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Macro PracticeTest 3

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					MACRO Practice Test 3 1. 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.

2. The determinants of aggregate demand: A) explain why the aggregate demand curve is downsloping. B) explain shifts in the aggregate demand curve. C) demonstrate why real output and the price level are inversely related. D) include input prices and resource productivity.

3. Other things equal, a decrease in the real interest rate will: A) expand investment and shift the AD curve to the left. B) expand investment and shift the AD curve to the right. C) reduce investment and shift the AD curve to the left. D) reduce investment and shift the AD curve to the right.

4. A rightward shift in the aggregate supply curve is best explained by an increase in: A) business taxes. B) productivity. C) nominal wages. D) the price of imported resources.

5. 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

6. Other things equal, a reduction in personal and business taxes can be expected to: A) increase aggregate demand and decrease aggregate supply. B) increase both aggregate demand and aggregate supply. C) decrease both aggregate demand and aggregate supply. D) decrease aggregate demand and increase aggregate supply.

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Use the following to answer questions 7-8:
P AS1 P2 P1 AD1 AD2 0 Q2 (A) Q1 Q 0 Q2 (B) Q1 Q 0 Q1 (C) P1 b a AD1 AD1 Q2 AD2 Q P AS2 AS1 P1 a b c P AS1 AS2

7. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. A recession is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only. D) panels (A) and (B).

8. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Growth, full-employment and price stability is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C).

Use the following to answer question 9:

AS1
AS2

Price level

P1 AD2

AD1 0 Q1 Q2 Q3 Real domestic output

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9. In the above figure AD1 and AS1 represent the original aggregate supply and demand curves and AD2 and AS2 show the new aggregate demand and supply curves. The changes in aggregate demand and supply in the above diagram produce: A) a higher price level. B) an expansion of real output and a stable price level. C) an expansion of real output and a higher price level. D) a decline in real output and a stable price level.

10. We would expect a decline in personal and corporate income taxes to: A) shift the aggregate demand curve rightward. B) decrease consumption and investment spending. C) decrease real output. D) shift the aggregate supply curve leftward.

11. A decline in investment will shift the AD curve to the: A) left by a multiple of the change in investment. B) left by the same amount as the change in investment. C) right by the same amount as the change in investment. D) right by a multiple of the change in investment.

12. Which of the following explains why the aggregate demand schedule is downward sloping: A) the real-balances effect B) the interest-rate effect C) the foreign purchases effect D) all of the above

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Use the following to answer questions 13-14: Use the following diagrams for the U.S. economy to answer the following questions.

13. Which of the above diagrams best portrays the effects of a substantial reduction in government spending? A) A B) B C) C D) D

14. Which of the above diagrams best portrays the effects of declines in the incomes of U.S. trading partners? A) A B) B C) C D) D

15. Other things equal, an increase in productivity will shift the aggregate supply curve rightward. A) True B) False

16. Unemployment and inflation can coexist. A) True B) False
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17. Cost-push inflation is depicted as a rightward shift of the aggregate demand curve along an upsloping aggregate supply curve. A) True B) False

18. The equilibrium price level and equilibrium level of real GDP occur at the intersection of the aggregate demand curve and the aggregate supply curve. A) True B) False

19. 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.

20. Fiscal policy is carried out primarily by: A) the Federal government. B) state and local governments working together. C) state governments alone. D) local governments alone.

21. Countercyclical discretionary fiscal policy calls for: A) surpluses during recessions and deficits during periods of demand-pull inflation. B) deficits during recessions and surpluses during periods of demand-pull inflation. C) surpluses during both recessions and periods of demand-pull inflation. D) deficits during both recessions and periods of demand-pull inflation.

22. Discretionary fiscal policy is so named because it: A) is undertaken at the option of the nation's central bank. B) occurs automatically as the nation's level of GDP changes. C) involves specific changes in T and G undertaken expressly for stabilization at the option of Congress. D) is invoked secretly by the Council of Economic Advisers.

23. Contractionary fiscal policy is so named because it: A) involves a contraction of the nation's money supply. B) necessarily reduces the size of government. C) is aimed at reducing aggregate demand and thus achieving price stability. D) is expressly designed to contract real GDP.

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24. An appropriate fiscal policy for severe demand-pull inflation is: A) an increase in government spending. B) depreciation of the dollar. C) a reduction in interest rates. D) a tax rate increase.

25. Which of the following represents the most contractionary fiscal policy? A) a $30 billion tax cut B) a $30 billion increase in government spending C) a $30 billion tax increase D) a $30 billion decrease in government spending

26. An expansionary fiscal policy is shown as a: A) rightward shift in the economy's aggregate demand curve. B) movement along an existing aggregate demand curve. C) leftward shift in the economy's aggregate supply curve. D) leftward shift in the economy's aggregate demand curve.

Use the following to answer questions 27-28:
AD3 AS

Price level

AD1

AD2 AD0
0

Qf Real GDP

27. Refer to the above diagram, in which Qf is the full-employment output. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at: A) AD0 B) AD1 C) AD2 D) AD3

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28. Refer to the above diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2: A) the most appropriate fiscal policy is an increase of government expenditures or a reduction of taxes. B) the most appropriate fiscal policy is a reduction of government expenditures or an increase of taxes. C) government should undertake neither an expansionary nor a contractionary fiscal policy. D) the economy is achieving its full capacity output.

29. Built-in stability means that: A) an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby stabilize the economy. B) with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus. C) Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity. D) government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.

30. The full-employment budget refers to: A) the inflationary impact that the automatic stabilizers have in a full-employment economy. B) that portion of a full-employment GDP that is not consumed in the year it is produced. C) the size of the Federal government's budgetary surplus or deficit when the economy is operating at full employment. D) the number of workers who are underemployed when the level of unemployment is 4 to 5 percent.

31. The full-employment budget tells us: A) that in a full-employment economy the Federal budget should be in balance. B) that tax revenues should vary inversely with GDP. C) what the size of the Federal budget deficit or surplus would be if the economy was at full employment. D) the actual budget deficit or surplus realized in any given year.

32. When current government expenditures equal current tax revenues and the economy is achieving full employment: A) the full-employment budget has neither a deficit nor a surplus. B) the full-employment budget may have either a deficit or a surplus. C) fiscal policy is contractionary. D) nominal GDP and real GDP are equal.

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33. When current government expenditures exceed current tax revenues and the economy is achieving full employment: A) the full-employment budget has neither a deficit nor a surplus. B) the full-employment budget has a deficit. C) fiscal policy is contractionary. D) nominal GDP and real GDP are equal.

34. When current tax revenues exceed current government expenditures and the economy is achieving full employment: A) the full-employment budget has neither a deficit nor a surplus. B) the full-employment budget may have either a deficit or a surplus. C) the full-employment budget has a surplus. D) nominal GDP and real GDP are equal.

35. Economists refer to a budget deficit that exists when the economy is achieving full employment as a: A) cyclical deficit. B) full-employment budget. C) natural deficit. D) nonrecurring deficit.

Use the following to answer questions 36-38: Answer the next question(s) on the basis of the following sequence of events involving fiscal policy: 1) The composite index of leading indicators turns downward for three consecutive months; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.

36. Refer to the above information. The operational lag of fiscal policy is reflected in events: A) 1 and 2. B) 2 and 3. C) 3 and 4. D) 4 and 5.

37. Refer to the above information. The recognition lag of fiscal policy is reflected in events: A) 1 and 2. B) 2 and 3. C) 3 and 4. D) 4 and 5.
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38. Refer to the above information. The administrative lag of fiscal policy is reflected in events: A) 1 and 2. B) 2 and 3. C) 3 and 4. D) 4 and 5.

39. The crowding-out effect of expansionary fiscal policy suggests that: A) government spending is increasing at the expense of private investment. B) imports are replacing domestic production. C) private investment is increasing at the expense of government spending. D) saving is increasing at the expense of investment.

40. Expansionary fiscal policy is so-named because it involves an expansion of the nation's money supply. A) True B) False

41. Demand-pull inflation can be restrained by increasing government spending and reducing taxes. A) True B) False

42. Built-in stability is synonymous with discretionary fiscal policy. A) True B) False

43. 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. A) True B) False

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Answer Key
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. C B B B D B D C B A A D D D A A B A C A B C C D D A D C B C C A B C B D A C A B B B B

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