d. an increase in resource prices
      ANS: B

193. If an economy is in equilibrium at a given price level and a given output level, the aggregate
     demand/aggregate supply (AD/AS) model indicates that an unanticipated decrease in aggregate demand
     will cause
     a. real output to decline.
     b. the price level to fall.
     c. unemployment to increase.
     d. all of the above.
      ANS: D

194. Which of the following is most likely to accompany a fully anticipated reduction in short-run aggregate
     supply?
     a. an increase in the price level
     b. a decrease in the price level
     c. a decrease in real GDP
     d. both a and c
      ANS: A

195. During the 1990s, a financial crisis spread throughout Asia causing those economies to drop into
     recessions. Other things constant, how would such a decrease in the income of foreign trading partners
     have influenced the price level and output of the United States?
     a. Both real output and the price level would have fallen.
     b. Both real output and the price level would have risen.
     c. Real output would have fallen, and the price level would have risen.
     d. Real output would have risen, and the price level would have fallen.
      ANS: A

196. Which of the following will most likely occur in the United States as the result of an unexpected rapid
     growth in real income in Japan and Europe?
     a. a short-run increase in U.S. employment and output
     b. a short-run decrease in U.S. employment and output
     c. a short-run decline in prices in the United States
     d. a reduction in the natural rate of unemployment in the United States
     ANS: A
197. If there is an unanticipated increase in aggregate demand, which of the following is most likely to occur?
     a. an increase in the price level (inflation)
     b. an increase in the rate of unemployment
     c. a reduction in the growth rate of real GDP
     d. a decrease in LRAS to restore full employment
      ANS: A
198. Which of the following will most likely increase the economy's long-run aggregate supply?
     a. advances in technology
     b. unfavorable weather conditions in agricultural areas
     c. an increase in the expected inflation rate
     d. a low rate of investment
      ANS: A

199. If improvements in education and training programs increased the productivity of persons in the labor
     force,
     a. aggregate demand would decrease.
     b. short-run aggregate supply would increase, but long-run aggregate supply would not
          change.
     c. long-run aggregate supply would increase, but short-run aggregate supply would not
          change.
     d. both short-run and long-run aggregate supply would increase.
      ANS: D

200. If an economy was initially in long-run equilibrium, an unanticipated increase in aggregate demand will
     tend to cause
     a. an increase in unemployment.
     b. a decrease in the price of resources.
     c. a reduction in real output that will spiral downward into a prolonged recession.
     d. a temporarily high level of output and employment that cannot be maintained.
      ANS: D

201. When an economy is in a recession,
     a. strong demand for investment funds will push interest rates upward.
     b. strong demand for resources will push the prices of resources upward.
     c. weak demand for investment funds will cause the real interest rate to decline.
     d. the unemployment rate will be less than its natural rate.
      ANS: C

202. Which of the following statements is most consistent with the view that the economy has a self-corrective
     mechanism?
     a. When the economy is in a recession, it will remain there until the government steps in to
        bring the economy out of the recession.
     b. When the economy is in a recession, falling resource prices and declining interest rates
        will direct the economy back to full employment.
     c. During economic booms, interest rates will fall, causing the economy to fall into a
        recession.
     d. In a market economy, resource prices, such as wages, can only increase; they can never
        decrease.
      ANS: B

203. Which of the following factors contributed to the 2008 economic recession in the United States?
     a. Housing wealth fell causing consumers to become more pessimistic about the economy.
     b. The stock market plummeted causing the real wealth of Americans to decrease
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      c. As the recession spread to other countries, falling incomes abroad depressed aggregate
         demand in the United States even more.
      d. All of the above.
      ANS: D


      CHAPTER 11
143. The expenditure multiplier is used to calculate the change in
     a. spending caused by a change in income.
     b. equilibrium income resulting from a change in interest rates.
     c. equilibrium income resulting from an independent change in spending.
     d. investment caused by a change in consumption.
      ANS: C

144. Which of the following is a major insight of the Keynesian model?
     a. Changes in output, as well as changes in prices, play a role in the macroeconomic
        adjustment process, particularly in the long run.
     b. A general overproduction of goods relative to total demand is impossible because
        production creates its own demand.
     c. The responsiveness of aggregate demand to changes in supply will be directly related to
        the availability of unemployed resources.
     d. Fluctuations in aggregate demand are an important potential source of business instability.
      ANS: D

145. If the MPC is 3/4, the simple expenditure multiplier is
     a. 4.00.
     b. 1.33.
     c. 1.75.
     d. 0.75.
      ANS: A

146. If consumption equals 800 when disposable income is 1,000, and then consumption increases to 1,000
     when disposable income increases to 1,300, the marginal propensity to consume is
     a. 8/10.
     b. 10/13.
     c. 2/3.
     d. 3/4.
      ANS: C

147. "If there is unemployment, the average wage rate will decline as the unemployed workers choose lower
     wages rather than going without a job. The demand curve for labor slopes downward and to the right so
     that more workers would be hired at the lower wage rate, restoring full employment." According to the
     Keynesian view, this quote is
     a. incorrect because widespread unemployment would cause wages to rise, not decline.
     b. incorrect because the demand for labor, other things constant, will not be negatively
          related to wages.
     c. incorrect because wages and prices tend to be highly inflexible downward.
      d. essentially correct.
      ANS: C

      Scenario 11-1
      The information below is relevant to the following question(s).

      Assume IBM decides, despite an ongoing recession, to build a new branch for computer analysis in
      Bozeman, Montana. The plant expects to spend $12 million to hire the necessary employees, all of whom
      move in from out of state to take the jobs.

148. Refer to Scenario 11-1. If the marginal propensity to consume of the newly-employed workers was 3/4,
     what would be the total change in income that would result from the operation of the plant for one year?
     a. $12 million
     b. $48 million
     c. $9 million
     d. $27 million
      ANS: B

149. Refer to Scenario 11-1. If Bozeman citizens decided to spend more than 3/4 of the additional income,
     a. the MPC would decrease.
     b. the expenditure multiplier would decrease.
     c. the expansion in income would be larger.
     d. aggregate expenditures would decline.
      ANS: C

150. If the federal government runs a budget deficit in order to finance an increase in spending, where do the
     funds to finance the spending come from?
     a. increased personal income taxes
     b. additional money printed by the Federal Reserve
     c. additional bonds issued by the U.S. Treasury
     d. the financial assets of the members of Congress who are legally responsible for the deficit
      ANS: C

151. When the federal government is running a budget surplus,
     a. government revenues exceed government expenditures.
     b. government expenditures exceed government revenues.
     c. the economy must be in a recession.
     d. additional government borrowing will decrease the size of the national debt.
      ANS: A

152. If a fiscal policy change is going to exert a stabilizing impact on the economy, it must
     a. be expansionary.
     b. be restrictive.
     c. be timed correctly.
     d. keep the federal budget in balance.
      ANS: C
      Test 3 Review


153. Automatic stabilizers are government programs that tend to
     a. reduce the ups and downs in aggregate demand without legislative action.
     b. bring expenditures and revenues automatically into balance without legislative action.
     c. signal Congress that legislative changes are needed.
     d. increase tax collections automatically during a recession.
      ANS: A

154. When the economy enters a recession, automatic stabilizers create
     a. higher taxes.
     b. more discretionary spending.
     c. larger budget deficits.
     d. larger budget surpluses.
      ANS: C

155. In the Keynesian model, the primary determinant of consumer spending is
     a. the interest rate.
     b. disposable income.
     c. expectations of inflation.
     d. the stage of the business cycle.
      ANS: B

156. Which of the following is most likely to lead to an increase in current consumption?
     a. an increase in personal income tax rates
     b. an increase in one's expected future income
     c. a decrease in one's marginal propensity to consume
     d. an increase in the interest rate
      ANS: B

157. If the economy is operating at a point where the aggregate expenditure line lies below the 45-degree line
     (AE = GDP),
     a. total spending is more than total output.
     b. unwanted business inventories will increase.
     c. businesses will reduce their future production.
     d. both b and c are correct.
      ANS: D

158. Keynesian analysis suggests that if planned spending (aggregate demand) were $700 billion but GDP was
     $800 billion,
     a. businesses would accumulate inventories, and output would fall.
     b. output would rise, incomes would rise, and tax revenues would automatically increase.
     c. production would be stimulated, and output would increase, unless the full-capacity output
        was less than $950 billion.
     d. the Federal Reserve would eventually lower interest rates.
      ANS: A

159. In the Keynesian aggregate expenditure model, the equilibrium level of income is achieved when
     a. the employment rate equals approximately 96 percent.
      b. actual saving equals actual investment.
      c. planned aggregate expenditures exceed actual output.
      d. actual output equals planned aggregate expenditures.
      ANS: D

160. Keynesian countercyclical budget policy suggests that
     a. a budget deficit is needed if the economy is operating at less than full employment.
     b. a budget deficit should be planned during an inflationary boom.
     c. the budget must be balanced if the national debt is growing more rapidly than the
        economy.
     d. the budget should always be in balance
      ANS: A

161. According to Keynesian theory, which of the following would most likely stimulate an expansion in real
     output if the economy were in a recession?
     a. an increase in tax rates
     b. a balanced budget
     c. a budget deficit
     d. a budget surplus
      ANS: C

162. The Keynesian macroeconomic model was highly popular for several decades following World War II
     because it provided an explanation for
     a. the strong economic recovery following the end of the war.
     b. the high inflation rates of the 1950s.
     c. the prolonged unemployment of the 1930s.
     d. the high rate of investment during the Great Depression.
      ANS: C

163. John Maynard Keynes and his followers argued that the Great Depression was primarily the result of
     a. excessive government spending.
     b. large budget deficits.
     c. the perverse monetary policies of the Fed.
     d. insufficient aggregate spending on goods and services.
      ANS: D

164. If output is less than full employment in the Keynesian model, what is needed to restore full employment?
     a. an increase in the price level
     b. an increase in aggregate demand
     c. a reduction in government expenditures
     d. an increase in aggregate supply
      ANS: B

165. According to the Keynesian view, if policy makers thought the economy was about to fall into a
     recession, which of the following would be most appropriate?
     a. a reduction in government expenditures
     b. an increase in government expenditures or reduction in taxes, financed by borrowing
      Test 3 Review


      c. a balanced federal budget
      d. an increase in taxes
      ANS: B

166. In the Keynesian model, equilibrium occurs when
     a. the real and nominal interest rates are equal.
     b. total spending is equal to current output.
     c. the general price level is constant.
     d. the money supply is growing at a constant rate.
      ANS: B

				
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