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The aggregate demand curve is:

downsloping because of the interest-rate, real-balances, and foreign purchases effects.

If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift:

rightward by $50 billion at each price level.

The aggregate supply curve (short-run):

is steeper above the full-employment output than below it.

Refer to the above diagram. If the initial aggregate demand and supply curves are AD0 and AS0, the equilibrium price level and level of real domestic output will be:

F and C, respectively.

Refer to the above diagram. A shift of the aggregate demand curve from AD1 to AD0 might be caused by a(n):

increase in investment spending.

Refer to the above diagram. Other things equal, a shift of the aggregate supply curve from AS0 to AS1 might be caused by a(n):

increase in government regulation.

Graphically, demand-pull inflation is shown as a:

rightward shift of the AD curve along an upsloping AS curve.

Expansionary fiscal policy is so named because it:

is designed to expand real GDP.

Countercyclical discretionary fiscal policy (that is, policy that reduces the size of swings in the business cycle) calls for:

deficits during recessions and surpluses during periods of demand-pull inflation.

An economist who favors smaller government would recommend:

tax cuts during recession and reductions in government spending during inflation.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?

a reduction in Federal tax rates on personal and corporate income

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 major advantage of the built-in or automatic stabilizers is that they:

require no legislative action by Congress to be made effective.

Suppose the government purposely changes the economy's standardized budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n):

contractionary fiscal policy.

Recessions have contributed to the public debt by:

reducing national income and therefore tax revenues.

Which of the following is not considered a legitimate concern of a large public debt?

Bankruptcy of the Federal government

In terms of aggregate supply, a period in which nominal wages and other resource prices are unresponsive to price-level changes is called the:

short run.

Refer to the above diagram. The long-run aggregate supply curve is:


In the short run (with a short-run aggregate supply curve) an increase in the price level will cause

an increase in output.

Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. Suppose there is demand-pull inflation caused by a shift of AD1 to AD2. In the short run equilibrium will move from d to:


Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. Suppose again that there is demand-pull inflation caused by a shift of AD1 to AD2. In the long run AS1 will respond by shifting to the:


Refer to the above diagram. The initial aggregate demand curve is AD2 and the initial aggregate supply curve is AS2 and the economy is at equilibrium at point a. Suppose there is a recession characterized by a shift from AD2 to AD1. Assuming that government does not intervene, the economy will return to full employment in the long run when AS2

shifts right to AS1 and the price level drops to d.

Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. Suppose short-run cost-push inflation causes AS1 to shift to AS2. If government responds by increasing aggregate demand from AD1 to AD2:

the price level will rise from P2 to P3.

Refer to the above graphs. Growth of production capacity is shown by:

both the shift from AB to CD and the shift from X to Y.

Refer to the above graphs, where the subscripts on the labels denote years 1 and 2. From the graphs we can
clearly conclude that from year 1 to year 2:

the economy experienced economic growth and some inflation.

For a nation's real GDP per capita to rise during a year:

real GDP must increase more rapidly than population.

If a nation's real GDP is growing by 5 percent per year, its real GDP will double in approximately: (Hint: Use the rule of 70.)

14 years.

Strong property rights are important for modern economic growth because:

people are less likely to invest if they are fearful that others can take their returns on investment without compensation.

Refer to the above graphs. An increase in an economy's labor productivity would:

shift curve AB to CD

Human development policies that encourage growth in less developed countries include

promoting economic opportunities for women, public education, and health.

If you place a part of your summer earnings in a savings account, you are using money primarily as a:

store of value.

In the United States, the money supply (M1) is comprised of:

coins, paper currency, and checkable deposits.

Paper money (currency) in the United States is issued by the:

Federal Reserve Banks.

During periods of rapid inflation, money may cease to work as a medium of exchange:

because people and businesses will not want to accept it in transactions.

Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank:

cannot safely lend out more money.

Suppose a savings and loan association has checkable deposits of $500,000 and the legal reserve ratio is 10 percent. If the institution has excess reserves of $4,000, then its actual (or total) reserves are:


Other things equal, if the required reserve ratio was lowered:

the size of the monetary multiplier would increase.

Refer to the above data. After a deposit of $10 billion of new currency into a checking account in the banking system, excess reserves will increase by:

$9 billion.

Refer to the above data. After the deposit of $10 billion of new currency, the maximum amount by which this commercial banking system can expand the supply of money by lending is: (Apply the money multiplier to your answer to the previous question.)

$90 billion.

Refer to the above diagram of the market for money. The equilibrium interest rate is:


The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable deposits:

of commercial banks are unchanged, but their reserves increase.

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