MACRO (AD/AS) Review questions
1. An inflationary gap means that short-run macroeconomic equilibrium GDP
a) is less than full-employment (potential) GDP.
b) may be less than, more than, or the same as full-employment (potential) GDP depending on level of potential GDP.
c) is more than full-employment (potential) GDP.
d)
equals full-employment (potential) GDP.
2. An increase in which of the following is most likely to cause the short-run aggregate supply curve to shift to the left? (A) Consumers’ incomes
(B) The money supply
(C) Government spending
(D) The optimism of business firms
(E) The per unit cost of production
3, The aggregate demand curve is downward sloping because an increase in the general price level will cause the demand
for exports, interest rates, and investment to change in which of the following ways?
Exports
Interest Rates
Investment
(A) Increase
Increase
Increase
(B) Increase
Increase
Decrease
(C) Increase
Decrease
Increase
(D) Decrease
Increase
Decrease
(E) Decrease
Decrease
Increase
4. Assume that the economy is in long-run equilibrium. According to New Classical economists, a shift in the aggregate
demand curve will change
(A) only the price level in the long run
(B) only the output level in the long run
(C) both the price level and the output level in the long run
(D) neither the price level nor the output level in the short run
(E) only the price level in the short run and only the output level in the long run
5. If a reduction in aggregate supply is followed by an increase in aggregate demand, which of the following will
definitely occur?
(A) Output will increase.
(B) Output will decrease.
(C) Output will not change.
(D) The price level will increase.
(E) The price level will decrease.
6. Which of the following combinations of changes in government spending and taxes is necessarily
expansionary?
Gov’t Spending
Taxes
(A) Increase
Increase
(B) Increase
Decrease
(C) Decrease
Not change
(D) Decrease
Increase
(E) Decrease
Decrease
7. With an upward-sloping short-run aggregate supply curve, an increase in government expenditure will most likely
(A) reduce the price level
(B) reduce the level of nominal gross domestic product
(C) increase real gross domestic product
(D) shift the short-run aggregate supply curve to the right
(E) shift both the aggregate demand curve and
the long-run aggregate supply curve to the left
USE this GRAPH for Questions 8 and 9:
8. In the graph above, AD denotes the aggregate demand curve, SRAS the short-run aggregate supply curve, and LRAS
the long-run aggregate supply curve. If no policy action were taken, which of the following changes would move the
economy to its long-run equilibrium?
(a) An increase in aggregate demand
(b) An increase in exports
(c) An increase in wages
(d) A decrease in wages
(e) A decrease in the expected price level
9 . If the government decided to take a policy action to move the economy to its long run equilibrium, which of the
following combinations of policies would be most appropriate.
(a) An increase in taxes and an increase in interest rates
(b) An increase in government expenditure and an increase in interest rates
(c) An increase in taxes and a decrease in interest rates
(d) A decrease in taxes and a decrease in interest rates
10. Suppose that a national government increased deficit spending on goods and services, increasing its demand for
loanable funds. In the long run, according to New Classical theory, this policy would most likely result in which of the
following changes in this country?
Real Interest Rate
Investment
Decrease
Decrease
(a)
(b)
Decrease
Increase
(c)
Increase
Decrease
(d)
Increase
No change
No change
Increase
(e)
11. If national income goes up but the price level is indeterminate then
A
B
C
D
E
the AD-curve must have shifted to the right and the AS curve to the left
the AD-curve must have shifted to the left
the AS-curve must have shifted to the right
the AS-curve must have shifted to the left
the AD-curve and the AS-curve must have shifted to the right
12. Which of the following will most likely occur as a result of an increase in labor productivity (ie. Output per manhour) in an economy?
A
An increase in output and a decrease in inflation
B
An increase in interest rates and a decrease in investment
C
A decrease in both money demand and money supply
D
A decrease in exports and an increase in unemployment
13. Expansionary fiscal policy will be most effective in increasing GDP when:
A
C
E
the aggregate supply curve is horizontal
wages and prices are very flexible
B
D
the economy is at or above full employment
the central bank at the same time decreases the money supply
the aggregate demand curve is horizontal
14. Which of the following would be desirable if there were large scale unemployment?
I. a budget deficit
A I only
15.
a)
B III only
II. lower interest rates
C I and III only
III. a rise in exports
D I, II and III
E II only
A recessionary gap means that short-run macroeconomic equilibrium GDP
is less than full-employment (potential) GDP.
b) may be less than, more than, or the same as full-employment (potential) GDP depending on the level of potential
GDP.
c) is more than full-employment (potential) GDP.
16.
d)
equals full-employment (potential) GDP.
In a fully employed economy, other things being equal, an increase in exports is
a. deflationary because more goods are leaving the country
b. deflationary because there will be a fall in home demand
c. inflationary because home supplies fall relative to demand
d. neutral because supply and demand both fall to the same extent.
17. If the “ new classical” long run aggregate supply curve (LRAS) is an appropriate model of the economy and if the
economy is in long-run equilibrium , what will be the effect of an increase in government spending on inflation and
unemployment in the long run?
Inflation
Unemployment
a.
No change
Increase
b.
Increase
Decrease
c.
Decrease
Increase
d.
Decrease
No change
e.
Increase
No change
18. Which of the following would directly increase the capital stock of an economy?
(A) An individual purchases shares of corporate stock. (B) An individual purchases high-risk corporate bonds.
(C) A business firm expands its production facilities.
(D) A bank uses cash reserves to purchase short- and long-term government securities.
(E) The government implements a spending program to cover prescription drugs for Medicare recipients
Do not worry if you do not fully understand the following questions. Use your intuition! They are still worth doing.
19. A stimulative (expansionary) fiscal (budgetary) policy combined with a restrictive (contractionary) monetary policy
will necessarily cause
(a) gross domestic product to increase
(b) gross domestic product to decrease
(c) interest rates to fall
(d) interest rates to rise
(e) the government budget deficit to decrease
20. Which of the following combinations of monetary and fiscal policies would INCREASE aggregate demand most
effectively?
Monetary Policy
Fiscal Policy
A
Increase interest rates
B
Decrease interest rates
C
Increase the money supply
D
Decrease the money supply
21. A country’s infrastructure refers to its Raise taxes
Raise government expenditure
Lower government expenditure
Lower taxes
(A)
(B) private financial institutions
natural resources
(C) proportion of population with postsecondary education (D) public capital goods such as highways
(E) internal as opposed to external debt
MACRO (AD/AS and the BUDGET) Review questions ANSWERS
1. C
2. E
3. D
4. A
5. D
6. B
7. C
8. C
9. A
10. C
11. E
12. A
13. A
14. D
15. A
16. C
17. E
18. C
Supplementary
19.D
20.B
21.D