Recurring upswings and downswings in an economy's real GDP over time are called

business cycles

During a severe recession, we would expect output to fall the most in

the construction industry

The production of durable goods varies more than the production of nondurable goods because

durables purchases are postponable

A recession is defined as a period in which

real domestic output falls

An unexpected increase in total spending will cause an increase in GDP

if prices are sticky

Which of the following would most likely move the economy into a recession in the short term

The central bank printing less money than was anticipated

Refer to the above information


The labor force in Scoob is

102 million

Refer to the above information


The unemployment rate in Scoob is


9 percent


Refer to the above information


If the natural rate of unemployment in Scoob is 5 percent, then

cyclical unemployment is about 2 percent

Cyclical unemployment results from

a deficiency of spending on goods and services

Which of the following constitute the types of unemployment occurring at the natural rate of unemployment

Structural and frictional unemployment

Which of the following types of unemployment is directly associated with insufficient overall demand for goods and services

Cyclical unemployment

The GDP gap measures the difference between

actual GDP and potential GDP

If actual GDP is $500 billion and there is a negative GDP gap of $10 billion, potential GDP is

$510 billion

Assume the natural rate of unemployment in the U


economy is 5 percent and the actual rate of unemployment is 9 percent


According to Okun's law, the negative GDP gap as a percent of potential GDP is

8 percent

Refer to the above data


The size of the negative GDP gap as a percent of potential GDP for the above economy is

12 percent

Refer to the above data


The amount of output being forgone by the above economy is

$24 billion

If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is

11 percent

Rising per-unit production costs are most directly associated with

cost-push inflation

Which of the following would most likely occur during the expansionary phase of the business cycle

Demand-pull inflation

Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price index rises from 100 to 105


The person's real income will

rise by about 15 percent

Who is least likely to be hurt by unanticipated inflation

an owner of a small business

Inflation affects:
both the level and the distribution of income

Suppose that lenders want to receive a real rate of interest of 5 percent, and that they expect inflation to remain steady at 2 percent in the coming years


Based on this, lenders should charge a nominal interest rate of

7 percent

Changes in stock market prices

do not greatly impact the macroeconomy and used alone are not reliable predictors of the future health of the economy

The most important determinant of consumer spending is

the level of income

The MPC can be defined as that fraction of a

change in income that is spent

A decline in disposable income

decreases consumption by moving downward along a specific consumption schedule

The consumption schedule is such that

the MPC is constant and the APC declines as income rises

The size of the MPC is assumed to be

greater than zero, but less than one

As disposable income increases, consumption

and saving both increase

Which one of the following will cause a movement down along an economy's consumption schedule

a decrease in disposable income

If Trent's MPC is

80, this means that he will

spend eight-tenths of any increase in his disposable income

Dissaving occurs where

consumption exceeds income

If the marginal propensity to consume is


9, then the marginal propensity to save must be


If the saving schedule is a straight line, the:
MPS must be constant

Refer to the above data


The marginal propensity to consume is


Refer to the above data

At the $100 level of income, the average propensity to save is


The relationship between the real interest rate and investment is shown by the:
investment demand schedule

The immediate determinants of investment spending are the

expected rate of return on capital goods and the real interest rate

The real interest rate is

the percentage increase in purchasing power that the lender receives on a loan

If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is

12 percent

A high rate of inflation is likely to cause a

high nominal interest rate

The multiplier is useful in determining the

change in GDP resulting from a change in spending

The multiplier is defined as

change in GDP/initial change in spending

The multiplier

can be found by taking the reciprocal of the MPS

The practical significance of the multiplier is that it

magnifies initial changes in spending into larger changes in GDP

If the MPC is


6, the multiplier will be


The Council of Economic Advisers has estimated that the actual multiplier for the U


economy is approximately


Suppose the multiplier is 4 and lump-sum taxes are increased by $16 in a closed economy


We can predict that

the aggregate expenditures schedule will shift downward by $12

If APC = 6 and MPC = 7, the immediate impact of an increase in personal taxes of $20 will be to

decrease consumption by $14

The inflationary expenditure gap in the United States in the late 1980s was caused by

rising aggregate expenditures

Suppose that the level of GDP increased by $100 billion in a private closed economy where the marginal propensity to consume is 0


Aggregate expenditures must have increased by

$50 billion

What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources?

a rise in the real GDP

The relationship between investment and GDP is shown by the

investment schedule

Refer to the above diagram


If net exports are Xn2, the GDP in the open economy will exceed GDP in the closed economy by


In an aggregate expenditures diagram, a lump-sum tax (T ) will

shift the C + Ig + Xn line downward by an amount equal to T × MPC

Refer to the above diagram for a private closed economy


At the $200 level of GDP


consumption is $200 and planned investment is $50 so that aggregate expenditures are $250


Assume the MPC is


If government were to impose $50 billion of new taxes on household income, consumption spending would decrease by

$40 billion

If the MPC in an economy is


9, a $1 billion increase in government spending will ultimately increase consumption by

$9 billion

A shortcoming of the aggregate expenditures model is that it does not

account for cost-push inflation

If aggregate expenditures exceed GDP in a private closed economy

planned investment will exceed saving

A lump-sum tax means that

the same amount of tax revenue is collected at each level of GDP

A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because

a portion of a tax cut will be saved

If the United States wants to increase its net exports, it might take steps to

increase the dollar price of foreign currencies

In the aggregate expenditures model, an increase in government spending may

increase output and employment

If the above economy was closed to international trade, the equilibrium GDP and the multiplier would be

$350 and 5

If an unintended increase in business inventories occurs at some level of GDP, then GDP

is too high for equilibrium

Which of the following would increase GDP by the greatest amount

a $20 billion increase in government spending

The determinants of aggregate supply

include resource prices and resource productivity

Which one of the following would not shift the aggregate demand curve

a change in the price level

Graphically, cost-push inflation is shown as a

leftward shift of AS curve

The real-balances effect indicates that

a higher price level will decrease the real value of many financial assets and therefore reduce spending

If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U


This statement describes

the foreign purchases effect

An increase in input productivity will

reduce the equilibrium price level, assuming downward flexible prices

Which of the above diagrams best portrays the effects of an increase in resource productivity


The ratchet effect is the tendency of

the price level to increase but not to decrease

Refer to the above diagram


If aggregate supply is AS1 and aggregate demand is AD0, then

F represents a price level that would result in a shortage of real output of AC

In which of the following sets of circumstances can we confidently expect inflation

aggregate supply decreases and aggregate demand increases

Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves


Cost-push inflation is depicted by

panel (B) only

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the

determinants of aggregate demand

The foreign purchases effect suggests that a decrease in the U


price level relative to other countries will

increase U

exports and decrease U




Answer the next question(s) on the basis of the following information about the relationship between input quantities and real domestic output in a hypothetical economy

The level of productivity in the above economy is:

If the price of each input is $5, the per-unit cost of production in the above economy is


The aggregate supply curve (short-run)

is steeper above the full-employment output than below it

Refer to the above data


The equilibrium price level will be


When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may

reduce worker morale and work effort, and thus lower productivity

The aggregate supply curve (short-run)

slopes upward and to the right

Refer to the above diagram


Which of the following would shift the aggregate demand curve from AD2 to AD1

an increase in the international value of the dollar

When aggregate demand declines, the price level may remain constant, at lease for a time, because

firms individually fear that their price cut may set off a price war

A decline in investment will shift the AD curve to the

left by a multiple of the change in investment

Other things equal, an improvement in productivity will

shift the aggregate supply curve to the right

Refer to the above table


If the amounts of GDP supplied at the price levels shown (in descending order) are $27, $25, $22, $18, and $13, the equilibrium price level will be


Fiscal policy refers to the

manipulation of government spending and taxes to stabilize domestic output, employment, and the price level

Contractionary fiscal policy is so named because it

is aimed at reducing aggregate demand and thus achieving price stability

An economist who favors smaller government would recommend

tax cuts during recession and reductions in government spending during inflation

If the MPS in an economy is


1, government could shift the aggregate demand curve rightward by $40 billion by

increasing government spending by $4 billion

If the MPC in an economy is


8, government could shift the aggregate demand curve rightward by $100 billion by

decreasing taxes by $25 billion

Discretionary fiscal policy will stabilize the economy most when

deficits are incurred during recessions and surpluses during inflations

Assume that aggregate demand in the economy is excessive, causing demand-pull inflation


Which of the following would be most in accord with appropriate government fiscal policy

an increase in Federal income tax rates

An appropriate fiscal policy for a severe recession is

a decrease in tax rates

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will

shift the AD curve to the left

An expansionary fiscal policy is shown as a

rightward shift in the economy's aggregate demand curve

A specific reduction in government spending will dampen demand-pull inflation by a greater amount, the

smaller is the economy's MPS

A contractionary fiscal policy is shown as a

leftward shift in the economy's aggregate demand curve

A tax reduction of a specific amount will be more expansionary, the

larger is the economy's MPC

Suppose the price level is fixed, the MPC is


5, and the GDP gap is a negative $80 billion To achieve full-employment output (exactly), government should

reduce taxes by $80 billion

If the economy has a standardized budget surplus, this means that

tax revenues would exceed government expenditures if full employment were achieved

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