Econ 2105: Sample questions for exam 3
Multiple Choice:
Identify the choice that best completes the statement or answers the question.
1. Which of the following would be most likely to cause an increase in current aggregate demand in the United
States?
a. increased fear that the U.S. economy was going into a recession
b. an increase in the real interest rate
c. sharp increase in the value of stocks owned by Americans
d. a recession in Canada, Mexico, and Western Europe
2. Which of the following will most likely accompany an unanticipated increase in aggregate demand?
a. an increase in real output
b. an increase in unemployment
c. a decrease in real GDP
d. a decrease in the demand for resources
3. In the aggregate demand/aggregate supply model, when the output of an economy is less than its long-run
potential, the economy will experience
a. declining real wages and interest rates that will stimulate employment and real output.
b. rising interest rates that will stimulate aggregate demand and restore full employment.
c. a budget surplus that will stimulate demand and, thereby, help restore full employment.
d. rising real wages and real interest rates that will restore equilibrium at a higher price level.
4. Which of the following will most likely result from an unanticipated decrease in aggregate supply due to
unfavorable weather conditions in agricultural areas?
a. a decrease in inflation
b. a decrease in unemployment
c. an increase in the general level of prices
d. an increase in the natural rate of unemployment
5. Which of the following will most likely increase aggregate supply in the long run?
a. unfavorable weather conditions in agricultural areas
b. an increase in the expected inflation rate
c. higher real interest rates
d. an increase in the rate of capital formation
6. Within the AD/AS model, an unanticipated increase in short-run aggregate supply will cause real output to
a. increase and the general level of prices to fall.
b. decrease and the general level of prices to rise.
c. increase and the general level of prices to rise.
d. decrease and the general level of prices to fall.
7. An increase in the long-run aggregate supply curve indicates that
a. the natural rate of unemployment has increased.
b. unemployment has increased.
c. the general level of prices has increased.
d. potential real GDP has increased.
8. If the general level of prices is lower than business decision makers anticipated when they entered into long-term
contracts for raw materials and other resources, which of the following is most likely to occur?
a. an economic boom
b. highly attractive profit margins
c. output less than the economy's long-run potential
d. a sharp increase in imports
9. When output is less than the economy's long-run capacity, which of the following is most likely to occur?
a. an abnormally low rate of unemployment
b. reductions in real interest rates and real resource prices
c. a sharp increase in imports
d. a government budget surplus
10. Suppose there was a sharp reduction in stock prices and a sharp increase in the world price of crude oil. Within the
framework of the AD/AS model, how would these two changes influence the U.S. economy?
a. The lower stock prices would increase SRAS, and the higher crude oil prices would reduce
AD; as a result, there would be downward pressure on the general level of prices.
b. The lower stock prices would reduce SRAS, and the higher crude oil prices would increase
AD; as a result, there would be upward pressure on the general level of prices.
c. The lower stock prices would increase AD, and the higher crude oil prices would increase
SRAS; as a result, output would tend to increase.
d. The lower stock prices would reduce AD, and the higher crude oil prices would reduce
SRAS; as a result, output would tend to decline.
11. When government expenditures exceed revenue from all sources,
a. a budget deficit is present.
b. the supply of money will increase.
c. the government's outstanding debt will decline.
d. all of the above are true.
12. According to the Keynesian view, which of the following would most likely decrease aggregate demand?
a. a decrease in tax rates
b. a decrease in government expenditures
c. an increase in transfer payments
d. an increase in the budget deficit
13. Automatic stabilizers are government programs that tend to
a. increase the ups and downs in aggregate demand without legislative action.
b. bring expenditures and revenues automatically into balance without legislative action.
c. shift the budget toward a deficit when the economy slows but shift it toward a surplus
during an expansion.
d. increase tax collections automatically during a recession.
14. Keynesian analysis implies that a planned expansion in the size of the budget deficit is
a. always necessary to ensure full employment.
b. proper during slack economic conditions but highly inappropriate if the economy is
already operating at capacity.
c. of little consequence unless there is a corresponding change in the money supply.
d. an effective method of dealing with inflation.
15. Which of the following is true?
a. Inability to forecast the future and political delays reduce the effectiveness of fiscal policy
as a stabilization tool.
b. Legislative action is necessary if automatic stabilizers are going to smooth the ups and
downs of the business cycle.
c. The crowding-out effect indicates that the expectation of higher future tax rates will
undermine the potency of expansionary fiscal policy.
d. The new classical theory indicates that higher real interest rates will undermine the
potency of expansionary fiscal policy.
16. The crowding-out effect suggests that
a. expansionary fiscal policy causes inflation.
b. restrictive fiscal policy is an effective weapon against inflation.
c. a reduction in private spending that results from higher interest rates caused by a budget
deficit will largely offset the expansionary effects of the deficit.
d. a tax reduction financed by borrowing will increase the disposable income of households
and, thereby, lead to a strong expansion in aggregate demand, output, and employment.
17. The supply-side effects of a reduction in taxes are the result of
a. increases in the disposable income of households accompanying reductions in tax rates.
b. the stimulus effects of increases in government expenditures.
c. increased attractiveness of productive activity relative to leisure and tax avoidance.
d. reductions in interest rates that generally accompany expansionary fiscal policy.
18. The new classical model implies that substitution of debt for tax financing
a. increases aggregate demand and exerts an expansionary effect on real output.
b. is highly effective against inflation.
c. reduces savings because it increases both the current and future tax liability of households.
d. leaves wealth, and therefore aggregate demand, unchanged because the debt will require
higher future tax rates.
19. If a fiscal policy change is going to exert a stabilizing impact on the economy, it must
a. add demand stimulus during a slowdown but restraint during an economic boom.
b. exert an expansionary impact during all phases of the business cycle.
c. restrain aggregate demand during all phases of the business cycle.
d. keep the government's budget in balance.
20. Since 1986, the top marginal personal income tax rate has been 40 percent or less compared to 70 percent or more
prior to 1981. During the last 15 years, the share of personal income taxes collected from high income taxpayers
a. has declined sharply.
b. has been virtually unchanged.
c. has increased.
d. rose prior to the capital gains tax cut of 1997, but has fallen sharply since that time.
21. How much does it cost to tax a dollar of revenue away from the private sector and transfer it to the government to
finance a government program?
a. one dollar
b. less than one dollar because the administration of and compliance with the tax laws creates
jobs for people
c. more than a dollar because collection of the taxes requires resources that would otherwise
be available for private sector production
d. more than a dollar because of the excess burden resulting from the elimination of
productive exchanges by the taxes
e. Both c and d are correct.
22. Real (adjusted for inflation) federal spending per person in the United States
a. has increased by approximately 10 percent per decade during the last 225 years.
b. increased more rapidly during the nineteenth century than during the twentieth century.
c. in 2006 was approximately 70 times the level of 1916.
d. increased rapidly during the first half of the twentieth century but has changed very little
since 1950.
23. Compared to the situation prior to 1980, the top marginal personal income tax rate imposed on the rich is now
substantially
a. lower and so is the share of the revenue collected from them.
b. higher and so is the share of the revenue collected from them.
c. lower, but the share of the revenue collected from them is now higher.
d. higher, but the share of the revenue collected from them is now lower.
24. Government expenditures as a share of the U.S. economy are
a. the largest in the world.
b. the smallest in the world.
c. smaller than most Western European countries but larger than a number of high-growth
Asian economies.
d. larger than Canada, France, and the United Kingdom but slightly smaller than Germany
and Italy.
25. When the Social Security system begins running a deficit during the years following 2018, the bonds in the trust
fund will be drawn down. The funds to redeem these bonds will have to come from
a. higher taxes, spending reductions in other programs, or additional government borrowing.
b. the surplus funds deposited in governmental banking accounts.
c. equity capital being liquidated.
d. the sale of private equities and securities that the government has been purchasing with the
funds.
26. Demographic conditions
a. were much less favorable for the Social Security system in 1950 than is currently the case.
b. are currently unfavorable because the number of retirees is growing rapidly as the result of
the high birth rate in the United States during 1930-1945.
c. will be less favorable for the Social Security system once the baby boom generation
begins to retire around 2011.
d. don't affect the financial status of the Social Security system because it is based on the
same principles as private insurance programs.
27. Compared to the United States and Japan, the labor markets of Europe, Canada, and Australia are characterized by
a. lower unionization.
b. less generous unemployment benefits.
c. more restrictive regulations.
d. lower rates of unemployment
28. Increases in unemployment benefits will ____ the opportunity cost of job search and, thereby, encourage ____
lengthy time periods of unemployment.
a. reduce; less
b. reduce; more
c. increase; less
d. increase; more
29. Countries with higher unemployment rates tend to have ____ centralized wage setting and ____ generous
unemployment benefit programs.
a. less; more
b. more; less
c. less; less
d. more; more