Lahore School of Economics
Winter Term, 2010
BSc II – Sec B
Macroeconomics I
Practice MCQs for Final Term Exam
1.
a.
b.
c.
d.
e.
Most economists prior to Keynes thought
unemployment could be eliminated by an active fiscal policy
full employment was the normal condition
the economy would always adjust to a natural rate of inflation
monetary policy could eliminate the business cycle
government intervention was needed to avoid persistent unemployment
2.
a.
b.
c.
d.
e.
In the Keynesian aggregate supply curve case,
firms will always supply the amount of goods demanded at each price
consumers will demand whatever is supplied by firms at each price
the economy is always sat potential GDP
unemployment is always at natural rate
all of the above
3.
a.
b.
c.
d.
e.
Which of the following is FALSE?
the AS curve is horizontal in the Keynesian case
the AS curve is vertical in the classical case
the AS curve is upward sloping in the medium run
the AS curve is more price elastic in the long run than in the short run
none of the above
4.
a.
b.
c.
d.
e.
A decrease in aggregate demand can be caused by
a decrease in MPS
a decrease in consumer confidence
a decrease in money demand
all of the above
none of the above
5. In the medium run, if the government purchases are decreased and nominal money
supply is increased, then we can expect that
a. AD decreases and AS increases
b. AD, prices and interest rate will all increase
c. AD and prices will decrease, while the interest rate increases
d. interest rate decreases, while AD and prices may increase, decrease or remain the
same
e. none of the above
6. In a normal AD-AS curve with an upward sloping AS curve, an increase in money
supply will
a. increase output and the price level but not affect the interest rate
b. increase output, the price level and the interest rate
c. increase output and the price level but decrease the interest rate
d. unchanged output, increased price level but decreased interest rate
e. the price level increases, but output and the interest rate remain unchanged
7.
a.
b.
c.
d.
e.
According to the Phillips Curve relationship, if unemployment is at the natural rate, then
the rate of inflation is zero
nominal wages will always be equal to real wages
the labor supply will be totally price elastic
prices will always immediately adjust to changes in money supply
none of the above
8.
a.
b.
c.
d.
e.
The upward sloping AS curve will shift to the left if
labor force productivity increases
actual output is lower than the full employment level
the mark up over the labor costs fall
actual output is higher than the full employment level
the level of potential output increases
9.
a.
b.
c.
Which of the following is not a property of the upward sloping AS curve
if actual inflation is above expected inflation, the AS curve shifts to the right
the position of the AS curve depends on the past level of prices
the AS curve becomes steeper as the impact of changes in output and employment on
wages becomes larger
d. if output is below the full-employment level, the AS curve will shift to the right
e. if wages respond very little to changes in unemployment, the AS curve is very flat
10. Assume the economy is at full employment and the SBP restricts money supply. What
will be the effects on the level of output and prices?
a. in the medium run output and prices will both decrease, but in the long run
output will remain the same, while prices will decrease
b. output will not be affected in the medium or long run, but prices will decrease in the
long run
c. output will decrease but only in the long run, while prices will decrease in the medium
and long run
d. in the medium run, output will remain the same, but in the long run output and prices
will decline
e. output and prices will decline in the medium and long run
11. In the long run, real money balances
a. are not affected by expansionary fiscal policy but increase if expansionary monetary
policy is employed
b. are not effected by expansionary monetary policy but increase if expansionary fiscal
policy is employed
c. are not affected by restrictive monetary policy, but increase if restrictive fiscal
policy is employed
d. are not effected by fiscal or monetary policy
e. decrease if either restrictive fiscal or monetary policy is employed
12. What sort of event could lead to a simultaneous decrease in inflation and unemployment
rates?
a.
b.
c.
d.
e.
a decrease in money supply
an increase in money supply
an adverse supply shock
a decrease in material prices
restrictive monetary policy following an adverse supply shock
13. If policy makers want to get the price level quickly back to its original level following a
supply shock, they need to
a. implement restrictive monetary policy
b. decrease taxes
c. increase government transfer payments
d. combine a tax increase with an increase in government spending of equal magnitude
e. levy a tariff on imported oil
14.
a.
b.
c.
If the government stimulates aggregate demand in response to an adverse supply shock,
the inflation rate will increase but frictional unemployment will decrease
the unemployment rate will increase but the inflation rate will decline
an increase in unemployment can be avoided but only at the cost of increased
inflation
d. high inflation can be avoided but the rate of unemployment will increase
e. the inflation and unemployment rates will be reduced simultaneously
15. Which of the following event(s) is most likely to leave the level of prices relatively
unchanged while increasing the level of output?
a. an increase in money supply combined with an income tax increase
b. expansionary monetary policy in response to an adverse supply shock
c. expansionary fiscal policy employed after a favorable supply shock
d. restrictive monetary policy in response to an oil price decrease
e. none of these
16. If money supply were not fixed but instead were interest sensitive (upward sloping MS
curve), then
a. the LM curve will become flatter
b. the LM curve will become steeper
c. the LM curve would shift to the left
d. monetary policy will be more effective
e. both a. and d.
17.
a.
b.
c.
d.
e.
The slope of the AD curve will become steeper if
money demand becomes more income inelastic
money demand becomes more interest elastic
investment becomes more interest elastic
the income tax rate is decreased
none of the above
18.
a.
b.
c.
d.
Fiscal policy is weakest and monetary policy is strongest when
we are in the liquidity trap
money demand is very interest elastic
investment is very interest inelastic
we are in the classical case
e. the IS curve is very steep and the LM curve is very flat
19.
a.
b.
c.
d.
e.
According to the rational expectations equilibrium approach
announced changes in money supply have no effect on nominal GDP
announced changes in money supply have no effect on prices
unannounced changes in money supply temporarily affect output and prices
unannounced changes in fiscal policy have no effect on prices
none of the above
20. The rational expectations equilibrium approach have influenced the modern
macroeconomic thinking since
a. empirical studies have proven without a doubt that monetary policy is incapable of
changing real output
b. evidence has shown that recessions have never been policy induced but have instead
been caused by misguided government policy
c. most economists now admit that wages are completely flexible and that markets always
clear immediately
d. many modern economists agree that macroeconomic models need to be
developed from basic microeconomic foundations
e. none of the above
21.
a.
b.
c.
The rational expectations equilibrium approach and the frictionless classical model
both allow for transitory deviation from full employment
both predict ‘policy irrelevance’
both predict that there is a difference in short run output whether a policy is anticipated
or not
d. classicals assume people make no systematic errors while Lucas assumes they do
e. all of the above
22. According to traditional view of government debt, a tax cut will lead to all of the
following in the short run except a(n):
a. increase in consumption
b. increase in private saving
c. increase in investment
d. decrease in public saving
23. During the early 1980s, taxes were cut substantially, and national savings fell. This
evidence would seem to support
a. the traditional view of government debt
b. the Ricardian view of government debt
c. neither view of government debt
d. the view that government debt is neutral