Question

Question 13:

Suppose that an increase in aggregate demand propels the economy to an equilibrium output in excess of potential GDP. According to the self-correcting model:

1. The AD curve will eventually shift back to the left and return the economy to potential GDP
   
2. The short-run AS curve will eventually shift to the right and return the economy to potential GDP
3. The short-run AS curve will eventually shift to the left and return the economy to potential GDP
4. Potential GDP will expand after the increase in AD

Question 14:

1. Assume that the economy is initially in equilibrium at a price level of 100 and a potential GDP of $1,000 billion. If aggregate demand falls,
2. The price level will initially decline but will return to 100 when the self-correcting mechanism restores potential GDP
3. The price level will initially rise but will return to 100 when the self-correcting mechanism restores potential GDP
4. The price level will initially decline but will fall even further when the self-correcting mechanism restores potential GDP
5. The price level will initially increase but will rise even further when the self-correcting mechanism restores potential GDP

Question 15:

The "crowding out" phenomenon refers to the fact that:

1. Increased government spending can lead to higher interest rates and thereby reduce investment
2. Higher tax rates can lead to lower consumption spending by households and a lower level of equilibrium income
3. Businesses now provide many of the services households once provided for themselves
4. Both a and b

Question 16:

1. Which of the following could lead to "crowding out"?
2. Increased consumption spending and rising prices
3. Increased government spending and rising interest rates
4. Increased investment spending and rising prices
5. Reduced government spending and falling prices

Question 17:

1. Which of the following is evidence of an inflationary gap?
2. very low unemployment rates
3. very low sales figures
4. artificially high GDP rates
5. very long lines at employment agencies

Question 18:

Expansionary bias refers to the fact that:

1. Discretionary fiscal policy works with a lagged effect
2. Politicians are more willing to lower taxes and increase spending than they are to do the opposite
3. Policymakers tend to overestimate the size of the recessionary gap
4. Deficit-financed government spending can lead to crowding out

Question 19

To quickly and completely eliminate a recessionary gap, the best type of discretionary fiscal policy to impose is:

1. A decrease in taxes
2. An increase in government spending
3. An increase in interest rates
4. A decrease in interest rates

Question 20

When a recessionary gap exists, activists would recommend:

1. Contractionary fiscal policy leading to a budget deficit
2. Contractionary fiscal policy leading to a budget surplus
3. Expansionary fiscal policy leading to a budget surplus
4. Expansionary fiscal policy leading to a budget deficit

Question 21

The lags in discretionary fiscal policy:

1. Are desirable, because they provide time for the economy to adjust to the policy
2. Are desirable, because they result in eliminating the gaps
3. Are undesirable, because discretionary fiscal policy is ineffective
4. Are undesirable, because the policy action may be inappropriate by the time its impact is felt

Question 22:

1. If an inflationary gap existed, increasing government spending would
2. Eliminate the gap
3. Make the problem worse
4. Either reduce or eliminate the gap
5. None of the above

Question 23

The U.S. is currently running a budget deficit estimated at $ 441 billion. A budget deficit occurs because:

1. Government tax revenues exceed government spending
2. Government tax revenues are declining
3. Government spending exceeds government revenue
4. The government fails to earn enough tax revenue to pay off the public debt

Question 24

If potential GDP is $3000 billion and equilibrium GDP is $2000 billion:

1. An inflationary gap exists since prices in the economy are far too high
2. An inflationary gap exists since not all resources are being fully employed
3. A recessionary gap exists since not all resources are being fully employed
4. A recessionary gap exists since prices in the economy are far too high

Question 25

Which of the following will not shift the long-run aggregate supply curve to the right?

1. An increase in the stock of capital
2. A technological advance
3. An increase in the average wage rate
4. An increase in worker training

Question 26

Keynesian economists believe that there should be a very active government role in guiding the economy’s performance:

1. True
2. False

Question 27

Marginal propensity to consume always is between 0 – 1:

1. True
2. False

Question 28

The long run aggregate supply curve is always vertical:

1. True
2. False

Question 29

The marginal propensity to save is equal to the slope of the consumption function:

1. True
2. False

Question 30

The slope of the consumption function is equal to the change in consumption over the change in disposable income:

1. True
2. False

Question 31

The intercept represented by “a” in the equation C = a + b DI represents minimum savings:

1. True
2. False

Question 32

The government’s second largest source of revenue comes from taxing business which accounts for roughly 48%:

1. True
2. False

Question 33

The self-correcting mechanism is used frequently:

1. True
2. False

Question 34:

The government, unlike people, can sometimes be exempt from paying interest on their debt.

1. True
2. False

Question 35:

An inflationary gap is represented by an artificially high GDP number.

1. True
2. False

Answer 1

13. C. The short-run AS curve will eventually shift to the left and return the economy to potential GDP.
(As AD increases, unemployment reduces so wage increases which increases costs of production. Thus, SRAS curve will shift to the left and return the economy to potential GDP.)

14. D. The price level will initially decline but will fall even further when the self-correcting mechanism restores potential GDP.
(When AD falls price level reduces and there is unemployment so wage decreases which decreases costs of production. Thus, SRAS curve will shift to the right and return the economy to potential GDP at a lower price.)

15. A. Increased government spending can lead to higher interest rates and thereby reduce investment
(Crowding out means increase in government spending reduces investment by increasing interest rates.)

16. C. Increased government spending and rising interest rates
(Crowding out means increased government spending and accompanying rising interest rates.)

(Note: Post 4 MCQs at a time.)