Question

Principles of Macroeconomics

Q.1 Unemployment that is the result of recessions is called

A.frictional unemployment.

B.cyclical unemployment.

C.downtime unemployment.

D.structural unemployment.

Q.2 If the aggregate demand curve shifts rightward following a decrease in the federal funds rate, what can be concluded if the short-run aggregate supply curve is rather steep? [Hint: draw a graph]

A.There will be a significant increase in both real GDP and the price level.

B.There is significant unemployment and slack in the economy.

C.There will be little increase in real GDP but a significant increase in the price level.

D.There will be a significant increase in real GDP with little impact on the price level.

Q.3 Which of the following are policy instruments available to the Fed as it tries to achieve its macroeconomic goals?
I. government expenditures on goods and services and taxes
II. the government budget deficit or surplus
III. changes in the target federal funds rate

A.I and II

B. III only

C.II and III

D.II only

Q.4 Which of the following is a problem in pursuing monetary policy?

A.The relationship between the change in the federal funds rate and long-term interest rates is loose.

B.Monetary policy must be approved by the Congress.

C.The lag between a change in the quantity of money and its effect on economic activity is long and variable.

D. Both A and C are correct.

E. Both A and B are correct.

Q.5 Once supply side effects are taken into account, tax cuts can change
I. the quantity of labor supplied.
II. saving, investmentand the quantity of capital.
III. potential real GDP.

A.I, II and III

B.I only

C.I and II

D. II only

Q.6 Because of automatic stabilizers, when income increases

A. government expenditures increase and tax revenues decrease.

B. the economy will automatically go to full employment.

C. government expenditures equal tax revenues.

D. government expenditures decrease and tax revenues increase.

Answer 1

1) Option A) Cyclical unemployment.

Unemployment that is the result of recessions is called Cyclical unemployment. Cyclical unemployment refers to that unemployment stage wherein demand falls, businesses lay off workers, ecomic slows down experiencing a negative economic growth.

2) Option A) There will be a significant increase in both real GDP and the price level.

If the aggregate demand curve shifts rightward following a decrease in the federal funds rate, there will be a significant increase in both real GDP and the price level. A change in any of the components of aggregate demand will cause AD to shift, anything that increases C, I, G, or NX will shift AD to the right. Anything that decreases C, I, G, or NX will shift AD to the left. Increases in AD causes an increase in the price level and increases in aggregate output creating positive output gaps thereby increasing real GDP.

3) Option III) changes in the target federal funds rate.

The policy instruments available to the Fed as it tries to achieve its macroeconomic goals is changes in the target federal funds rate. Fed is only responsible for monetary policy and the three monetary policy tools available to it are open market operations, discount rate and reserve ratio. Through this, Fed can impact the federal funds rate in the market for reserves.