1) Which of the following is the correct definition of the

IS curve?
(a) The IS curve represents the combinations of output
and the interest rate where the goods market is in
equilibrium.
(b) The IS curve represents the single level of output
where the goods market is in equilibrium.
(c) The IS curve represents the single level of output
where financial markets are in equilibrium.
(d) The IS curve represents the combinations of output
and the interest rate where the money market is in
equilibrium.
(e) none of the above
a

2) Which of the following will cause a shift of the IS

curve?
(a) an increase in taxes
(b) an increase in government spending
(c) an increase in consumer confidence
(d) all of the above
(e) none of the above
d

3) Which of the following will cause a shift in the LM

curve?
(a) an open market purchase of bonds
(b) an increase in consumer confidence
(c) a reduction in taxes
(d) an increase in output
(e) all of the above
a

4) Suppose the economy is currently operating on both

the LM curve and the IS curve. Which of the following
is true for this economy?
(a) Production equals demand.
(b) The quantity supplied of bonds equals the quantity
demanded of bonds.
(c) Financial markets are in equilibrium.
(d) The money supply equals money demand.
(e) all of the above
e

5) Which of the following will occur if there is an

increase in taxes?
(a) The IS curve shifts and the economy moves along
the LM curve.
(b) Both the IS and LM curves shift.
(c) Output will change causing a change in money

demand and a shift of the LM curve.

(d) Neither the IS nor the LM curve shifts.
(e) The LM curve shifts and the economy moves along
the IS curve.
a

6) Suppose the central bank decides to conduct an

open market purchase of bonds. Which of the following
will occur as a result of this monetary policy action?
(a) The LM curve shifts right.
(b) The IS curve shifts rightward as the interest rate
falls.
(c) The IS curve shifts leftward as the interest rate
increases.
(d) The LM curve shifts left.
(e) none of the above
a

7) Suppose fiscal policy makers implement a policy to

reduce the size of a budget deficit. Based on the IS-LM
model, we know with certainty that the following will
occur as a result of this fiscal policy action.
(a) Investment spending will increase.
(b) Investment spending will decrease.
(c) There will be no change in investment spending.
(d) Investment spending may increase, decrease, or
not change.
(e) none of the above
d

8) For this question, assume that investment spending

depends only on the interest rate and no longer
depends on output. Given this information, an increase
in government spending:
(a) may cause investment to increase or to decrease.
(b) will have no effect on output.
(c) will cause an increase in output and have no effect
on the interest rate.
(d) will cause investment to increase.
(e) will cause investment to decrease.
e

9) Suppose investment spending is NOT very sensitive

to the interest rate. Given this information, we know
that:
(a) the LM curve should be relatively steep.
(b) the LM curve should be relatively flat.
(c) neither the IS nor the LM curve will be affected.
(d) the IS curve should be relatively steep.
(e) the IS curve should be relatively flat.

10) A reduction in the money supply will cause a

reduction in which of the following variables?
(a) consumption
(b) investment
(c) output
(d) all of the above
(e) none of the above
d

11) Suppose there is an increase in consumer

confidence. Which of the following represents the
complete list of variables that must increase in
response to this increase in consumer confidence?
(a) consumption and output
(b) consumption, investment and output
(c) consumption
(d) consumption and investment
(e) consumption, output and the interest rate
e

12) Suppose there is a simultaneous tax cut and open

market purchase of bonds. Which of the following must
occur as a result of this?
(a) the interest rate decreases
(b) both output and the interest rate increase
(c) output decreases
(d) the interest rate increases
(e) output increases
e

13) Suppose there is a simultaneous tax increase and

open market purchase of bonds. Which of the following
must occur as a result of this?
(a) output increases
(b) output decreases
(c) the interest rate decreases
(d) both output and the interest rate increase
(e) the interest rate increases
c

14) Suppose there is a Fed purchase of bonds and

simultaneous tax cut. We know with certainty that this
combination of policies must cause:
(a) an increase in the interest rate (i).
(b) a reduction in i.
(c) an increase in output (Y).
(d) a reduction in Y.
c

15) We know with certainty that a tax increase must

cause which of the following?
(a) an increase in investment
(b) no change in investment
(c) a reduction in investment
(d) none of the above
d

16) An increase in the reserve deposit ratio, q, will

most likely have which of the following effects?
(a) a rightward shift in the IS curve
(b) a leftward shift in the IS curve
(c) an leftward shift in the LM curve
(d) a rightward shift in the LM curve
c

17) The IS curve will NOT shift when which of the

following occurs?
(a) a reduction in government spending
(b) a reduction in consumer confidence
(c) a reduction in the interest rate
(d) all of the above
(e) none of the above
c

18) For this question, assume that investment

spending depends only on output and no longer
depends on the interest rate. Given this information,
an increase in government spending:
(a) will cause investment to increase.
(b) may cause investment to increase or to decrease.
(c) will have no effect on output.
(d) will cause an increase in output and have no effect
on the interest rate.
(e) will cause investment to decrease.
a

1) The reservation wage is:

(a) the wage offer that will end a labor-strike.
(b) the lowest wage firms are allowed by law to pay
workers.
(c) the wage that ensures a laid-off individual will wait
for re-hire, rather than find another job.
(d) the wage that an employer must pay workers to
reduce turnover to a reasonable level.
(e) none of the above
e

2) Efficiency wage theory suggests that:

(a) firms will be more resistant to wage increases as
the labor market tightens.
(b) the government can only set tax rates so high
before people will prefer not to work.
(c) unskilled workers will have a lower turnover rate
than skilled workers.
(d) workers will be paid less than their reservation
wage.
(e) productivity might drop if the wage rate is too low.
e

3) If efficiency wage theory is valid, we would expect a

relatively low premium over the reservation wage
when:
(a) workers have few other options for employment in
the area.
(b) the unemployment rate is low.
(c) the job requires very little training.
(d) Both (a) and (c) are correct.
(e) (a), (b), and (c) are correct.
d

4) In the wage-setting relation, the nominal wage

increases when:
(a) the price level rises.
(b) unemployment benefits fall.
(c) the minimum wage falls.
(d) the unemployment rate rises.
(e) all of the above
a

5) For this question, assume there is perfect

competition in the product market. Given this
assumption, we know that e (in the price setting
equation P = (1+e)W will equal:
(a) P.
(b) 1.
(c) 0.
(d) W.
(e) W/P.
c

6) Suppose we wish to examine the determinants of

the equilibrium real wage and equilibrium level of
employment (N). In a graph with the real wage on the
vertical axis, and the level of employment on the
horizontal axis, the price-setting relation will now be:
(a) an upward sloping line.
(b) a horizontal line.

(c) kinked at the natural rate of unemployment.

(d) a vertical line.
(e) a downward sloping line.
b

7) Suppose we wish to examine the determinants of

the equilibrium real wage and equilibrium level of
employment (N). In a graph with the real wage on the
vertical axis, and the level of employment on the
horizontal axis, the wage-setting relation will now be:
(a) a vertical line.
(b) a curve that first slopes upward, then downward.
(c) a downward sloping line.
(d) a horizontal line.
(e) an upward sloping line.
e

8) The natural level of employment will decrease when

which of the following occurs?
(a) a reduction in unemployment benefits
(b) a reduction in the actual unemployment rate
(c) a reduction in the markup of prices over costs
(d) all of the above
(e) none of the above
e

9) Suppose workers and firms expect the overall price

level to increase by 2%. Given this information, we
would expect that:
(a) the nominal wage will increase by exactly 2%.
(b) the real wage will increase by 2%.
(c) the nominal wage will increase by more than 2%.
(d) the nominal wage will increase by less than 2%.
(e) the real wage will increase by less than 2%.
a

10) Suppose the actual unemployment rate decreases.

This will cause:
(a) an upward shift in the WS curve.
(b) an upward shift in the PS curve.
(c) a downward shift in the WS curve.
(d) a downward shift in the PS curve.
(e) none of the above
e

11) An increase in unemployment insurance will tend

to cause which of the following?
(a) an upward shift in the WS curve
(b) a downward shift in the WS curve
(c) an upward shift in the PS curve

(d) a downward shift in the PS curve

(e) none of the above
a

12) A reduction in the minimum wage will tend to

cause which of the following?
(a) an upward shift in the WS curve
(b) a downward shift in the WS curve
(c) an upward shift in the PS curve
(d) a downward shift in the PS curve
(e) none of the above
b

13) Assume product markets less competitive in the

U.S. Given this information, we would expect to
observe which of the following?
(a) an upward shift in the WS curve
(b) a downward shift in the WS curve
(c) an upward shift in the PS curve
(d) a downward shift in the PS curve
(e) none of the above
d

14) We know that a reduction in the markup will

cause:
(a) an increase in the equilibrium real wage.
(b) a reduction in the equilibrium real wage.
(c) an increase in the natural rate of unemployment.
(d) a reduction in the natural rate of unemployment
and no change in the real wage.
a

15) Suppose the actual unemployment rate increases.

This will cause:
(a) a downward shift in the WS curve.
(b) an upward shift in the PS curve.
(c) a movement along the WS and the PS curves.
(d) an upward shift in the WS curve.
(e) none of the above
c

16) Suppose the aggregate production function is

given by the following: Y = AN. Given this information,
we know that labor productivity is represented by the
following:
(a) A.
(b) 1/A.
(c) 1/N.
(d) N/Y.
a

1) In the aggregate supply relation, a reduction in

current output causes:
(a) an increase in the expected price level and an
upward shift of the AS curve.
(b) a reduction in the current price level.
(c) an increase in the markup over labor costs.
(d) a change in the expected price level this year.
(e) a shift of the aggregate supply curve.
b

2) The aggregate supply curve will shift right when

which of the following occurs?
(a) a reduction in unemployment benefits
(b) a reduction in the expected price level
(c) a reduction in firms' markup over labor costs
(d) all of the above
(e) none of the above
d

3) Suppose that the current price level is equal to the

expected price level. Given this information, we know
with certainty that:
(a) The output level is higher than natural rate of
output.
(b) the unemployment rate is equal to the natural rate
of unemployment.
(c) the unemployment rate is zero.
(d) both the price level and the expected price level
are equal to one.
(e) none of the above
b

4) Suppose the economy is operating at a point where

output is less than the natural level of output. Which of
the following statements is correct given this
information?
(a) the price level is less than the expected price level
(b) the unemployment rate is less than the natural
unemployment rate
(c) the price level will be higher next period than this
period
(d) all of the above
(e) none of the above
a

5) Which of the following will cause the aggregate

demand curve will shift to the left?
(a) a rise in the price level
(b) a decrease in the price level

(c) an increase in taxes

(d) an increase in consumer confidence
(e) an increase in the money supply
c

6) Suppose the central bank implements

contractionary monetary policy. Which of the following
will occur in the short run?
(a) An increase in the price level
(b) a decrease in output
(c) an increase in the interest rate
(d) all of the above
(e) none of the above
d

7) A monetary expansion will, in the short run, cause:

(a) the AD curve to shift leftward.
(b) the price setting curve to shift down.
(c) the wage setting curve to shift upward.
(d) an increase in the nominal wage.
(e) the wage setting curve to shift downward.
d

8) Assume the economy is initially operating at the

natural level of output. Which of the following events
will initially cause a shift of the aggregate supply
curve?
(a) an increase in the money supply
(b) an increase in consumer confidence
(c) an increase in government spending
(d) all of the above
(e) none of the above
e

9) The neutrality of money is consistent with which of

the following statements?
(a) Changes in the money supply will not affect
employment in the short run.
(b) Changes in the money supply will not affect the
price level in the medium run.
(c) Changes in the money supply will not affect the
price level in the short run.
(d) Changes in the money supply will not affect
employment in the medium run.
d

10) Assume the economy is initially operating at the

natural level of output. Now suppose a budget is
passed that calls for a tax cut. This fiscal expansion
will, in the short run, cause an increase in:

(a) the nominal wage.

(b) the price level.
(c) the interest rate.
(d) all of the above
(e) none of the above
d

11) Assume the economy is initially operating at the

natural level of output. Now suppose a budget is
passed that calls for a tax cut. This fiscal expansion
will, in the medium run, have no effect on which of the
following?
(a) the price level
(b) the interest rate
(c) employment
(d) all of the above
(e) none of the above
c

12) Assume the economy is initially operating at the

natural level of output. Which of the following events
will NOT change the composition of output (i.e., the
percentage of GDP composed of consumption,
investment, etc.) in the medium run?
(a) a reduction in the desire to save
(b) an increase in the money supply
(c) a cut in taxes
(d) an increase in consumer confidence
(e) a reduction in government spending
b

13) Assume the economy is initially operating at the

natural level of output. Now suppose that individuals
decide to reduce their desire to save. We know with
certainty that which of the following will occur in the
short run as a result of decreased desire to save?
(a) no change in the economy at all
(b) less investment
(c) an increase in the nominal wage
(d) greater investment
(e) higher output and lower investment
c

14) Answer this question using the AS/AD model

presented in the textbook. Which of the following
would cause a reduction in the natural level of output
in the medium run?
(a) a decrease in government spending
(b) an increase in taxes
(c) a decrease in the money supply

(d) both A and C

(e) none of the above
e

15) The aggregate demand (AD) curve presented in

the textbook has its particular shape because of which
of the following explanations?
(a) An increase in P will cause a reduction in the real
wage, an increase in employment, and an increase in
output.
(b) As P decreases in a closed economy, goods and
services become relatively cheaper and individuals
respond by increasing the quantity demanded of
goods and services.
(c) An increase in the aggregate price level (P) will
cause an increase in the interest rate and a reduction
in output.
(d) An increase in the money supply (M) will cause a
reduction in the interest rate, an increase in
investment, and an increase in output.
c

16) The short-run aggregate supply curve (AS)

presented in the textbook has its particular shape
because of which of the following explanations?
(a) An increase in the aggregate price level causes an
increase in nominal money demand and an increase in
the interest rate.
(b) A reduction in output causes a reduction in
employment, an increase in unemployment, a
reduction in the nominal wage and a reduction in the
price level.
(c) A drop in the nominal wage causes an increase in
the amount of output that firms are willing to produce.
(d) A reduction in the aggregate price level will cause
a reduction in the interest rate and an increase in
output.
b

17) Which of the following events will cause an

increase in the aggregate price level?
(a) an increase in the unemployment rate
(b) a reduction in Pe
(c) an increase in the unemployment benefits
(d) a reduction in the markup
(e) none of the above
c

18) If u > un, we know with certainty that:

(a) P > Pe.

(b) Y > Yn.

(c) P = Pe.
(d) P < Pe.
d

19) Which of the following events will cause the

largest rightward shift (as measured horizontally) of
the AD curve?
(a) a 15% reduction in the nominal wage
(b) a 15% reduction in the aggregate price level
(c) a tax increase
(d) a 10% increase in the nominal money supply
(e) none of the above
d

20) For this question, assume that the economy is

initially operating at the natural level of output. An
increase in taxes will cause which of the following?
(a) an increase in the aggregate price level, no change
in output and no change in the interest rate in the
medium run
(b) a reduction in employment and no change in the
nominal wage in the short run
(c) an increase in investment in the medium run
(d) a reduction in output and no change in the
aggregate price level in the short run
c

21) For this question, assume that the economy is

initially operating at the natural level of output. A
reduction in consumer confidence will cause:
(a) ambiguous effects on the real wage in the medium
run.
(b) an increase in the real wage in the medium run.
(c) no change in the real wage in the medium run.
(d) a reduction in the real wage in the medium run.
c

22) For this question, assume that the economy is

initially operating at the natural level of output. A
monetary expansion will cause:
(a) no change in the nominal wage in the medium run.
(b) a reduction in the interest rate in the medium run.
(c) an increase in investment in the medium run.
(d) no change in the real wage in the medium run.
d

23) For this question, assume that the economy is

initially operating at the natural level of output. A onetime 7% increase in the nominal money supply will

cause:
(a) a 7% reduction in the interest rate (i) in the
medium run.
(b) a 7% increase in the real money supply in the
medium run .
(c) a 7% increase in the price level in the medium
run .
(d) all of the above
c

24) For this question, assume that the economy is

initially operating at the natural level of output. A
simultaneous reduction in taxes and reduction in the
money supply will cause which of the following?
(a) a reduction in the interest rate in the medium run
(b) a reduction in output and a reduction in the
nominal wage in the short run
(c) an increase in output and an increase in the
aggregate price level in the short run
(d) an increase in the aggregate price level, no change
in output, and no change in the interest rate in the
medium run
(e) a reduction in investment in the medium run
e