Unit 3 Review Practice Set 1

Multiple Choice
Identify the choice that best completes the statement or answers the question.
____

1. Consider a simple economy: MPC = 0.75, income =$400 billion and aggregate consumption spending= $400
billion. The autonomous consumption is:
A. 0.
B. $100 billion.
C. $300 billion.
D. $200 billion.
E. $400 billion.

____

2. A fall in the market interest rate makes any investment project:

A. less profitable if the funds were borrowed and more profitable if it came from retained
earnings.
B. less profitable, regardless of whether the funds were borrowed or came from retained
earnings.
C. more profitable, regardless of whether the funds were borrowed or came from retained
earnings.
D. more profitable only if the funds were borrowed
E. more profitable if the funds come from retained earnings than if the funds are borrowed.

____

3. All else equal, the higher the current production capacity in the economy:
A. the higher is planned investment spending.
B. the lower is planned investment spending.
C. the higher is actual production.
D. the lower is current production.
E. the lower is unplanned investment spending.

____

4. An increase in wealth or an increase in government spending will result in a:

A. shift to the left of the short-run aggregate supply curve.
B. shift right of the aggregate demand curve.
C. shift right of the short-run aggregate supply curve.
D. movement along the aggregate demand curve.
E. shift right of the long-run aggregate supply curve.

____

5. The AD curve will shift left:

A. because of the wealth and interest rate effects.
B. if there is a decrease in household wealth.
C. if the aggregate price level falls.
D. if government decreases taxes paid by households.
E. if net exports rise.

____

6. Which of the following will shift the AD curve to the right?

A. an increase in wealth
B. pessimism about the future of the economy
C. a decrease in government spending.
D. a decrease in productivity
E. an increase in commodity prices.

____

7. Which of the following policies will shift the AD curve to the left?

A.
B.
C.
D.
E.

The government increases its level of spending in the economy.

The government increases transfer payments to households.
The Federal Reserve increases the money supply in the economy.
The government decreases its level of taxation in the economy.
The government increases its level of taxation in the economy.

____

8. Changes in short-run aggregate supply can be caused by changes in:

A. wages.
B. wealth.
C. government spending.
D. consumption spending.
E. investment spending.

____

9. A movement along the short-run AS curve occurs, holding everything else constant, if there is a:
A. change in commodity prices.
B. supply shock.
C. change in the aggregate price level.
D. productivity change.
E. decrease in investment spending.

____ 10. Sticky wages and prices occur:

A. in the long run.
B. in the short run.
C. in both the short and long run.
D. only when the economy is operating above its potential real GDP.
E. only when the economy is operating below its potential real GDP.
Figure 19-9: Inflationary and Recessionary Gaps

____ 11. Use the Inflationary and Recessionary Gaps Figure 19-9. In Panel (a), an expansionary policy designed
to move the economy from Y1 to Yp would attempt to:
A. shift aggregate demand to the left.
B. shift aggregate demand to the right.
C. shift SRAS to the left.
D. shift LRAS to the left.
E. shift SRAS to the right.

Figure 19-11: Policy Alternatives

____ 12. Use the Policy Alternatives Figure 19-11. In Panel (b), the economy is initially in short-run equilibrium at
real GDP level Y1 and price level P2. If the government decides to intervene, it would most likely:
A. increase taxes.
B. decrease the quantity of money available.
C. increase the level of government purchases of goods and services.
D. decrease the level of government purchases of goods and services.
E. decrease transfer payments.
____ 13. If an economy is currently in short-run equilibrium where the level of real GDP is greater than potential
output, then in the long run, one will find:
A. nominal wages will rise and the SRAS curve will shift left bringing the economy back to its
potential real GDP.
B. nominal wages will rise shifting the AD curve to the right and restoring real GDP to its
potential level.
C. nominal wages will fall and the SRAS curve will shift right bringing the economy back to
its potential real GDP.
D. nominal wages will fall shifting the AD curve to the left and bringing the economy back to
its potential real GDP.
E. nominal wages will rise and the LRAS curve will shift left bringing the economy back to its
potential real GDP.
____ 14. When actual output is above potential output, in the absence of deliberate monetary or fiscal policy:
A. nominal wages will increase, and the short-run aggregate supply curve will shift to the
right.
B. nominal wages will increase, and the short-run aggregate supply curve will shift to the left.
C. the aggregate demand curve will shift to the right.
D. the short-run aggregate supply curve will shift to the right.
E. nominal wages will increase, and the aggregate demand curve will shift to the left.
____ 15. Suppose the economy is operating at potential GDP and there is an increase in the money supply. Which of
the following best describes the adjustment process that follows?
A. Aggregate output will rise above potential output, nominal wages will rise, and the SRAS
will shift leftward.
B. Aggregate output will fall below potential output, nominal wages will rise, and the SRAS
will shift leftward.

C. Aggregate output will rise above potential output, nominal wages will fall, and the SRAS
will shift leftward.
D. Aggregate output will rise above potential output, nominal wages will rise, and the SRAS
will shift rightward.
E. Aggregate output will rise above potential output, nominal wages will fall, and the SRAS
will shift rightward.
Figure 19-12: Short-Run and Long-Run Effects of Monetary Policy

____ 16. Use the Short-Run and Long-Run Effects of Monetary Policy Figure 19-12. If the economy is initially
at E2 and the central bank makes no change in its monetary policy, then:
A. AD2 will shift to the right, increasing the existing inflationary gap.
B. AD2 will shift to the left, closing the inflationary gap.
C. SRAS1 will eventually shift to the left, closing the existing inflationary gap, but raising the
aggregate price level.
D. SRAS2 will immediately shift to the right, increasing the existing inflationary gap.
E. SRAS1 will eventually shift to the left, closing the existing inflationary gap, but lowering
the aggregate price level.
____ 17. If an economy is operating at an output level below its potential output level, holding everything else
constant, one would expect in the long run:
A. nominal wages to rise.
B. nominal wages to stay the same.
C. potential GDP to increase.
D. price levels to increase.
E. nominal wages to fall.
____ 18. Suppose the economy is experiencing a recessionary gap. To move equilibrium aggregate output closer to the
level of potential output, the best fiscal policy option is to:
A. decrease government purchases.
B. decrease taxes.
C. decrease government transfers.

D. increase real interest rates.

E. increase the money supply.
____ 19. Decreasing funding to explore space:
A. will shift the short-run aggregate supply curve to the left.
B. will shift the short-run aggregate supply curve to the right.
C. will shift the aggregate demand curve to the left.
D. will shift the aggregate demand curve to the right.
E. will shift the long-run aggregate supply curve to the right.
Figure 20-8: Fiscal Policy Options

____ 20. Use the Fiscal Policy Options Figure 20-8. If the aggregate demand curve is AD:
A. a contractionary fiscal policy may be warranted.
B. an expansionary fiscal policy may be warranted.
C. no change in discretionary fiscal policy is warranted.
D. the economy is experiencing an inflationary gap.
E. the unemployment rate is higher than the natural rate of unemployment.
____ 21. Use the Fiscal Policy Options Figure 20-8. If the aggregate demand curve is AD':
A. a contractionary fiscal policy may be warranted.
B. an expansionary fiscal policy may be warranted.
C. the economy is in long-run equilibrium.
D. the economy is experiencing an inflationary gap.
E. the unemployment rate is lower than the natural rate of unemployment.
____ 22. Use the Fiscal Policy Options Figure 20-8. If the aggregate demand curve is AD":
A. the economy is in long-run equilibrium.
B. an expansionary fiscal policy may be warranted.
C. a contractionary fiscal policy may be warranted.
D. the economy is experiencing a recessionary gap.
E. the unemployment rate is higher than the natural rate of unemployment.
____ 23. A contractionary fiscal policy is a policy that:
A. reduces aggregate demand by decreasing government purchases.
B. reduces aggregate demand by decreasing money supply.
C. reduces aggregate demand by decreasing interest rates.
D. reduces aggregate demand by decreasing taxes.
E. reduces aggregate demand by increasing transfer payments.

____ 24. Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which of the
following would most likely be the end result?
A. Equilibrium real GDP will be more than anticipated.
B. The economy could move into a recession.
C. The economy will generate a larger inflationary gap than anticipated.
D. This will not have any adverse effects on the economy, since inflation has been abated.
E. The unemployment rate will continue to decline.
____ 25. Suppose the government increases spending more than is necessary to close a recessionary gap. Which of the
following is likely to be the end result?
A. The economy will experience inflation.
B. The price level will decline.
C. The equilibrium real GDP will fall.
D. The equilibrium real GDP will rise, but still fall short of potential GDP.
E. The unemployment rate will continue to rise.
____ 26. If the marginal propensity to consume is 0.9, then the tax multiplier will be:
A. 0.1.
B. 0.9.
C. 9.
D. 10.
E. 5.
____ 27. Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and
the MPC is equal to 0.80. Then the government should follow a policy of:
A. raising taxes by $25 billion to take the economy back to potential output.
B. cutting taxes by $33.33 billion to take the economy back to potential output.
C. raising taxes by $33.33 billion to take the economy back to potential output.
D. cutting taxes by $25 billion to take the economy back to potential output.
E. cutting taxes by $20 billion to take the economy back to potential output.
____ 28. Consider an economy where the households save 20% of their income. If the government lowers its transfers
by $100 billion, then the real GDP will:
A. fall by $125 billion.
B. fall by $100 billion.
C. increase by $125 billion.
D. fall by $500 billion.
E. fall by $400 billion.
____ 29. Government spending increases to provide funding for tuition assistance for qualified college students. Which
of the following is likely to result?
A. Automatic stabilizers will increase the contractionary impact of the decrease in aggregate
demand.
B. Automatic stabilizers will decrease the contractionary impact of the increase in aggregate
demand.
C. Automatic stabilizers will increase the expansionary impact of the increase in aggregate
demand.
D. Automatic stabilizers will decrease the expansionary impact of the increase in aggregate
demand.
E. Automatic stabilizers will have no impact on the increase in government spending and
aggregate demand.

____ 30. Congress increases the personal income tax in order to balance the budget. Which of the following is likely to
result?
A. Automatic stabilizers will increase the contractionary impact of the decrease in aggregate
demand.
B. Automatic stabilizers will have no impact on the increase in taxes and aggregate demand.
C. Automatic stabilizers will increase the expansionary impact of the increase in aggregate
demand.
D. Automatic stabilizers will decrease the expansionary impact of the increase in aggregate
demand.
E. Automatic stabilizers will decrease the contractionary impact of the decrease in aggregate
demand.
____ 31. The fact that tax receipts fall during a recession:
A. makes the multiplier stronger.
B. has no impact on the multiplier.
C. reduces the adverse effect of the initial fall in aggregate demand.
D. acts as an automatic contractionary fiscal policy.
E. crowds out consumer spending.
____ 32. Suppose the economy is currently experiencing a recessionary gap. Which of the following fiscal policy
options is most likely to increase real GDP by the largest amount?
A. a decrease in taxes
B. an increase in government purchases
C. an increase in transfer payments
D. an increase in government purchases, paid for by an increase in taxes.
E. an increase in taxes.
____ 33. Assume that the MPC = 0.8 and the government increases spending by $100 billion, financing this spending
with a $100 billion tax increase. Which of the following will be the likely effect of this action?
A. Real GDP will contract by $200 billion.
B. Real GDP will contract by $100 billion.
C. Real GDP will expand by $500 billion.
D. Real GDP will expand by $400 billion.
E. Real GDP will expand by $100 billion.
____ 34. Holding everything else constant, the multiplier effect for:
A. taxes is the same as that for changes in autonomous aggregate spending.
B. aggregate autonomous spending is greater than that for taxes.
C. taxes is greater than that for aggregate autonomous spending.
D. taxes and aggregate autonomous spending is always equal to 0.
E. taxes is always equal to 5.
____ 35. The multiplier effect of government purchases of goods and services:
A. has a more direct and greater impact than an equal amount of tax changes.
B. runs into fewer time lag issues than tax changes.
C. is a type of automatic stabilizer.
D. is useful for recessions but not for inflations.
E. is useful for inflations but not for recessions.

Unit 3 Review Practice Set 1

Answer Section
MULTIPLE CHOICE
1. ANS:
SKL:
2. ANS:
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3. ANS:
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4. ANS:
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5. ANS:
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6. ANS:
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7. ANS:
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9. ANS:
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10. ANS:
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11. ANS:
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12. ANS:
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13. ANS:
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14. ANS:
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16. ANS:
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18. ANS:
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19. ANS:
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20. ANS:
SKL:
21. ANS:
SKL:
22. ANS:
SKL:

B
PTS:
Analytical Thinking
C
PTS:
Critical Thinking
B
PTS:
Concept-Based
B
PTS:
Concept-Based
B
PTS:
Critical Thinking
A
PTS:
Critical Thinking
E
PTS:
Critical Thinking
A
PTS:
C
PTS:
Concept-Based
B
PTS:
Fact-Based
B
PTS:
Analytical Thinking
C
PTS:
Analytical Thinking
A
PTS:
Study Guide
B
PTS:
Analytical Thinking
A
PTS:
Critical Thinking
C
PTS:
Critical Thinking
E
PTS:
Critical Thinking
B
PTS:
Critical Thinking
C
PTS:
Critical Thinking
C
PTS:
Critical Thinking
B
PTS:
Critical Thinking
C
PTS:
Critical Thinking

DIF: D

REF: Module 16

DIF: D

REF: Module 16

DIF: D

REF: Module 16

DIF: M

REF: Module 17

DIF: M

REF: Module 17

DIF: M

REF: Module 17

DIF: M

REF: Module 17

1
1

REF: Module 18
DIF: M

REF: Module 18

DIF: M

REF: Module 18

DIF: D

REF: Module 19

DIF: D

REF: Module 19

DIF: D

REF: Module 19

DIF: D

REF: Module 19

DIF: M

REF: Module 19

DIF: M

REF: Module 19

DIF: M

REF: Module 19

DIF: D

REF: Module 20

DIF: D

REF: Module 20

DIF: M

REF: Module 20

DIF: M

REF: Module 20

DIF: M

REF: Module 20

23. ANS:
SKL:
24. ANS:
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25. ANS:
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26. ANS:
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27. ANS:
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28. ANS:
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29. ANS:
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30. ANS:
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31. ANS:
SKL:
32. ANS:
SKL:
33. ANS:
SKL:
34. ANS:
SKL:
35. ANS:
SKL:

A
PTS:
Fact-Based
B
PTS:
Analytical Thinking
A
PTS:
Analytical Thinking
C
PTS:
Analytical Thinking
D
PTS:
Analytical Thinking
E
PTS:
Analytical Thinking
D
PTS:
Analytical Thinking
E
PTS:
Analytical Thinking
C
PTS:
Critical Thinking
B
PTS:
Analytical Thinking
E
PTS:
Critical Thinking
B
PTS:
Critical Thinking
A
PTS:
Critical Thinking

DIF: M

REF: Module 20

DIF: D

REF: Module 20

DIF: D

REF: Module 20

DIF: D

REF: Module 21

DIF: D

REF: Module 21

DIF: D

REF: Module 21

DIF: D

REF: Module 21

DIF: D

REF: Module 21

DIF: D

REF: Module 21

DIF: D

REF: Module 21

DIF: D

REF: Module 21

DIF: M

REF: Module 21

DIF: M

REF: Module 21