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ECO 204--Part Two Test
True-False. Use “A” for true and “B” for false.
1. One type of macro failure is instability.
2. Macro outcomes are partially determined by internal
market forces and external “shocks,”
but no governmental actions can
affect the macro economy.
3. An increase in the marginal propensity to consume
will increase equilibrium output.
4. Equilibrium output is where consumption equals
saving.
5. An inflationary gap occurs when full employment
output exceeds equilibrium output.
6. If interest rates in the economy rise, aggregate
demand will increase because businesses will
become more optimistic about the
future.
7. When government is included in equilibrium models,
one equilibrium condition is
where I + G = S + T.
8. Since the federal government maintains a capital
budget, reports about the size of a budget deficit
are often understated.
9. A government deficit or surplus does not affect the
magnitude of the total national debt.
10. The total national debt is mostly owned by foreign governments.
Multiple choice. Remember to select the best response.
11. The great depression, beginning in 1929,
A. occurred because of
the stock market crash in October of 1929.
B. led to an unemployment
rate that reached 25 percent.
C. lasted until the
beginning of World War II.
D. was serious, but not
as serious as the downturn in 1980.
12. A recession
A. is defined as a
decline in nominal GDP for one full year.
B. is of approximately
the same duration as the expansion phase preceding recession.
C. occurs when the
economy grows at less than 3 percent per year.
D. is often thought of as
a downturn in real GDP for two successive quarters, although
the NBER does not always follow that formula.
E. none of the above
13. Classical economists believed that
A. flexible wages and
prices ensured that government intervention was not necessary to
promote recovery from a recession.
B. government
intervention was necessary because Say’s Law was no longer operative.
C. the private sector was
inherently unstable because of the instability of investment.
D. recessions were caused
by poorly designed government policies.
14. Unlike classical economists, Keynes believed that
A. the economy would not
self-adjust to unemployment, partially because wages and prices
are not flexible.
B. government
intervention is necessary to ensure that equilibrium income is equal to full
employment income.
C. government
intervention is not effective in promoting full employment.
D. it is not the
responsibility of government to try to attain macro stability.
E. both A and B
15. The aggregate demand curve is negatively sloped because
A. people will buy more
goods and services at higher prices, because higher prices involve
larger real incomes.
B. a higher price level
will induce producers to offer fewer goods and services.
C. people will buy more
goods and services if prices fall.
D. lower prices induce
producers to offer more goods and services.
16. If aggregate demand decreases, the aggregate
demand-aggregate supply model
predicts that the result will
be
A. a decrease in real
output and a decrease in the price level.
B. a decrease in real
output and an increase in the price level.
C. an increase in real
output and an increase in the price level.
D. an increase in real
output and a decrease in the price level.
17. Which of the following is correct about the full
employment level of income?
A. It may be larger than
the equilibrium level of income, which would create unemployment.
B. It does not bear any
necessary relationship to the equilibrium level of outcome.
C. It may be larger than
the equilibrium level of income which would create inflation.
D. both A and B
E. both B and C
18. Which of the following is a type of macroeconomic failure?
A. Large business firms
have too much market power.
B. An attempt by
government to use fiscal policy to reduce unemployment doesn’t work.
C. Environmental problems
require the federal government to spend more money on
pollution abatement.
D. The economy exhibits
instability sometimes having rising unemployment and sometimes
an increasing inflation rate.
19. The belief that government policy should involve shifting
aggregate demand is a belief shared by
A. Keynesians and supply
siders.
B. only Keynesians.
C. Keynesians and
monetarists.
D. Keynesians,
monetarists and supply siders.
Questions 20 through 23 refer to the following table:
|
Output |
Consumption |
|
$0 |
$600 |
|
1000 |
1300 |
|
2000 |
2000 |
|
3000 |
2700 |
|
4000 |
3400 |
|
5000 |
4100 |
20. What is the amount of saving at an output of $3000?
A. $300
C. $700
B. $600
D. cannot be determined
21. The amount of autonomous consumption is
A. $0.
C. $2000.
B. $600.
D. cannot be determined
C. $700.
22. If investment is $600, what is the equilibrium
output?
A. $1000
D. $4000
B. $2000
E. $5000
C. $3000
23. The multiplier is equal to
A. 1.25.
C. 5.
B. 3.33.
D. 10.
24. An increase in investment spending
A. shifts the aggregate demand
curve to the right.
B. shifts the aggregate demand
curve to the left.
C. shifts the aggregate supply
curve to the right.
D. shifts the aggregate supply
curve to the left.
25. Which of the following correctly describes equilibrium output?
A. where consumption equals
saving
B. where the sum of investment
and consumption crosses the 45-degree line
C. where saving crosses the
45-degree line
D. where consumption equals
investment
E. none of the above
26. An increase in interest rates will
A. shift aggregate demand to
the right and increase real income.
B. shift the I + G curve
downward and reduce nominal income.
C. shift the C + I curve upward
and increase nominal income.
D. shift aggregate demand to
the left and increase real income.
27. A decrease in the marginal propensity to save will, in the
short run,
A. decrease consumption and
increase nominal output.
B. shift aggregate demand to
the right and increase real output.
C. shift aggregate demand to
the left and decrease real output.
D. decrease investment and
decrease real output.
28. The multiplier
A. works for increases or
decreases investment but not for changes in consumption or
government spending.
B. is calculated by using the
formula 1/APS, where APS stands for the marginal propensity to save.
C. is applicable for both
increases or decreases in aggregate demand.
D. depends partially on the
marginal propensity to consume such that the larger the MPC,
the
smaller the multiplier.
E. C and D above
29. If the economy achieves equilibrium and full employment at the
same output level, and then
aggregate demand increases
A. real output will fall.
C. the price level will rise.
B. real output will rise.
D. the price level will fall.
30. A recessionary gap
A. is where the C = I line
crosses the 45-degree line.
B. occurs when full employment
output exceeds equilibrium output.
C. occurs when the price level
is less than the equilibrium price level.
D. is the ratio of the
multiplier to the GDP gap.
31. Assume that full employment exceeds equilibrium output by $100
billion. Also assume that
the multiplier is 5. Which of the
following is then correct?
A. To achieve full employment,
aggregate demand would have to increase by $100 billion.
B. If aggregate demand
increases by $20, the economy will be closer to full employment–but
will
not get completely to full employment because of the price level effect.
C. Because of the multiplier,
aggregate demand would have to increase by something less
than
$20 billion to get to full employment.
D. The only way to get to full
employment is if aggregate supply shifts to the right.
32. The paradox of thrift suggests that
A. increased saving lowers
interest rates which reduces the incentive to save.
B. if consumers increase
saving, equilibrium output will increase in the short run.
C. it would be preferable if
consumers saved almost nothing, since income would grow consistently.
D. all of the above
E. none of the above
33. Which of the following correctly describes equilibrium output
when government is included?
A. I must equal G and S must
equal T.
B. Aggregate demand is equal to
I + G + T.
C. C + I must equal S + T + G.
D. C - S equals G - T.
E. none of the above
34. According to Keynesians, the correct fiscal policy to stimulate
recovery from a recession is to
A. raise taxes to increase
aggregate demand.
B. increase government
expenditure to increase aggregate demand.
C. lower taxes to increase
aggregate supply.
D. increase transfer payments
to increase aggregate supply.
35. According to Keynesians, if the marginal propensity to
consume is 0.8, a tax increase
of $100 billion will
A. decrease saving by $20
billion.
B. decrease consumption by $80
billion.
C. reduce output by $400
billion.
D. all of the above
E. none of the above
36. If government increases expenditure for national parks by
$40 billion and also increases
taxes by $40 billion to pay for the
parks, equilibrium output will
A. not change.
C. increase by more than $40 billion.
B. increase by $40 billion.
D. decrease by $40 billion.
37. “Crowding out” refers to
A. a decrease in private
consumption or investment as the result of an increase in
government spending.
B. a decrease in investment
resulting from an increase in consumption.
C. a decrease in government
spending resulting from a decrease in taxes.
D. a decrease in consumption
resulting from an increase in investment.
38. According to your instructor,
A. temporary tax increases are
more likely to affect output than are permanent tax increases.
B. permanent tax cuts are more
likely to increase output than temporary ones.
C. permanent tax cuts are not
likely to change output.
D. temporary tax cuts are
government’s most powerful fiscal policy tool.
39. When government reduces income tax rates,
A. total tax revenues often
increase
B. by definition, total tax
revenues will also decrease.
C. total tax revenues are not
affected, since the tax rates are adjusted to ensure the same
revenue
as before the tax rate reduction.
D. the lost revenue will be
made up by automatic increases in other tax rates.
40. Automatic stabilizers tend to stabilize the level of output
because
A. they can be changed quickly
by Congress.
B. they increase the size of
the multiplier.
C. when output falls, they
automatically lead to higher income and output.
D. they control the rate of
change in prices.
E. all of the above.
41. Which of the following is correct about government fiscal
policy?
A. Thanks to high speed
computers, government officials can quickly detect a recession or inflation and
quickly
adjust policy accordingly.
B. Fiscal policy is enhanced
because a large portion of the federal budget is discretionary.
C. Fiscal policy is largely
responsible for the economy not having suffered any downturns for the
past
two decades.
D. Fiscal policy is hampered
because of time lags in recognizing problems and additional time lags in
designing legislation to cure problems.
42. In the United States,
A. there has been a government
deficit in every year since the beginning of World War II.
B. the government deficit as a
percentage of GDP has risen in each of the last ten years.
C. the size of government
deficits fell in the 1990s, and there was finally a government surplus in
the
late 1990s.
D. the annual deficit has grown
more rapidly than total public debt.
43. Which of the following is correct?
A. Congress attempts to achieve
an annually balanced budget.
B. Budget deficits do not have
any relationship to the public debt.
C. A government deficit creates
a liability for the government and an asset for government
bond
holders.
D. A government deficit creates
liabilities for the whole economy, but there are no offsetting assets.
44. The cyclical component of an annual federal budget deficit
refers to
A. the impact of items not
included in the regular deficit reports.
B. that portion which arises
because of fiscal policy designed to expand the economy.
C. that portion of the deficit
which arises because of economic fluctuations in the economy.
D. structural factors at work
in the economy.
E. none of the above
45. During the three years in the late 1990s when there was a
government budget surplus,
A. most politicians believed
the surplus should be used for transfer payments to low
income
households.
B. Congress mandated that the
surplus would be used to reduce the total public debt.
C. there was no consensus as to
what to do with the surplus.
D. there was general agreement
that the surplus should be used for tax rebates since, in effect,
taxpayers had overpaid for government services.
46. The largest single owners of the public debt are
A. other government agencies.
C. state and local governments.
B. U. S. individuals.
D. U. S. banks
47. There is general agreement among economists that the internally
held public debt
A. will be largely shifted to
future generations.
B. involves a major problem
because of the large annual interest payments which must be
made to
those holding the debt.
C. causes higher interest rates
and inflation.
D. all of the above
E. none of the above
48. The externally held public debt
A. will always impose a burden
on future generations.
B. initially allows the U. S.
to finance increased government expenditure with no reduction
in
private expenditure.
C. poses a problem because
foreigners are required to redeem their debt for cash and are
not
allowed to purchase additional government bond.
D. is generally regarded as a
threat to domestic economic stability.
49. Which of the following is correct about the effects of the
public debt on economic growth?
A. Economic growth might be
slowed by the debt because the opportunity cost of the debt is
that
less funds are available for private investment.
B. Economic growth is higher as
a result of the debt.
C. There is no connection
between the debt and economic growth
D. Economic growth is slowed
because the debt reduces domestic consumption.
50. Most economists believe that
A. an annually balanced budget
constitutional amendment should be enacted.
B. a cyclically balanced budget
constitutional amendment should be enacted.
C. Congress should enact a debt
ceiling and not permit debt to rise about the ceiling.
D. enacting any balanced budget
amendment is a poor idea because it would involve a loss
of
flexibility in designing government policy.
ANSWERS
1.
A
2. B
3. A
4. B
5. B
6. B
7. A
8. B
9. B
10. B
11. B
12. D
13. A
14. E
15. C
16. A
17. D
18. D
19. C
20. A
21. B
22. D
23. B
24. A
25. B
26. B
27. B
28. C
29. C
30. B
31. B
32. E
33. E
34. B
35. D
36. B
37. A
38. B
39. A
40. C
41. D
42. C
43. C
44. C
45. C
46. A
47. E
48. B
49. A
50. D
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