Econ 295 Final Pt. 1 Flashcards
(450 cards)
1
Q
In a recessionary gap, actual _ potential GDP
A
2
Q
In an inflationary gap, actual _ potential GDP
A
>
3
Q
Unemployment rate formula
A
(Num unemployed/ num in labor force) *100
4
Q
Frictional unemp. Is from
A
Job turnover
5
Q
Recessions are associated with (2)
A
Unemployment and lost output
6
Q
Economic booms can cause problems as well as create benefits because they are often accompanied by
A) deflationary pressures.
B) excessive labour-force participation.
C) inflationary pressures.
D) pressure on the government budget deficit to rise.
E) rising real interest rates.
A
C
7
Q
Potential gdp assumes — employment
A
Full
8
Q
Full employment definition
A
Frictictional and structural employment still exist, cyclical does not
9
Q
Structural unemp.
A
From mismatch btwn jobs n workers. Non demanded skills
10
Q
An equivalent term for “real national income” is
A
Actual national income
11
Q
An upward trend in real national income over an extended period of time is called
A
Economic growth
12
Q
To compare aggregate output in 2 different time periods, do economists compare the real or nominal national incomes for the periods
A
Real
13
Q
Do savers want a high or low interest rate
A
High
14
Q
Do borrowers want a high or low interest rate?
A
Low
15
Q
Value added
A
Sales revenue - cost of intermediate goods
A.k.a. Payments owed to a firm’s factors of production
16
Q
National output
A
Sum of all values added
17
Q
Y
A
Actual output is less than potential output - recessionary gap.
18
Q
Macroeconomics is mainly concerned with the study of fluctuations and trends in __________ data
A
Disaggregated
19
Q
The economic problems studied in macroeconomics include:
1) the level of economic activity;
2) competition policy;
3) the rate of unemployment.
A
1 and 3
20
Q
A nations real national income in a given year measures the
A) dollar income earned by the nation’s producing sector.
B) value of output produced by the economy, measured in constant dollars.
C) level of national income that is subject to taxation by the federal government.
D) market value of national output produced by the economy.
E) opportunity cost of the economy’s national output.
A
B
21
Q
Real national income
A) always equals nominal national income.
B) changes by the same amount and in the same direction as does nominal national income.
C) changes only when the underlying quantities change.
D) refers to national income with no adjustment for changes in prices.
E) refers to national wealth but is not an indicator of current production.
A
C
22
Q
In macroeconomics, the term “national income” refers to
A) all sales of both current production and used goods.
B) only those sales of currently produced goods sold to other nations.
C) the value of a nation’s total wealth.
D) the value of the income generated by the production of total output.
E) total current spending by all households.
A
D
23
Q
In macroeconomics, if the value of the national product increases, there is
A) an even larger increase in the value of income claims on that output, due to value added.
B) a decrease in value of income claims on that output, due to taxation.
C) a decrease in the value of income claims on that output, due to importing.
D) a decrease in the value of income claims on that output, due to household saving.
E) an equal increase in the value of income claims on that output.
A
E
24
Q
T or F: National product = National income
A
T
25
Real GDP measures
A) the constant-dollar value of the potential output of the nation's economy over the period of one year.
B) the quantity of total output produced by the nation's economy over the period of one year.
C) the fluctuations of national income around its long-term trend.
D) the annual growth rate of real national income.
E) the long-term trend in total output produced by the nation's economy.
B
26
Which of the following is the best description of the business cycle?
A) the normal cycle of profits and losses by producers in the economy
B) the short-run fluctuations of national income around its trend value
C) a five-year period designed for national accounting purposes to capture the normal cycle of recession periods and boom periods
D) a ten-year period designed for national accounting purposes to capture the normal cycle of recession periods and boom periods
E) the fluctuations of one country's national income in comparison to another country's national income
B
27
Potential or full-employment output is
A) the maximum GDP that an economy actually achieves throughout its entire history.
B) achieved during periods when all of the labour force is employed.
C) a goal that can never be achieved by the economy.
D) the GDP that would be produced if the economy's resources were fully employed at a normal intensity of use.
E) the GDP that could be produced if the economy's resources were fully employed at their maximum intensity of use.
D
28
In macroeconomics, the "output gap" is the difference between
A) output in the current year and output in the base year.
B) output and employment.
C) potential real national income and actual real national income.
D) real GNP and real GDP.
E) real and nominal national income.
C
29
The output gap is the
A) measure of output that could have been produced if the economy were fully employed.
B) dead-weight loss of inflation.
C) difference between nominal and real output.
D) percentage change in real GDP.
E) difference between Y and Y*
E
30
An output gap with Y < Y*
A) is desirable because it keeps wage costs low.
B) represents a loss of output due to unemployed resources. C) tends to force prices up.
D) occurs when there is excess demand.
E) is known as an inflationary boom.
B
31
Suppose actual output is less than potential output. If the output gap measures the output loss due to the failure to achieve full employment, it can generally be concluded that the larger this output gap, the
A) greater is the employment rate.
B) greater is the unemployment rate.
C) lower is frictional unemployment.
D) lower the deadweight loss of unemployment.
E) more upward pressure there is on prices.
B
32
In the study of short-run fluctuations in national income, potential income (output) is usually assumed to be
A) falling at its average growth rate.
B) moving together with potential output in neighbouring countries.
C) constant.
D) equal to actual income.
E) irrelevant, as the economy is rarely there.
C
33
Business cycle definition
Short-run fluctuations in real GDP around its trend value
34
```
Consider an economy in which existing capital is being used at a high degree, shortages in labour and goods markets are developing, and costs are rising. Which of the following terms best describes this stage of the business cycle?
A) trough
B) recovery
C) peak
D) recession
E) slump
```
C
35
```
On a graph showing real national income on the vertical axis and time on the horizontal axis, the trend-line would probably be a good approximation of the
A) business cycle.
B) distribution of income.
C) inflation rate.
D) path of potential output.
E) unemployment rate.
```
D
36
```
On a graph showing real national income on the vertical axis and time on the horizontal axis, the fluctuations of real national income around the trend-line would indicate the
A) business cycle.
B) distribution of income.
C) inflation rate.
D) path of potential output.
E) unemployment rate.
```
A
37
```
When macroeconomists use the term "recession" they usually define it as a fall in real GDP that lasts for at least
A) one quarter.
B) two quarters.
C) three quarters. D) one year.
E) two years.
```
B
38
Women entered the labour force in large numbers in the 20th century and increased the economy's GDP. This change
A) created inflationary gaps.
B) created recessionary gaps.
C) raised potential output.
D) was only possible in an economy operating above normal rates of utilization.
E) was only possible in an economy operating below normal rates of utilization.
C
39
A worker is considered unemployed if that worker has no job, is legally eligible to work, A) and is actively searching for employment.
B) and is not collecting unemployment insurance.
C) whether the worker is looking for a job or is not looking for a job.
D) but only if they previously held a job.
E) but only if they were previously employed for at least three consecutive months.
A
40
Consider the growth in Canada's labour force and employment. Over the last 50 years,
A) the labour force has grown much more rapidly than employment.
B) both the labour force and employment have remained roughly constant.
C) the number of unemployed persons has been a much larger fraction of the labour force than it was during the first half of the 20th century.
D) the main trend of the economy has been one of growth in employment that roughly matches the growth in the labour force.
E) the main trend of the economy has been to have employment grow more rapidly than the growth in output.
D
41
How is Canada's unemployment rate determined?
A) The rate is determined by Canada Census data.
B) The rate is determined by a survey of Canadian employers.
C) The federal government department HRSDC (Human Resources and Skills Development Canada) conducts a monthly survey of the labour force.
D) Statistics Canada conducts a Labour Force Survey each month.
E) An estimate is produced by HRSDC based on the previous month's unemployment rate
D
42
If a country's population is 15 million people, and 1 million of those are unemployed, the country's unemployment rate is
A) 2.5%.
B) 3.3%.
C) 6.7%.
D) 7.1%.
E) There is not enough information to know.
E
43
Which of the following is the best example of frictional unemployment?
A) A worker is laid off because his firm has to reduce production due to reduced demand.
B) A worker quits her current job to search for a better one.
C) An ironworker cannot find a job in Ottawa because all job vacancies are in Alberta.
D) Bank tellers are unable to find jobs due to technological advances in the banking system.
E) Inflationary pressures have led to higher wages for all jobs.
B
44
Economists expect some unemployment to exist even at times of "full employment" for, among others, the following reasons:
1) actual GDP is rarely equal to potential GDP;
2) as the economy changes, the structure of the existing labour force is not the same as the structure of labour demand;
3) people entering the labour force typically take some time to find a job.
A) 1 only
B) 2 only
C) 3 only
D) 2 and 3
E) 1 and 2
D
45
The unemployment rate will understate the true amount of unemployment if
A) the unemployment rate is rising.
B) crime, divorce, and social unrest are all positively correlated with unemployment.
C) the official unemployment figure excludes discouraged workers who have stopped actively looking for work.
D) the labour force has grown more rapidly than output.
E) the actual unemployment rate is greater than the natural rate of unemployment.
C
46
Cyclical unemployment is associated with
A) changes to the economy's industrial structure resulting from growth in some industries and decline in others.
B) an output level different from the economy's potential output.
C) differences between the characteristics of the supply of labour and the demand for labour.
D) people entering the labour force typically take some time to find a job.
E) people quitting their present jobs to look for other jobs.
B
47
Workers with experience and skills sometimes lose their jobs and become unemployed due to changing technology or market conditions, even while firms in other industries or regions are looking to hire more workers. This type of unemployment is called
Structural
48
If the cyclical unemployment rate is negative, then the A) economy is operating beyond full employment.
B) economy is operating at less than full employment.
C) frictional unemployment rate is negative.
D) frictional unemployment rate is greater than the structural unemployment rate. E) real-wage unemployment rate is negative.
A
49
If the cyclical unemployment rate is greater than zero, then the
A) economy is operating beyond full employment.
B) economy is operating at full employment.
C) economy is operating at less than full employment.
D) frictional unemployment rate is greater than the structural unemployment rate. E) real-wage unemployment rate is negative.
C
50
The three main reasons that Canada's real GDP has increased steadily for many years are A) rising employment, increasing levels of education of the labour force and the increase in the participation rate of women in the labour force.
B) an increasing stock of physical capital, increasing exports and rising employment.
C) the increase in life expectancy, the rise in employment and increasing productivity.
D) rising employment, increasing stock of physical capital and increasing productivity.
E) increasing productivity of labour, increasing productivity of land and increasing productivity of the capital stock.
D
51
In some macroeconomic analyses, it is common to treat the level of productivity as roughly constant. This is a justifiable assumption in
A) the long run.
B) the short run.
C) both the long run and the short run.
D) neither the long run nor the short run.
E) macroeconomics but not microeconomics.
B
52
The most common measure of productivity is ________, which can be measured as real GDP divided by ________.
A) indexed productivity; per capita output
B) factor productivity; the total number of factors employed in the economy
C) capital productivity; the number of units of capital employed in the economy
D) potential productivity; the total number of factors that would be employed in the economy at full employment.
E) labour productivity; the number of units of work effort
E
53
Most economists believe that the single largest cause of rising material living standards over long periods of time is
A) productivity growth.
B) rising employment.
C) growth in the capital stock. D) real GDP growth.
E) rising real wages.
A
54
Changes in productivity can be analyzed by looking at how GDP per employed worker changes over time or how GDP per hour worked changes over time. Why might one measure be more preferable than the other?
A) GDP per hour worked is preferable because it eliminates the need to adjust for variations in productivity between employed workers.
B) GDP per employed worker is more accurate because the data available on the number of employed workers is more accurate than the data available on the number of hours worked.
C) GDP per hour worked is more accurate because the average number of hours worked per employed worker has changed over time.
D) GDP per employed worker is preferable because the number of employed workers has risen significantly over time.
E) Both measures are equally good.
C
55
Why is real income for an average Canadian today so much higher than it was for an average Canadian 100 years ago?
A) Because of the increase in the labour force due to rising population, immigration and the increase in female labour-force participation.
B) Primarily because productivity per worker is so much higher today than in the past.
C) Because inflation has been maintained at relatively low levels throughout that time.
D) Because free-trade agreements have vastly increased real incomes.
E) Because the life span of the average worker has increased from about 55 years to about 80 years over that time period.
B
56
A change in the Consumer Price Index measures A) a change in a specific absolute price.
B) a change in quantities of commodities sold.
C) a change in relative prices.
D) a change in a broad average price over some particular time span.
E) the change in gross domestic product.
D
57
Inflation, the rate of change of average prices in the economy, generally A) benefits creditors if it is unanticipated.
B) has no real effects if it is unanticipated.
C) increases the purchasing power of money.
D) reduces the real value of existing nominal debt.
E) increases the real value of fixed money incomes.
D
58
If nominal national income increased by 10% over a certain period of time while real national income increased by 20%, then
A) everybody in the economy became worse off.
B) inflation has occurred during this time period.
C) the labour force increased by 10%.
D) the price level has declined by about 10%.
E) the price level has increased by approximately 10%.
D
59
If nominal national income increased by 20% over a certain period of time while real national income increased by 10%, then
A) everybody in the economy became worse off.
B) inflation has decreased during this time period.
C) the labour force increased by 10%.
D) the price level has declined by about 10%.
E) the price level has increased by approximately 10%.
E
60
```
The group that tends to be most hurt by unexpected inflation is A) banks.
B) individuals with unindexed pensions.
C) employers.
D) fixed-income earners.
E) both B and D are correct.
```
E
61
If the price index is P1 in one year and P2 in the next year, the inflation rate from one year to
the next is calculated as A) (P2 - P1) × 100
B) (P2/P1) × 100
C) (P1/P2) × 100
D) [(P2 - P1)/P1] × 100
E) [(P1 - P2)/P2] × 100
D
62
Which of the following statements is logically valid?
A) If the rate of inflation is high, the nominal rate of interest must be low.
B) If the rate of inflation is less than the nominal interest rate, the real interest rate is positive.
C) If the real interest rate is less than the nominal interest rate, inflation must be zero.
D) If the real interest rate is less than the nominal interest rate, inflation must be negative.
E) If the nominal interest rate is high, the real interest rate must be high.
B
63
Suppose that at the end of a given year there has been unanticipated inflation of 4%. Who is better off at the end of the year?
A) a bank that lent money at the beginning of the year
B) a bank that lent money at the end of the year
C) a consumer who borrowed money at the beginning of the year
D) a consumer who borrowed money at the end of the year
E) a consumer who lent money at the end of the year
C
64
The real interest rate must be
A) high if the nominal interest rate is high.
B) high if the inflation rate is greater than the nominal interest rate.
C) low if the nominal interest rate is high.
D) positive if the nominal rate of interest is greater than the rate of inflation.
E) negative if the nominal rate of interest is greater than the rate of inflation.
D
65
It is important for policy makers to recognize that most macroeconomic variables are characterized by
A) long-run trends and short-run fluctuations.
B) gradual increases over long periods of time.
C) short-run fluctuations that need to be smoothed for a well-functioning economy.
D) long-run economic growth.
E) the impacts of the business cycle.
A
66
1) Total value added in an economy is equal to the value of
A) all final goods produced.
B) all final and intermediate goods produced.
C) all inputs and outputs in the economy.
D) all profits of all firms in the economy.
E) the sum of the value of primary, intermediate and final goods
A
67
Suppose national accounting was done by adding up the market values of all outputs of all firms. This approach would
A) accurately reflect the value of production in the economy.
B) obtain gross domestic product.
C) obtain gross national product.
D) underestimate the value of production in the economy.
E) overestimate the value of production in the economy.
E
68
All goods and services produced by one firm but used as inputs into a further stage of production are called
A) value added.
B) intermediate goods.
C) national income goods. D) final goods.
E) consumption goods.
B
69
In national-income accounting, the value of intermediate products
A) should always be counted as part of GDP in the expenditure approach.
B) should be subtracted from the value of final goods in determining a firm's total value added.
C) should be added to the value of other inputs in determining a firm's contribution to GDP.
D) must equal the value added by the firm.
E) is counted as factor income in the calculation of GDP from the income side.
B
70
Consider a firm producing skateboards in one factory. In determining this firm's value added, we would start with its total revenue and subtract the cost of (among other things)
1) salaries to the firm's cleaning staff;
2) electricity used in the factory;
3) the wood used for the base of the skateboards. A) 1 and 2
B) 2 and 3
C) 1 and 3
D) 1 only
E) 3 only
B
71
Which of the following statements about national-income accounting is correct?
A) The total value added in the economy is equal to the sum of all components in the circular flow of expenditure and income.
B) The value of the expenditure on a nation's output is equal to the total income claims generated by producing that output.
C) GDP on the expenditure side is calculated by adding up all the income claims generated by the act of production.
D) GDP on the income side is calculated by adding up total expenditure for each of the main components of final output.
E) GDP from the expenditure side and GDP from the income side differ by the amount of investment in the economy.
B
72
When adding up the value of all goods produced in the economy, double counting can be avoided if only the ________ is included.
A) value of final good and services
B) value of intermediate goods and services
C) cost of intermediate goods and services
D) revenue of all goods and services
E) revenue of intermediate goods and services
A
73
Consider the circular flow of expenditure and income in the Canadian economy. Which of the following is an injection into the circular flow?
A) Bombardier imports machine parts from Germany.
B) Bombardier exports subway cars to Mexico.
C) Safeway pays corporate income tax to the federal government.
D) You put $500 into your TFSA (tax-free savings account).
E) You make an online purchase from a U.S. retailer.
B
74
```
Consider the circular flow of income and expenditure in the Canadian economy. Which of the following is a withdrawal from the circular flow?
A) investment
B) consumption
C) saving
D) exports
E) government purchases
```
C
75
Consider the circular flow of income and expenditure in the Canadian economy. Which of the following is a withdrawal from the circular flow?
A) Your family buys weekly groceries.
B) Bombardier exports subway cars to Mexico.
C) You put $500 into your TFSA (tax-free savings account).
D) The B.C. provincial government builds a new hospital.
E) Canadian farmers sell wheat to China.
C
76
The term "investment" in macroeconomics means
A) the total amount of capital goods in the country.
B) the production of goods for immediate consumption.
C) the same thing as profits.
D) the production of goods not for immediate consumption use.
E) money spent in markets for financial capital.
D
77
To calculate GDP from the expenditure side, one must add together
A) wages, profits, government purchases and net exports.
B) consumption, government purchases, and interest.
C) wages, rent, interest, and profits.
D) consumption, investment, government purchases, and net exports.
E) consumption, investment, government purchases, and exports.
D
78
```
GDP from the expenditure side is equal to the sum of A) Ca + Ia + Ga + (IMa - Xa).
B) Ca + Ia + Ga - net exports.
C) Ca + Ia + Ga + (Xa - IMa).
D) Ca + Ia + Ga.
E) Ca + Ia + net exports.
```
C
79
Which of the following purchases by households is considered as consumption expenditure for the purposes of national-income accounting?
A) legal services
B) a new house
C) a Government of Canada Treasury bill D) tractors for use on a family farm
E) the purchase of company stock
A
80
```
Which of the following purchases by households is considered as consumption expenditure for the purposes of national-income accounting?
A) legal services
B) a new house
C) a Government of Canada Treasury bill
D) tractors for use on a family farm
E) the purchase of company stock
```
A
81
When calculating GDP from the expenditure side, Ga comprises
A) only expenditures made by the federal government.
B) government purchases of goods and services, excluding transfer payments.
C) only purchases of goods and not services.
D) only expenditures made by provincial and local governments.
E) government expenditures on goods and services, including transfer payments.
B
82
In national-income accounting, a rise in Ga will be recorded (other things being equal) if
A) labour productivity in the government sector rises.
B) output of government-produced goods and services increases.
C) the total salaries paid to civil servants rise.
D) wages in the government sector fall.
E) the government's purchases of office furniture falls.
C
83
In national-income accounting, a fall in Ga (other things being equal) will be recorded if
A) labour productivity in the government sector falls.
B) the true market value of government-produced goods and services decreases.
C) wages in the government sector rise.
D) the Canadian armed forces reduces the size of the army.
E) the number of employed civil servants increases, but total government salaries remains unchanged.
D
84
In macroeconomics, the term "capital goods" refers to
A) the financial resources necessary to start a firm.
B) man-made factors of production, such as tools, machines, and factory buildings.
C) money.
D) stocks and bonds.
E) all factors of production.
B
85
In national-income accounting, "depreciation" refers to
A) a term used in accounting, not economics.
B) the amount by which the capital stock is depleted during the accounting period. C) net investment.
D) the increase in the economy's stock of capital per year.
E) the decrease in the economy's stock of capital per year.
B
86
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In national-income accounting, a reduction of inventories counts as
A) consumption.
B) depreciation.
C) negative investment.
D) positive investment.
E) saving.
```
C
87
To calculate the change in the value of inventories for the investment component of GDP, one should use their
A) cost of production at the time they were produced.
B) cost of production minus the costs of labour and capital.
C) current market value.
D) market value at the time they were produced.
E) value at the time the goods are sold and removed from inventory
C
88
n national-income accounting, replacement investment is the investment that
A) is used in the calculation of GDP from the expenditure side.
B) maintains the existing capital stock at a constant level.
C) is equal to all existing capital stock in the country.
D) when added to gross investment is equal to total saving.
E) is done by the government.
B
89
In national-income accounting, the term "fixed investment" refers to
A) total gross investment minus depreciation.
B) the existing capital stock.
C) the creation of new plant and equipment.
D) investment in stocks and bonds.
E) capital stock that has been repaired
C
90
Which of the following statements regarding investment is correct?
A) The capital stock includes investment in stocks and bonds.
B) The accumulation of inventories does not count as current investment.
C) Rental payments are included as investment expenditures.
D) Depreciation refers to funds used to increase the existing stock of capital.
E) Housing construction is classified as investment expenditure rather than consumption expenditure.
E
91
Which of the following statements about depreciation is correct?
A) Depreciation includes net additions to the economy's total stock of capital.
B) The total amount of capital goods in a country is called depreciation.
C) Net investment is equal to gross investment minus depreciation.
D) Net investment is equal to gross investment plus depreciation.
E) Depreciation is equal to net investment.
C
92
```
When calculating GDP using the expenditure approach, the investment component includes
A) net investment only.
B) net investment minus depreciation.
C) gross investment plus depreciation.
D) net investment plus depreciation.
E) fixed investment minus depreciation.
```
D
93
Which of the following statements regarding housing expenditures in the national accounts is correct?
A) Owner-occupied housing is counted as investment by imputing the value of the housing services enjoyed by the owner.
B) Rental payments for houses are counted as part of consumption.
C) The provision of new public housing by the government is classified as private investment.
D) New residential construction is classified as consumption.
E) The cost of a home purchased from its previous occupant is part of investment.
B
94
In national-income accounting, government expenditures on the salaries of civil servants are included at
A) their imputed market value.
B) the market value of the goods and services they produce.
C) their after-tax salaries.
D) their pre-tax salaries, or factor incomes.
E) opportunity cost.
D
95
Transfer payments are excluded from the government component in the calculation of GDP because
A) they do not represent the purchase of a good or a service.
B) they are not counted as income by any economic agent.
C) they do not generate additional income in the economy.
D) it is difficult to assess the market value of a transfer payment.
E) they are small enough to ignore when computing the national accounts.
A
96
When calculating GDP from the expenditure side, "actual consumption expenditures" includes
A) the purchase of a new house.
B) American tourists travelling to and spending in Canada.
C) increases in automobile inventories.
D) the construction of an apartment building.
E) the monthly rental of an apartment.
E
97
When calculating GDP from the expenditure side, "actual consumption expenditures" includes
A) a tractor purchased by an Ontario farmer.
B) fees paid by Google Canada to a Toronto law firm.
C) robotic paint equipment purchased by Bombardier.
D) snow-plow equipment purchased by the City of Montreal.
E) Canadian fashion designs purchased by a Swiss department store.
B
98
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Which of the following would be classified as "investment" in the national income and product accounts?
A) the purchase of a government bond
B) the purchase of Telus stock
C) the construction of a new factory
D) the payment of real-estate fees
E) the holding of money
```
C
99
Suppose that in 2012, ABC Corporation produced $6 million worth of natural gas pipes but was able to sell only $5 million worth. Is the remaining $1 million of unsold pipes part of GDP for 2012?
A) Yes, since changes in inventories are part of consumption expenditures.
B) Yes, since they are part of the economy's output in 2012.
C) No, since changes in inventories are part of actual investment.
D) No, since they are part of the economy's output only when sold.
E) No, since they are added to existing inventories.
B
100
In national-income accounting, changes in inventories are
A) classified as part of current actual investment.
B) included under actual consumption expenditures.
C) referred to as intermediate goods.
D) described as actual fixed investment. E) not included in the national accounts.
A
101
In national-income accounting, what does the term Ia represent?
A) actual net investment
B) actual net investment minus depreciation
C) actual gross investment (including depreciation)
D) actual inventory investment
E) actual fixed investment minus depreciation
E
102
When calculating GDP from the expenditure side, which of the following is true of the investment component, Ia?
A) it excludes expansions of existing factories
B) it only includes business fixed investment
C) it includes the transfer of houses between individuals
D) it includes changes in inventories
E) it only includes decumulation of inventories
D
103
If a firm's depreciation exceeds its gross investment, then its
A) capital stock will be shrinking.
B) capital stock will be growing.
C) gross investment will be negative.
D) net investment will be positive.
E) depreciation cannot exceed gross investment
A
104
Which one of the following government expenditures is an example of "government purchases"?
A) $2000 paid to a retiree
B) $1000 paid to a poor person for income support
C) $4000 spent for services provided by a private consultant
D) $100 000 paid as interest on the national debt
E) $600 paid to an unemployed worker for employment insurance
C
105
To calculate GDP from the income side, one must add together wages,
A) consumption and depreciation.
B) interest, rent, depreciation, profits and indirect taxes net of subsidies.
C) investment, rent, depreciation, profits and indirect taxes net of subsidies.
D) government income, interest, and profits.
E) net exports, depreciation, and profits.
B
106
```
Gross domestic product is the sum of factor incomes ________ indirect business taxes, ________ subsidies, ________ depreciation.
A) plus; plus; plus
B) plus; plus; minus
C) plus; minus; minus
D) plus; minus; plus
E) minus; plus; plus
```
D
107
```
When calculating GDP from the income side, which of the following is included in non- factor payments?
A) wages and salaries
B) GST
C) income tax
D) bond interest
E) business profits
```
B
108
Which of the following pairs are conceptually identical? A) gross domestic product and gross domestic expenditure
B) gross national product and gross domestic product
C) gross domestic product and personal disposable income
D) personal income and labour income
E) personal income and personal disposable income
A
109
In the national-income accounts, disposable personal income
A) includes capital consumption allowances.
B) includes undistributed corporate profits.
C) equals personal income, minus personal income taxes, plus transfer payments and interest on public debt.
D) is the part of national income that is available to households to spend or save.
E) is equal to wages.
D
110
```
Suppose you are hired as a consultant to estimate the increase in consumer demand for automobiles for the coming year. Which measure of aggregate income would be most useful to you for this type of forecasting?
A) Gross Domestic Product
B) Net National Product
C) GDP Deflator
D) Disposable Income
E) Gross National Product
```
D
111
```
Which of the following is the most appropriate measure for evaluating the average material living standards of Canadian residents?
A) disposable income
B) per capita Net National Product
C) Net Domestic Income at Factor Cost
D) per capita Gross Domestic Product
E) per capita Gross National Product
```
E
112
Historically, nominal GDP has increased faster than real GDP because
A) the general price level has fallen.
B) improvements in product quality have not been reflected in prices.
C) exports have risen more rapidly than imports.
D) imports have risen more rapidly than exports.
E) the general price level has increased
E
113
Real GDP is equivalent to
A) the money value of all goods and services produced in an economy per year plus imports.
B) the market value of all goods and services produced in an economy per year.
C) personal disposable income plus depreciation.
D) the value of all goods and services produced in an economy per year adjusted for price changes.
E) the nominal value of GNP multiplied by the GDP deflator.
D
114
```
A country's computed GDP deflator
1) excludes the changes in the price of imported goods;
2) is less relevant than the measured CPI for the typical consumer; 3) is set to be equal to 100 in its base year.
A) 1 only
B) 2 only
C) 1, 2, and 3
D) 1 and 3
E) 2 and 3
```
C
115
One major reason that GDP is an inaccurate measure of the true level of economic activity is that
A) people frequently buy things they do not want.
B) it is statistically very inaccurate.
C) it does not include non-market activities.
D) it cannot be adjusted for changes in prices.
E) it includes net exports.
C
116
One major reason that GDP is an inaccurate measure of the "quality of life" is that
A) people frequently buy things they do not want.
B) it does not include the value of leisure.
C) it is statistically very inaccurate.
D) it cannot be adjusted for changes in prices.
E) it includes net exports.
B
117
One reason that real GDP tends to overstate the economic well-being of the country's residents is that it ignores
A) the costs of increased leisure time.
B) the market-based activity done from the home.
C) the economic "bads" associated with production, such as pollution.
D) non-market activities, such as teenaged-babysitting services.
E) illegal activities, such as the drug trade.
C
118
Measures of GDP may understate the economic well-being of people in developing countries if those countries tend to
A) import much more than they export.
B) have a high degree of foreign direct investment.
C) emphasize agricultural and resource-based production.
D) have very high rates of pollution.
E) have a large share of nonmarket activities.
E
119
Which of the following statements about the underground economy and how it relates to GDP is correct?
A) Activity in the underground economy is Canada is estimated at over 25% of the value of GDP, which therefore significantly understates total output.
B) Transactions in the underground economy are not legal, are not reported for tax purposes, and therefore not included in GDP.
C) Transactions in the underground economy are legal but are not reported for tax purposes, and therefore not included in GDP.
D) Activity in the underground economy is illegal and therefore should not be included in any measure of legitimate economic activity.
E) Transactions in the underground economy are legal and therefore an estimate of their total value is included in GDP.
C
120
Using GDP as a measure of the economic well-being of a country can be criticized for ignoring non-market and other activities. However, it remains useful because
A) GDP is the best measure we have of the effects of economic "bads" on the well-being of the country.
B) the change in GDP from one year to the next is a good indication of what rates of inflation and unemployment will be.
C) it provides a good indication of household income distribution when measured from the income side.
D) the change that is measured in GDP from one year to the next is a good indication of the change in economic activity.
E) it is simply not possible to reform the current measure of GDP.
D
121
With respect to consumption, investment, government purchases and net exports, the national- income and product accounts measure
A) desired expenditures in each of the categories.
B) both actual and desired expenditures, since actual expenditure must equal desired expenditure in each category.
C) the flow of saving at any income.
D) neither actual nor desired expenditures.
E) actual expenditures in each of the categories.
E
122
For firms or individual households, desired expenditure is
A) always greater than planned expenditure.
B) always greater than actual expenditure.
C) not relevant because human wants are unlimited.
D) what they plan on spending, given the resources at their command.
E) not a useful concept because it cannot be measured.
D
123
```
In the simple macroeconomic model, "autonomous expenditures" are
A) dependent on national income.
B) not dependent on national income.
C) induced expenditures.
D) those which are constant.
E) non-domestic expenditures.
```
B
124
Undesired or unplanned inventory accumulation is likely to occur when
A) consumption exceeds investment.
B) investment exceeds consumption.
C) autonomous expenditure exceeds induced expenditure.
D) desired aggregate expenditure exceeds actual aggregate expenditure.
E) actual aggregate expenditure exceeds desired aggregate expenditure.
E
125
Undesired or unplanned inventory decumulation is likely to occur when
A) consumption exceeds investment.
B) investment exceeds consumption.
C) autonomous expenditure exceeds induced expenditure.
D) desired aggregate expenditure exceeds actual aggregate expenditure.
E) actual aggregate expenditure exceeds desired aggregate expenditure.
D
126
```
In each of the four expenditure categories, national income accounts measure ________ expenditures, while the theoretical model of the economy deals with ________ expenditures.
A) actual; autonomous
B) desired; actual
C) induced; exogenous
D) endogenous; exogenous
E) actual; desired
```
E
127
In macroeconomics, the consumption function
A) and the aggregate expenditure function are the same.
B) describes the relationship between desired consumption expenditure and the factors that determine it, like national income.
C) refers to the relationship between consumption expenditure and relative prices.
D) refers to the relationship between an individual's consumption and his/her wealth.
E) is relatively unimportant in macroeconomics, because consumption is such a small component of aggregate expenditure.
B
128
The consumption function is based on the assumption that as real disposable income rises, aggregate desired consumption
A) will fall and desired saving will rise.
B) will rise and desired saving will fall.
C) and desired saving will both rise.
D) remains constant and desired saving will rise.
E) remains constant and desired saving will fall.
C
129
In a simple macro model, an increase in households' wealth is generally assumed to
A) cause no change in desired consumption because consumption is a function of disposable income only.
B) cause no change in desired consumption because the increase is always expected.
C) cause a downward shift in the aggregate consumption function.
D) cause an upward shift in the aggregate consumption function.
E) affect only desired saving, not desired consumption.
D
130
In a simple macro model, a decrease in households' wealth is generally assumed to
A) cause no change in consumption because consumption is a function of disposable income only.
B) cause no change in consumption because the decline is always expected.
C) cause a downward shift in the consumption function.
D) cause an upward shift in the consumption function.
E) affect only saving, not consumption.
C
131
Consider the consumption function in a simple macro model with no taxes. At the level of national income where APC = 1, the nation's households are
A) consuming all of their disposable income.
B) allocating their income equally between saving and consumption.
C) saving a portion of their income, but saving is less than consumption.
D) spending more than their current income.
E) saving all of their disposable income.
A
132
On a graph of a consumption function, what is the significance of the 45-degree line?
A) It connects all points where desired consumption equals desired expenditure.
B) It connects all points where desired consumption equals actual disposable income.
C) It shows the slope of the average consumption function, against which we measure other consumption functions.
D) It connects all points where desired consumption equals desired saving.
E) Desired consumption is zero at all points along the 45-degree line.
B
133
If the consumption function coincides with the 45-degree line, then we know that
A) desired consumption is constant at all levels of disposable income.
B) the marginal propensity to consume is less than one.
C) the marginal propensity to consume is greater than one.
D) desired consumption equals desired saving at all levels of disposable income.
E) desired saving is zero at all levels of disposable income.
E
134
Consider a consumption function that is upward sloping but flatter than the 45-degree line. When real disposable income rises
A) desired consumption will fall and saving will rise.
B) desired consumption will rise and saving will fall.
C) desired consumption and saving will both rise.
D) desired consumption remains constant.
E) saving remains constant.
C
135
```
Desired consumption divided by disposable income is called the
A) average propensity to consume.
B) average propensity to save.
C) average propensity to spend.
D) marginal propensity to save.
E) total propensity to save.
```
A
136
```
Desired consumption expenditure divided by disposable income is called the
A) consumption function.
B) marginal propensity to consume.
C) average propensity to consume.
D) average propensity to save.
E) relative consumption ratio.
```
C
137
The "marginal propensity to consume" refers to the additional
A) desired saving that occurs out of an additional dollar of disposable income.
B) desired consumption that occurs out of an additional dollar of disposable income.
C) desired consumption that occurs out of an additional dollar of investment.
D) desired consumption caused by a change in tastes.
E) desired consumption that occurs over time.
B
138
```
The change in desired consumption divided by the change in disposable income that brought it about is called the
A) average propensity to consume.
B) average propensity not to consume.
C) consumption function.
D) marginal propensity to consume.
E) marginal propensity not to spend.
```
D
139
The marginal propensity to consume is defined to be
A) the change in desired consumption divided by the change in saving.
B) the change in desired consumption divided by total disposable income.
C) the change in desired consumption divided by the change in disposable income.
D) total desired consumption divided by total disposable income.
E) total desired consumption divided by the change in disposable income.
C
140
If the marginal propensity to consume (MPC) is equal to 0.9, an increase in household income causes desired consumption expenditure to
A) rise by more than the increase in income.
B) rise by the full increase in income.
C) rise by less than the full increase in income.
D) fall, as an increase in income will increase saving.
E) remain constant, because the MPC is also constant.
C
141
The consumption function is based on a number of assumptions. Given these assumptions, which of the following statements is true?
A) Below a certain level of income, APC > 1 and MPC < 0.
B) The MPC and APC are always less than unity.
C) As income rises, the MPC falls and the APC rises.
D) The MPC is greater than zero and less than one, and the APC falls as income rises.
E) The APC is greater than zero and less than one, and the MPC falls as income rises.
D
142
Which of the following statements must be true in the simple macro model ?
A) APC increases as income rises.
B) APS decreases as income rises.
C) MPS and MPC are both negative.
D) MPC is negative below a certain level of income.
E) The sum of MPC and MPS is one.
E
143
```
Total desired saving divided by total income is called the
A) average propensity to consume.
B) average propensity to save.
C) average propensity to spend.
D) marginal propensity to save.
E) total propensity to save.
```
B
144
The marginal propensity to save refers to the
A) additional saving that occurs out of an additional dollar of income.
B) additional saving that occurs out of an additional dollar of investment.
C) total saving divided by a change in income.
D) change in saving divided by total income.
E) additional saving that occurs over time
A
145
```
In a simple model of the economy, without government or taxes, a shock that causes an upward shift of the aggregate consumption function also causes ________ shift of the saving function.
A) an equal upward
B) a less-than-equal upward
C) an equal downward
D) a less-than-equal downward
E) no
```
C
146
```
When desired consumption exceeds disposable income, desired saving is ________; when desired consumption is less than the disposable income, desired saving is ________.
A) negative; negative
B) positive; negative
C) negative; positive
D) positive; positive
E) zero; positive
```
C
147
```
Desired investment expenditure will generally fall as a result of which of the following changes?
A) a decrease in business confidence
B) a decrease in interest rates
C) an increase in government purchases
D) an increase in sales volume
E) an increase in business confidence
```
A
148
In the simple macro model, desired investment is assumed to be autonomous with respect to national income. Which of the following will cause a shift of the investment function?
1) a decrease in interest rates
2) an increase in firms' optimism about the economy
3) an expectation of a downturn in future economic activity
A) 1 and 2
B) 2 and 3
C) 1 and 3
D) 1, 2, and 3
E) 1 only
D
149
```
Investment expenditure is the ________ volatile component of GDP, and changes in investment are ________ associated with business-cycle fluctuations.
A) most; strongly
B) most; weakly
C) least; strongly
D) least; weakly
E) least; not
```
A
150
```
A rise in the real rate of interest ________ the opportunity cost of holding an inventory of a given size, and therefore ________ desired investment expenditure.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; leaves unaffected
E) decreases; decreases
```
B
151
```
In Canada, as in many other countries, the largest component of domestic investment expenditure is
A) plant and equipment.
B) residential housing.
C) inventories.
D) financial assets.
E) savings.
```
A
152
Other things being equal, higher real interest rates tend to
A) increase every component of desired investment expenditure.
B) reduce every component of desired investment expenditure.
C) reduce every component of desired investment expenditure except residential housing.
D) reduce every component of desired investment expenditure except inventories.
E) reduce every component of desired investment expenditure except plant and equipment.
B
153
In the simplest macroeconomic model, with a closed economy and no government, the aggregate expenditure (AE) function is the sum of
A) saving and desired investment.
B) consumption and disposable income.
C) desired consumption and desired investment.
D) consumption and saving.
E) actual consumption and actual investment.
C
154
Consider the simplest macroeconomic model, with a closed economy and no government. If we assume that desired investment is autonomous with respect to national income, then the investment function (which graphs desired investment against actual national income) will be A) negatively sloped.
B) positively sloped and relatively steep.
C) positively sloped and relatively flat.
D) vertical.
E) horizontal.
E
155
```
The schedule that relates the level of desired total expenditures to the level of actual national income is called the
A) consumption function.
B) desired aggregate demand function.
C) aggregate expenditure function.
D) dissaving function.
E) equilibrium function.
```
C
156
```
The increase in aggregate planned expenditures divided by the change in national income that brought it about is called the
A) average propensity to consume.
B) average propensity to save.
C) marginal propensity to spend.
D) marginal propensity to save.
E) marginal propensity to consume.
```
C
157
Suppose there is an increase in the marginal propensity to spend out of national income. The result will be
A) a movement to the right along the AE curve.
B) a movement to the left along the AE curve.
C) an increase in the slope of the AE curve.
D) a decrease in the slope of the AE curve.
E) a parallel upward shift in the AE curve.
C
158
A decrease in the marginal propensity to spend out of national income will cause
A) a movement to the right along the AE curve.
B) a movement to the left along the AE curve.
C) an increase in the slope of the AE curve, which rotates it upward.
D) a decrease in the slope of the AE curve, which rotates it downward.
E) a parallel downward shift in the AE curve.
D
159
In general, the marginal propensity to spend is the change in total desired expenditure induced by a change in ________ whereas the marginal propensity to consume is the change in desired consumption expenditure induced by a change in ________. In the case of the simplest macro model with no government and no international trade, however, the marginal propensity to spend is ________ the marginal propensity to consume.
A) national income; disposable income; greater than
B) national income; disposable income; equal to
C) disposable income; national income; equal to
D) disposable income; national income; greater than
E) national income; disposable income; smaller than
B
160
Consider a simple macro model with demand-determined output. At the equilibrium level of national income,
A) consumers' purchases of goods and services equal firms' purchases of investment goods.
B) firms will hold no inventories of raw materials or final goods.
C) desired aggregate expenditures will equal total output.
D) desired aggregate expenditures will equal total output minus inventory holdings.
E) consumers' purchases of goods and services equals their saving.
C
161
In a simple macro model with no government and no foreign trade, the equilibrium level of national income is the level of income at which
A) aggregate desired expenditure is greater than actual national income.
B) aggregate desired expenditure equals actual national income.
C) aggregate desired expenditure equals consumer spending.
D) saving equals income.
E) saving equals consumer spending.
B
162
In a simple model of the economy with demand-determined output, the equilibrium level of national income is at an income
A) to the right of the point where the AE curve intersects the 45-degree line.
B) to the left of the point where the AE curve intersects the 45-degree line.
C) where aggregate desired expenditure equals the value of total output.
D) where aggregate desired expenditure equals consumption.
E) where saving equals consumption.
C
163
In a simple macro model with demand-determined output, the equilibrium level of national income is at an income
A) to the left of the point where the AE curve intersects the 45-degree line.
B) where the AE curve intersects the 45-degree line.
C) to the right of the point where the AE curve intersects the 45-degree line.
D) where saving equals consumption.
E) where saving equals income
B
164
Consider the simplest macro model with a constant price level and demand-determined output. If desired aggregate expenditure is less than actual national income, then
A) inventories begin to fall, causing firms to increase production.
B) actual national income is below the equilibrium level.
C) actual national income must be above the equilibrium level.
D) actual national income must be at equilibrium.
E) inventories begin to fall, causing national income to fall.
C
165
Consider the simplest macro model with demand-determined output. If desired aggregate expenditure is greater than actual national income, then
A) inventories will likely begin to fall, causing firms to increase production.
B) actual national income must be less than the equilibrium level.
C) actual national income must be greater than the equilibrium level.
D) inventories will likely begin to rise, causing firms to reduce production.
E) both A and B are correct.
E
166
In a simple macro model with the price level assumed to be constant, a change in firms' level of desired investment is predicted to influence equilibrium national income by
A) shifting the saving function.
B) shifting the consumption function.
C) shifting the aggregate expenditure function.
D) causing movement along the investment function.
E) shifting the 45-degree line
C
167
Consider a simple macro model with a constant price level and demand-determined output. In such a model, the level of national income will
A) tend to rise if desired aggregate expenditure is less than actual national income.
B) remain constant if savings equals consumption.
C) be in equilibrium if all of the resources of the economy are fully employed. D) remain constant if firms are accumulating inventories.
E) tend to rise if firms have unplanned decumulation of inventories.
E
168
If national income is demand-determined, the condition for national income to be in equilibrium can be stated as
A) unemployment must equal the natural unemployment rate.
B) AE must be greater than Y.
C) desired saving equals actual investment.
D) actual saving equals actual investment.
E) desired aggregate expenditure equals the actual level of national income.
E
169
```
Consider the simplest macro model with a constant price level and demand-determined output. If national income is less than its equilibrium level, it is likely that firms' inventories are ________, and so national income tends to ________.
A) accumulating; rise
B) accumulating; fall
C) being depleted; rise
D) being depleted; fall
E) constant; fall
```
C
170
```
Consider a simple macro model with a constant price level and demand-determined output. If national income is above its equilibrium level, it is likely that inventories are ________, and so national income tends to ________.
A) accumulating; rise
B) accumulating; fall
C) being depleted; rise
D) being depleted; fall
E) constant: fall
```
B
171
Consider a simple macro model with a constant price level and demand-determined output. Suppose the level of actual national income is less than desired aggregate expenditure. In this case,
A) inventories will build up, causing national income to rise.
B) national income will fall, because desired expenditures are less than actual expenditures.
C) shortages of goods and reductions in inventories will cause producers to increase output and national income to rise.
D) national income may increase or decrease, depending on the relative sizes of the average propensity to consume and the average propensity to save.
E) there will be no change in national income because only actual expenditure is relevant.
C
172
Consider a simple macro model with a constant price level and demand-determined output. Suppose desired aggregate expenditures are less than the current level of national income. The vertical distance between the AE curve and the 45-degree line represents
A) desired accumulation of inventories.
B) desired decumulation of inventories.
C) the amount by which output exceeds desired expenditures.
D) the output gap.
E) the amount by which desired expenditures exceeds output
C
173
```
Consider an exogenous increase in the real interest rate in the simple macro model. This will tend to cause ________ in desired consumption and ________ in desired investment.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; a decrease
D) a decrease; no change
E) a decrease; an increase
```
C
174
Consider a simple macro model with a constant price level and demand-determined output. In such a model, a downward shift of the saving function causes equilibrium national income to A) fall because the AE function shifts downward simultaneously.
B) rise because the AE function shifts upward simultaneously.
C) remain constant but consist of more consumption and less investment.
D) remain constant but consist of less consumption and more investment.
E) remain constant because it does not affect desired aggregate expenditure.
B
175
Consider the simplest macro model with a constant price level and demand-determined output. In such a model, an upward shift of the saving function causes equilibrium national income to
A) fall because the AE function shifts downward simultaneously.
B) rise because the AE function shifts upward simultaneously.
C) remain constant but consist of more consumption and less investment.
D) remain constant but consist of less consumption and more investment.
E) remain constant because it does not affect desired aggregate expenditure.
A
176
The simple multiplier, which applies to short-run situations in which the price level is constant, describes changes in
A) investment induced by changes in equilibrium income.
B) saving caused by changes in investment.
C) the equilibrium level of national income caused by changes in autonomous expenditure. D) the rate of interest caused by increased demand for credit.
E) employment induced by changes in equilibrium income.
C
177
Consider a simple macro model with a constant price level and demand-determined output. Using this model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the
A) average propensity to save.
B) marginal propensity to save.
C) equilibrium level of national income.
D) simple multiplier.
E) reciprocal of the marginal propensity to spend
D
178
The simple multiplier applies to short-run situations in which the price level is constant. The simple multiplier can be defined as
A) national income divided by aggregate expenditure.
B) the change in equilibrium national income divided by the initial change in autonomous expenditure that brought it about.
C) the change in national income resulting from a change in expenditure, multiplied by the number of years since the initial change.
D) a change in aggregate expenditures multiplied by the equilibrium level of national income.
E) the change in national income resulting from a change in saving.
B
179
```
In a simple macro model with demand-determined output, the simple multiplier is equal to 1/(1-z), where z equals the
A) average propensity to spend.
B) average propensity not to spend.
C) level of autonomous expenditure.
D) marginal propensity to spend.
E) marginal propensity not to spend.
```
D
180
Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is zero, the simple multiplier is
A) zero.
B) a positive number between zero and one.
C) one.
D) a positive number greater than one but less than infinity.
E) infinitely large.
C
181
Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is one, the simple multiplier is
A) zero.
B) a positive number between zero and one.
C) one.
D) a positive number greater than one but less than infinity.
E) infinitely large.
E
182
Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is between zero and one, the simple multiplier is
A) zero.
B) a positive number between zero and one.
C) one.
D) a positive number greater than one but less than infinity.
E) infinitely large.
D
183
```
Consider a simple macro model with demand-determined output. If z is the marginal propensity to spend out of national income, Y is national income and A is autonomous expenditure, then the simple multiplier is equal to
A) z.
B) 1 - z.
C) 1/z.
D) 1/(1-z).
E) Y/(1-z).
```
D
184
```
Consider a simple macro model with demand-determined output. In such a model, the larger the marginal propensity to spend, the
A) larger the MPC.
B) smaller the MPS.
C) smaller the simple multiplier.
D) larger the simple multiplier.
E) greater is investment.
```
D
185
```
Consider a simple macro model with demand-determined output. In such a model, the smaller the marginal propensity to spend, the
A) smaller the MPS.
B) smaller the simple multiplier.
C) larger is investment.
D) larger the MPC.
E) larger the simple multiplier.
```
B
186
Consider a simple macro model with demand-determined output. In such a model, the multiplier is larger, the
A) higher the level of autonomous expenditures.
B) steeper is the AE function.
C) flatter is the AE function.
D) lower the APC.
E) lower the level of autonomous expenditures.
B
187
Consider a simple macro model with demand-determined output. Using such a model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the reciprocal of one minus
A) the average propensity to save.
B) the marginal propensity to save.
C) the equilibrium level of national income.
D) the marginal propensity not to spend.
E) the marginal propensity to spend.
E
188
```
Consider a simple macro model with a constant price level. If the AE function is horizontal, then we know the simple multiplier is
A) less than zero.
B) zero.
C) between zero and one.
D) exactly one.
E) greater than one.
```
D
189
Suppose aggregate output is demand-determined. The simple multiplier will increase as a result of
A) an increase in the marginal propensity to consume.
B) a decrease in the marginal propensity to consume.
C) a decrease in autonomous consumption.
D) an increase in autonomous consumption.
E) an increase in investment.
A
190
Why are government expenditures such as Old Age Security payments, employment insurance payments, or welfare benefits paid to individuals not considered part of G, the government component of aggregate expenditure?
A) These are transfer payments and place no direct demand on Canada's total output.
B) These payments are directly included as part of C, consumption, because they become consumption expenditure for the recipient.
C) Since the revenues from which these payments are made did not originate from tax collection, they are not considered part of G.
D) Since these expenditures are transfers from recipients to taxpayers, they are not included in G.
E) These payments are included in G only when the payments are made directly by the federal government.
A
191
```
Consider the government's budget balance. Suppose G = 300 and the government's net tax revenue is equal to 280, the government is running a budget
A) deficit of 20.
B) surplus of 20.
C) balance.
D) deficit of -20.
E) surplus of 40.
```
A
192
Transfer payments made by the government affect its net tax revenues
A) directly.
B) indirectly through government purchases.
C) indirectly through net exports.
D) indirectly through the investment function.
E) indirectly through the consumption function.
A
193
```
If the government's net tax rate increases, then for a given level of national income disposable income will ________ and net tax revenue will ________.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease
E) not change; increase
```
B
194
Consider a simple macro model with a constant price level and demand-determined output. The inclusion of government in such a model affects desired aggregate expenditure directly through ________ and indirectly through ________.
A) the net taxes; the government purchases of goods and services
B) the net taxes; its affect on disposable income
C) the government purchases of goods and services; its effect on net exports
D) the government purchases of goods and services; its effect on disposable income
E) the government purchases of goods and services; its effect on investment
D
195
In a simple macro model, it is generally assumed that a country's exports A) and imports are autonomous.
B) and imports are induced.
C) are autonomous whereas imports are induced.
D) are induced whereas imports are autonomous.
E) are always equal to investment.
C
196
When determining the AE function for an open economy with government, it is generally assumed that as real national income
A) increases, exports will decrease.
B) increases, net exports will decrease.
C) increases, imports will decrease.
D) decreases, net exports will decrease.
E) decreases, exports will decrease.
B
197
```
In a simple macro model, the net export (NX) function indicates a ________ relationship between ________ and domestic national income.
A) positive; exports
B) positive; net exports
C) negative; imports
D) negative; net exports
E) negative; exports
```
D
198
```
A movement along the net export (NX) function can be caused by a change in A) domestic national income.
B) foreign national income.
C) domestic prices.
D) the exchange rate.
E) foreign prices.
```
A
199
A parallel upward shift in the net export (NX) function can be caused by A) an increase in domestic national income.
B) an increase in foreign national income.
C) an increase in domestic prices relative to foreign prices.
D) a decrease in the Canadian-dollar price of foreign currency.
E) a decrease in foreign prices relative to domestic prices.
B
200
A parallel downward shift in the net export (NX) function can be caused by
A) an increase in domestic national income.
B) a decrease in foreign national income.
C) a decrease in domestic prices.
D) an increase in the Canadian-dollar price of foreign currency.
E) a decrease in foreign prices.
B
201
An upward shift and flattening of the net export (NX) function can be caused by
A) an increase in domestic national income.
B) a decrease in foreign national income.
C) a decrease in domestic prices relative to foreign prices.
D) an increase in the Canadian-dollar price of foreign currency.
E) both C and D are correct
E
202
A downward shift and steepening of the net export (NX) function can be caused by A) an increase in domestic national income.
B) a decrease in foreign national income.
C) an increase in domestic prices relative to foreign prices.
D) a decrease in the Canadian-dollar price of foreign currency.
E) both C and D are correct.
E
203
The net export (NX) function crosses the horizontal axis at a level of national income where the
A) X and IM curves intersect.
B) X curve reaches the horizontal axis.
C) IM curve reaches the horizontal axis.
D) X and IM curves are at their farthest distance apart. E) X curve reaches its maximum.
A
204
```
A rise in domestic prices relative to foreign prices, other things being equal, causes the net export (NX) function to shift ________ and ________.
A) upward; become flatter
B) upward; become steeper
C) downward; become flatter
D) downward; keep the same slope
E) downward; become steeper
```
E
205
```
A fall in domestic prices relative to foreign prices, other things being equal, causes the net export (NX) function to shift ________ and ________.
A) upward; become flatter
B) upward; become steeper
C) downward; become flatter
D) downward; keep the same slope
E) downward; become steeper
```
A
206
```
A rise in the Canadian-dollar price of foreign currency, other things being equal, causes Canada's net export (NX) function to shift ________ and ________.
A) upward; become flatter
B) upward; become steeper
C) downward; become flatter
D) downward; keep the same slope
E) downward; become steeper
```
A
207
```
A fall in the Canadian-dollar price of foreign currency, other things being equal, causes Canada's net export (NX) function to shift ________ and ________.
A) upward; become flatter
B) upward; become steeper
C) downward; become flatter
D) downward; keep the same slope
E) downward; become steeper
```
E
208
```
decrease in domestic national income will cause a ________ the net exports (NX) function.
A) movement to the left along
B) parallel downward shift of
C) parallel upward shift of
D) rotation upward in
E) rotation downward in
```
A
209
```
An increase in foreign income, other things being equal, is assumed to cause the net export (NX) function to
A) shift parallel upward.
B) shift parallel downward.
C) pivot downward.
D) pivot upward.
E) remain stationary.
```
A
210
Consider the net export function. An increase in domestic national income, other things being equal, is assumed to cause
A) the net export function to shift upward.
B) the net export function to pivot upward.
C) movement to the right along the net export function. D) the net export function to pivot downward.
E) no effect on net exports.
C
211
```
The AE function for an open economy with government can be written as
A) AE = C + I - G + (X-IM).
B) AE = C + I + G - (X-IM).
C) AE = C + I - G - (X+IM).
D) AE = C + I + S + (X+IM).
E) AE = C + I + G + (X-IM).
```
E
212
Once government and taxes are included in the consumption function, what is desired consumption (function)
where a = autonomous consumption, t = net tax rate, Y = national income, = disposable income, and MPC = marginal propensity to consume.
C = a + MPC(1 - t)Y
213
In our simple macro model with government, which statement is correct regarding the following equation: T = (0.2)Y?
A) Total tax revenues are equal to 20% of disposable income.
B) Total tax revenues are equal to 20% of real GDP.
C) Net tax revenues are equal to 20% of disposable income.
D) If national income increases by $1.00, then net tax revenue increases by $0.20.
E) If total tax revenue increases by $0.20, then national income increases by $1.00.
D
214
In our simple macro model with government, which statement is correct regarding the
following equation: = (0.75)Y?
A) If disposable income increases by $0.75, then national income increases by $1.00 and total tax revenue rises by $0.75.
B) Net tax revenue is equal to 75% of national income.
C) If national income increases by $1.00, then disposable income increases by $0.75 and net tax revenue increases by $0.25.
D) Net tax revenue is equal to 25% of disposable income.
E) If national income increases by $1.00, then disposable income increases by $0.25 and net tax revenue increases by $0.75.
C
215
In our simple macro model with government and foreign trade, the marginal propensity to consume out of disposable income is ________ whereas the marginal propensity to consume out of national income is ________.
A) MPC; MPC(1 - t)
B) MPC(1 - t); MPC
C) MPC(1 - t) - m; MPC(1 - t) D) MPC; MPC(1 - t) - m
E) MPC(1 - t); MPC(1 - t) - m
A
216
```
Consider a simple macro model with a constant price level and demand-determined output. The marginal propensity to spend out of national income, z, can be expressed as ________ (where t = net tax rate and m = marginal propensity to import).
A) z = MPC(1 - t - m)
B) z = tY - mY
C) z = MPC - (1 - t- m)Y
D) z = MPC - (1 - t - m)
E) z = MPC(1 - t) - m
```
E
217
```
. In a simple macro model with a constant price level, an increase in the net tax rate causes the AE curve to
A) shift parallel downward.
B) shift parallel upward.
C) rotate downward.
D) rotate upward.
E) remain stationary.
```
C
218
```
In a simple macro model with a constant price level, a decrease in the net tax rate causes the AE curve to
A) shift parallel downward.
B) shift parallel upward.
C) rotate downward.
D) rotate upward.
E) remain stationary.
```
D
219
```
Consider a simple macro model with a constant price level and demand-determined output. When national income falls short of desired aggregate expenditures, unplanned inventory ________ will induce firms to ________ the rate of output production.
A) depletion; lower
B) depletion; raise
C) buildup; lower
D) buildup; raise
E) at zero; maintain the current
```
B
220
In an open economy with government and demand-determined output, an increase in the equilibrium level of national income could be caused by
A) an increase in taxes at all levels of income.
B) an increase in the desired level of imports at all levels of income.
C) a decrease in desired consumption at all levels of income.
D) a decrease in the desired level of saving at all levels of income.
E) a decrease in government purchases.
D
221
In an open economy with government and demand-determined output, a decrease in the equilibrium level of national income could be caused by
A) a decrease in taxes at all levels of income.
B) a decrease in the desired level of imports at all levels of income.
C) a decrease in desired consumption at all levels of income.
D) a decrease in the desired level of saving at all levels of income.
E) an increase in government purchases.
C
222
In an open economy with government and demand-determined output in the short run, a specific "target" level of national income
A) cannot be achieved by any of the government's fiscal policy tools.
B) can be achieved by changing G, but not T.
C) can be achieved by changing T, but not G.
D) can be achieved by changes in G, T, or both.
E) can be achieved only by changing both G and T at the same time.
D
223
Consider the following news headline: "Minister of Defence announces $2 billion purchase of military helicopters." Assuming that aggregate output is demand-determined, and that the helicopters are purchased domestically, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income?
A) The AE function will shift down parallel to itself and equilibrium national income will fall. B) The AE function will rotate upward (become steeper) and equilibrium national income will rise.
C) The AE function will rotate downward (become flatter) and national income will fall.
D) The AE function will shift up parallel to itself and equilibrium national income will rise.
E) There will be no change in the AE function or in equilibrium national income.
D
224
Consider the following news headline: "Finance minister announces that the federal income- tax rate will rise by three percentage points." Assuming that aggregate output is demand- determined, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income?
A) The AE function will shift down parallel to itself and equilibrium national income will fall. B) The AE function will rotate upward (become steeper) and equilibrium national income will rise.
C) The AE function will rotate downward (become flatter) and national income will fall.
D) The AE function will shift up parallel to itself and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income.
C
225
Consider the following news headline: "Business community gloomy about the economy— investment plans axed." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income?
A) The AE function will shift down parallel to itself and equilibrium national income will fall.
B) The AE function will rotate upward (become steeper) and equilibrium national income will rise.
C) The AE function will rotate downward (become flatter) and national income will fall.
D) The AE function will shift up parallel to itself and equilibrium national income will rise.
E) There will be no change in the AE function or in equilibrium national income.
A
226
Consider the following news headline: "Canadian exporters hurt by foreign recession." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income?
A) The AE function will shift down parallel to itself and equilibrium national income will fall.
B) The AE function will rotate upward (become steeper) and equilibrium national income will rise.
C) The AE function will rotate downward (become flatter) and national income will fall.
D) The AE function will shift up parallel to itself and equilibrium national income will rise.
E) There will be no change in the AE function or in equilibrium national income.
A
227
Consider the following news headline: "Canadians develop a greater taste for foreign vacations." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income?
A) The AE function will shift down parallel to itself and equilibrium national income will fall.
B) The AE function will rotate upward (become steeper) and equilibrium national income will rise.
C) The AE function will rotate downward (become flatter) and national income will fall.
D) The AE function will shift up parallel to itself and equilibrium national income will rise.
E) There will be no change in the AE function or in equilibrium national income.
C
228
Consider the following news headline: "Government follows through on election promise— cuts income-tax rate by 5 percentage points." Assuming that aggregate output is demand- determined, what will be the effect of this action, all other things equal, on the AE function and on equilibrium national income?
A) The AE function will shift down parallel to itself and equilibrium national income will fall.
B) The AE function will rotate upward (become steeper) and equilibrium national income will rise.
C) The AE function will rotate downward (become flatter) and national income will fall.
D) The AE function will shift up parallel to itself and equilibrium national income will rise.
E) There will be no change in the AE function or in equilibrium national income.
B
229
Consider the following news headline: "China signs deal to buy more Canadian wheat." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income?
A) The AE function will shift down parallel to itself and equilibrium national income will fall.
B) The AE function will rotate upward (become steeper) and equilibrium national income will rise.
C) The AE function will rotate downward (become flatter) and national income will fall.
D) The AE function will shift up parallel to itself and equilibrium national income will rise.
E) There will be no change in the AE function or in equilibrium national income.
D
230
Consider a simple macro model with demand-determined output. Suppose the level of
exports decreases unexpectedly by $6 billion. If the government wants to restore the initial equilibrium level of output it could, all other things equal, ________ by ________.
A) increase its purchases; more than $6 billion
B) increase its net tax revenues; $6 billion
C) increase its net tax revenues; less than $6 billion
D) increase its purchases; $6 billion
E) decrease its purchases; $6 billion
D
231
```
Consider a model with demand-determined output and a constant price level. A decrease in the net tax rate causes ________ in autonomous spending and a ________ in the simple multiplier.
A) a rise; rise
B) a rise; fall
C) no change; rise
D) no change; fall
E) a fall; fall
```
C
232
In a simple macro model with government and demand-determined output, to raise equilibrium national income by $100 billion, G must be
A) raised by $100 billion.
B) raised by $100 billion times the simple multiplier.
C) raised by $100 billion divided by the simple multiplier.
D) lowered by $100 billion times the simple multiplier.
E) lowered by $100 billion divided by the simple multiplier.
C
233
Consider a simple macro model with government and demand-determined output. If the government wants to reduce equilibrium national income by $20 billion, G must be
A) raised by $20 billion times the simple multiplier.
B) raised by $20 billion divided by the simple multiplier.
C) lowered by $20 billion times the simple multiplier.
D) lowered by $20 billion divided by the simple multiplier.
E) lowered by $20 billion.
D
234
```
Consider a macro model with a constant price level and demand-determined output. A rise in the net tax rate ________ the simple multiplier and ________ equilibrium national income. A) lowers; has no effect on
B) lowers; lowers
C) lowers; raises
D) raises; raises
E) raises; has no effect on
```
B
235
```
Consider a simple macro model with government and foreign trade and where the price level is taken as given. The simple multiplier is equal to
A) 1/(1-MPC).
B) 1/MPC.
C) 1/(1- MPS - t).
D) 1/(1 - (MPC(1 - t)- m )).
E) 1/(1- (MPS(1 - t)- m )).
```
D
236
Consider the simplest macro with demand-determined output. If the marginal propensity to
consume out of disposable income (MPC) is equal to the marginal propensity to spend out of national income (z), then
A) the marginal propensity to import (m) is larger than the tax rate (t).
B) the marginal propensity to import (m) is smaller than the tax rate (t).
C) the simple multiplier is smaller in a closed economy with no government.
D) the simple multiplier is larger in a closed economy with no government.
E) there is no effect on the simple multiplier from imports or tax rates.
E
237
If the price level is taken as given in a simple macro model with demand-determined output, it is implicitly being assumed that
A) net exports are positive.
B) net exports are negative.
C) the marginal propensity to consume out of disposable income is equal to the marginal propensity to spend out of national income.
D) all resources in the economy are fully employed.
E) producers can provide whatever output is demanded of them without requiring higher prices to offset any higher costs.
E
238
Consider a macro model in which output is assumed to be demand-determined. One situation which may justify this assumption is when
A) net exports are positive.
B) net exports are negative.
C) the marginal propensity to consume out of disposable income is equal to the marginal propensity to spend out of national income.
D) all resources in the economy are fully employed.
E) the economy is operating with some unemployed resources.
E
239
```
We would expect real national income to be "demand determined" when 1) there is large-scale unemployment of resources in the economy;
2) firms are price setters;
3) firms have excess capacity.
A) 1, 2, and 3
B) 1 and 2
C) 2 and 3
D) 1 only
E) 3 only
```
A
240
The simple macro model that is considered in Chapters 21 and 22 of the textbook is characterized by
A) a given (constant) price level, and equilibrium national income determined by demand and supply.
B) an endogenous price level, and national income that is solely demand determined.
C) a given (constant) price level, and national income that is solely demand determined.
D) an endogenous price level, and equilibrium national income determined by demand and supply.
E) an open economy with an endogenous exchange rate.
C
241
In the simple macro model that is considered in Chapters 21 and 22 of the textbook, A) the economy is always in equilibrium.
B) there is no government or foreign trade.
C) the price level is determined within the model.
D) there are no supply-side influences on national income.
E) the simple multiplier is always equal to 1.
D
242
Other things being equal, a rise in the domestic price level
A) causes a decrease in real saving.
B) lowers the real value of all assets denominated in money units. C) makes domestic goods more attractive to foreigners.
D) makes foreign goods less attractive to domestic residents.
E) raises the real burden of repaying a fixed money value debt.
B
243
Other things being equal, a fall in the domestic price level leads to a rise in private-sector wealth and thus
A) an increase in the average propensity to save.
B) an increase in autonomous desired consumption.
C) a downward shift in the AE curve.
D) a downward shift in net exports.
E) domestic goods appearing less attractive to foreigners.
B
244
Other things being equal, when the domestic price level falls exogenously, A) Canadian goods become more expensive relative to foreign goods.
B) the net export function shifts upward.
C) the aggregate expenditure function shifts downward.
D) imports of foreign goods rise.
E) the net export function shifts downward.
B
245
Other things being equal, when the domestic price level rises exogenously, A) Canadian goods become more expensive relative to foreign goods.
B) the net export function shifts upward.
C) the aggregate expenditure function shifts upward.
D) imports of foreign goods fall.
E) the desired investment function shifts upward.
A
246
Consider a simple macro model with a given price level and demand-determined output. An exogenous change in the domestic price level changes equilibrium real GDP
A) in the same direction.
B) in the opposite direction.
C) by the same amount in the same direction.
D) by the same amount in the opposite direction.
E) by a lesser amount in either direction.
B
247
Consider a simple macro model with demand-determined output. An exogenous increase in the domestic price level will
A) shift both the net export function and the AE curve upward.
B) shift the net export function upward and the AE curve downward.
C) shift both the net export function and the AE curve downward.
D) shift the net export function downward and the AE curve upward.
E) pivot the net export function and the AE curve upward.
C
248
Suppose there is an exogenous increase in the domestic price level. Which of the individuals listed below would experience an increase in wealth?
A) a person with a 25-year home mortgage
B) a person with cash under the mattress
C) a person with deposits in a bank savings account
D) a person with a government bond that promises to pay the holder $1000, 5 years hence
E) a person with a corporate bond that promises to repay the face value of the bond in the future
A
249
Suppose there is an exogenous increase in the domestic price level. Which of the individuals listed below would experience an increase in wealth?
A) a person with a 25-year home mortgage
B) a person with cash under the mattress
C) a person with deposits in a bank savings account
D) a person with a government bond that promises to pay the holder $1000, 5 years hence
E) a person with a corporate bond that promises to repay the face value of the bond in the future
A
250
```
Other things being equal, a rise in the price level will imply ________ in wealth for the bondholder and ________ in the wealth of the issuer of the bond.
A) a decline; an increase
B) a decline; a decline
C) a decline; no change
D) an increase; a decline
E) an increase; an increase
```
A
251
Other things being equal, an exogenous increase in the price level causes the aggregate wealth of holders and issuers of private-sector bonds to
A) decrease.
B) increase.
C) not change since the changes in the wealth of bondholders and bond issuers offset each other.
D) either increase or decrease depending on other factors.
E) rise in nominal terms, but fall in real terms.
C
252
Which of the following events would cause the AE function to shift upwards in a parallel way?
A) an increase in the MPC
B) a decrease in the net tax rate
C) a decrease in the business confidence of firms D) a decrease in foreign income
E) a decrease in the aggregate price level
E
253
Other things being equal, as the price level rises exogenously, the aggregate expenditure (AE) function shifts
A) down and the economy will move upward to the left along the AD curve.
B) down and the economy will move downward to the right along the AD curve.
C) upward and the economy moves upward to the left along the AD curve.
D) upward and the economy moves downward to the right along the AD curve.
E) to the right and the AD curve will also shift to the right.
A
254
Other things being equal, as the price level falls exogenously, the aggregate expenditure (AE) function shifts
A) down and the economy will move upward along the AD curve.
B) down and the economy will move downward along the AD curve.
C) upward and the economy moves upward along the AD curve.
D) upward and the economy moves downward along the AD curve.
E) to the left, as does the AD curve.
D
255
The AD curve relates the price level to
A) desired aggregate expenditure.
B) desired consumption.
C) equilibrium real GDP if output is demand determined.
D) equilibrium nominal GDP if output is demand determined.
E) equilibrium savings and wealth.
C
256
All points on an economy's AD curve
A) correspond to a particular point on industry demand curves for a particular product.
B) relate a particular price level to the total demand for output at that price level.
C) show only changes in relative prices and quantities.
D) show the direct relationship between the price level and net exports.
E) show the direct relationship between the price level and the demand for consumer goods.
B
257
In a macro model with a constant price level, an increase in autonomous desired consumption will cause the AE curve to shift
A) downward and the AD curve to shift to the left.
B) downward and the AD curve to shift to the right.
C) upward and the AD curve to shift to the left.
D) upward and the AD curve to shift to the right.
E) upward and a movement to the right along the AD curve.
D
258
In a macro model with a constant price level, an increase in government purchases will cause the AE curve to shift
A) downward and the AD curve to shift to the right.
B) downward and the AD curve to shift to the left.
C) downward and a movement to the right along the AD curve.
D) upward and the AD curve to shift to the left.
E) upward and the AD curve to shift to the right.
E
259
On a graph that shows the derivation of the AD curve, an exogenous change in the price level causes
A) a shift in the AE curve and a movement along the AD curve.
B) a shift in both the AE and AD curves.
C) a movement along the AE curve and a shift in the AD curve.
D) a movement along the AE curve but not along the AD curve.
E) a movement along both the AE and AD curves.
A
260
Which of the following would likely cause an upward parallel shift in the AE curve and a rightward shift in the AD curve?
A) an increase in the business confidence of firms
B) a reduction in government purchases
C) an increase in the MPC
D) a decrease in the price level
E) an increase in the price level
A
261
Which of the following would likely cause a downward shift in the AE curve and a movement upward along the AD curve?
A) a decrease in the business confidence of firms
B) a reduction in government purchases
C) a decrease in the MPC
D) a decrease in the price level
E) an increase in the price level
E
262
Which of the following would likely cause a downward parallel shift in the AE curve and a leftward shift in the AD curve?
A) an increase in the business confidence of firms
B) a reduction in government purchases
C) an decrease in the MPC
D) a decrease in the price level
E) an increase in the price level
B
263
Consider a simple macro model with a given price level and demand-determined output. An exogenous change in the price level causes a
A) shift in both the AE and AD curves.
B) movement along the AE curve and a shift in the AD curve.
C) movement along both the AE and AD curves.
D) shift in the AE curve and a movement along the AD curve.
E) movement along AE but does not affect the AD curve.
D
264
Consider the relationship between the AE curve and the AD curve. A rise in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income
A) shifts the AD curve to the left.
B) shifts the AD curve to the right.
C) causes a movement along the AD curve.
D) causes a movement along the AE curve.
E) causes a shift of the AE curve but no movement of the AD curve.
B
265
Consider the relationship between the AE curve and the AD curve. A fall in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income
A) shifts the AD curve to the left.
B) shifts the AD curve to the right.
C) causes a movement along the AD curve.
D) causes a movement along the AE curve.
E) causes a shift of the AE curve but no movement of the AD curve.
A
266
```
A leftward shift of the aggregate demand (AD) curve could result from a fall in A) autonomous government purchases.
B) induced imports.
C) the net tax rate.
D) autonomous desired saving.
E) the price level.
```
A
267
A leftward shift in the aggregate demand (AD) curve could result from a rise in A) autonomous exports.
B) autonomous government purchases.
C) government transfer payments to households.
D) desired investment.
E) autonomous desired savings.
E
268
A leftward shift of the aggregate demand (AD) curve could result from a rise in A) desired exports.
B) government purchases.
C) government transfer payments to households.
D) the net tax rate.
E) desired investment.
D
269
```
A rightward shift in the aggregate demand (AD) curve could result from a rise in A) induced imports.
B) desired investment.
C) the net tax rate.
D) desired saving.
E) the price level.
```
B
270
Consider the basic AD/AS macro model. The simple multiplier is reflected by the
A) horizontal distance between initial macroeconomic equilibrium and the new intersection of AD and AS in response to a change in autonomous expenditure.
B) downward movement along the AD curve in response to a change in autonomous expenditure.
C) size of the rightward shift of the AD curve in response to a change in autonomous expenditure.
D) upward movement along the AD curve in response to a change in autonomous expenditure.
E) size of the leftward shift of the AD curve in response to a rise in autonomous expenditure.
C
271
Consider the basic AD/AS model in the short run. When there is a change in autonomous desired expenditure, the simple multiplier is equal to the
A) product of the horizontal shift of the AD curve times the change in autonomous expenditure. B) product of the vertical movement along the AD curve times the change in autonomous expenditure.
C) ratio of the horizontal shift of the AD curve to the change in autonomous expenditure.
D) ratio of the vertical movement along the AD curve to the change in autonomous expenditure.
E) ratio of the vertical shift of the AD curve to the change in autonomous expenditure.
C
272
One reason why the aggregate demand (AD) curve slopes downward is that
A) aggregate expenditure increases as the price level rises.
B) increases in the price level cause consumers to substitute foreign goods for domestic goods. C) increased production results in lower production costs.
D) when the price level falls firms must be more competitive when output increases.
E) when the price level falls consumers increase their saving rate.
B
273
One reason why the aggregate demand (AD) curve slopes downward is that
A) aggregate expenditure increases as the price level rises.
B) decreases in the price level cause increases in private-sector wealth which lead to increases in desired consumption.
C) increased production results in lower production costs.
D) when the price level falls firms must be more competitive when output increases.
E) when the price level falls consumers increase their saving rate.
B
274
The AD curve shows the relationship between
A) the price level and the equilibrium level of demand-determined national income.
B) AS and real national income.
C) real national income and AE.
D) AS and AE.
E) the price level and desired consumption.
A
275
Consider the relationship between the AE curve and the AD curve. A rise in the amount of desired investment expenditure at each level of national income
A) shifts the AD curve to the left.
B) shifts the AD curve to the right.
C) causes a movement along the AD curve.
D) causes a movement along the AE curve.
E) causes a shift of the AE curve but no movement of the AD curve.
B
276
Consider the relationship between the AE curve and the AD curve. A decline in the amount of desired net exports at each level of national income
A) shifts the AD curve to the right.
B) shifts the AD curve to the left.
C) causes a movement up along the AD curve.
D) causes a movement down along the AD curve.
E) causes an upward shift of the AE curve but no movement of the AD curve.
B
277
Consider the relationship between the AE curve and the AD curve. A decline in the amount of desired net exports at each level of national income
A) shifts the AD curve to the right.
B) shifts the AD curve to the left.
C) causes a movement up along the AD curve.
D) causes a movement down along the AD curve.
E) causes an upward shift of the AE curve but no movement of the AD curve.
D
278
```
Other things being equal, a ________ marginal propensity to spend will lead to a ________
AD curve.
A) lower; flatter
B) higher; flatter
C) higher; steeper
D) lower; rightward shift of the
E) lower; leftward shift of the
```
B
279
```
Other things being equal, a closed economy will have a ________ marginal propensity to spend and thus a ________ AD curve compared to an open economy with foreign trade.
A) lower; flatter
B) higher; flatter
C) higher; steeper
D) lower; rightward shift of the
E) lower; leftward shift of the
```
B
280
Consider the simple multiplier when the price level is constant. We can say that national income is ________ and that the simple multiplier measures the horizontal shift in ________ in response to a change in autonomous desired expenditure.
A) demand determined; the AS curve
B) unit-cost determined; the AD curve C) constant; the AD curve
D) demand determined; the AD curve E) constant; the AE curve
D
281
Aggregate supply refers to the
A) decisions of firms to decrease inputs in order to produce outputs. B) effects of increases in input prices on output.
C) economy's potential output at each possible labour force.
D) supply of labour inputs in the economy.
E) total output firms wish to produce at each price level.
E
282
The economy's aggregate supply (AS) curve shows the relationship between the A) equilibrium real GDP and marginal cost.
B) equilibrium real GDP and desired consumption.
C) price level and the marginal propensity to consume (MPC).
D) price level and the total output that firms wish to produce and sell, with technology and input prices held constant.
E) price level and the total output that firms wish to produce and sell, as technology and input prices vary.
D
283
The economy's aggregate supply (AS) curve shows the relationship between the price level and the total
A) investment that firms wish to make, with input prices given.
B) investment that firms wish to make, as input prices vary.
C) output that firms wish to produce and sell, with input prices given.
D) output that firms wish to produce and sell, as input prices vary.
E) wealth accumulated by households, with national income given.
C
284
The aggregate supply (AS) curve is drawn with which variables on the axes of the graph? A) the price level on the vertical axis and MPC on the horizontal axis
B) national income on the vertical axis and total desired consumption on the horizontal axis C) the price level on the vertical axis and real national income on the horizontal axis
D) national income on the vertical axis and marginal cost on the horizontal axis
E) the price level on the vertical axis and real disposable income on the horizontal axis
C
285
The aggregate supply curve relates the price level to the quantity of output that firms would like to produce and sell, given the assumption that
A) technology and the prices of all factors of production remain constant.
B) unit costs remain constant.
C) all firms are price takers.
D) all firms are price setters.
E) technology and the prices of all factors of production do not remain constant.
A
286
RED In the short run, the aggregate supply curve has a positive slope because, as the price level
rises, producers can
A) accumulate inventories.
B) be compensated for the extra costs incurred to produce more output.
C) experience rising factor prices.
D) produce less in response to falling profits.
E) increase output at unchanged unit costs.
B
287
In building a macro model with an AS curve, it is assumed that producers will A) increase prices without changing their output.
B) decrease their prices without changing output.
C) decrease their prices when they expand output.
D) produce as much as possible at the existing price level.
E) produce more output only if prices rise.
E
288
The economy's aggregate supply (AS) curve is assumed to slope upward because A) inputs become more expensive at higher levels of output.
B) inputs become less expensive at higher levels of output.
C) firms' unit costs rise as output increases.
D) firms' unit costs fall as output increases.
E) aggregate demand increases at higher levels of national income.
C
289
The economy's aggregate supply curve is drawn under two main assumptions. They are A) firms' unit costs are constant; prices of all factors of production are constant.
B) firms' unit costs are constant; the state of technology is constant.
C) firms will produce more output only if prices rise; technology improves only if prices rise.
D) the prices of all factors of production are constant; the state of technology is constant.
E) the prices of all factors of production are constant; productivity improves as the price level rises
D
290
A decrease in aggregate supply in the short run is
A) shown by a shift to the left of the AS curve.
B) shown by a shift to the right of the AS curve.
C) interpreted to mean that more national output will be supplied at any given price level.
D) caused by a decrease in the price level.
E) caused by an increase in the price level.
A
291
A decrease in aggregate supply in the short run is
A) reflected in a movement to the left along the AS curve.
B) reflected in a shift to the right in the AS curve.
C) interpreted to mean that less total output will be supplied at any given price level.
D) caused by a decrease in the price level.
E) caused by an increase in the price level.
C
292
Consider the basic AD/AS model. If there is a decrease in the cost of non-labour inputs to production, the result will be to
A) shift the AD curve to the left.
B) shift the AD curve to the right.
C) shift the AS curve to the left.
D) shift the AS curve to the right.
E) cause a movement to the left along the AS curve.
D
293
Consider the basic AD/AS model. If major labour unions succeed in increasing wages across the economy, the AS curve will shift
A) downward (to the right), reducing the price level.
B) downward (to the right) and then return immediately to its original position.
C) upward (to the left) and then return immediately to its original position.
D) upward (to the left), increasing the price level.
E) None of the above; there will no effect on the AS curve.
D
294
A movement along the economy's AS curve could be caused by a change in A) labour productivity.
B) the cost of capital.
C) the price level, caused in turn by an AD shock.
D) technology.
E) the wage rate.
C
295
```
The economy's AS curve will shift upward in the short run if there is A) an improvement in technology.
B) a decrease in the cost of capital.
C) an increase in the price level.
D) a decrease in nominal wages.
E) an increase in nominal wages.
```
E
296
```
The economy's AS curve will shift upward in the short run if there is A) a deterioration in technology.
B) a decrease in the cost of capital.
C) a decrease in nominal wages.
D) a decrease in the price level.
E) an improvement in technology.
```
A
297
Other things being equal, the AS curve will shift downward if there is A) a decrease in labour productivity.
B) a decrease in the cost of capital inputs.
C) a decrease in the price level.
D) an increase in the price level.
E) an increase in nominal wages.
B
298
A rightward shift in the economy's AS curve implies that
A) at any given price level, a lower level of output will be supplied. B) at any given price level, a higher level of output will be supplied. C) there is a decrease in aggregate supply.
D) there is a demand shock.
E) the same output will be produced, but only at a higher price level.
B
299
A leftward shift in the economy's AS curve implies that
A) at any given price level, a lower level of output will be supplied.
B) at any given price level, a higher level of output will be supplied.
C) there is an increase in aggregate supply.
D) there is a demand shock.
E) the same output will be produced in equilibrium, but at a lower price level.
A
300
The economy's AS curve is often assumed to be relatively flat at low levels of real GDP. The underlying reasoning is that
A) consumer demand for most goods tends to be non-responsive to price when output is low.
B) consumer demand for most goods tends to be very responsive to price when output is low.
C) at low levels of output, firms are faced with unused capacity and thus can increase output without significantly increasing their costs.
D) the price level is constant.
E) profits are normally high in this section of the AS curve, so firms are willing to expand output.
C
301
Consider the economy's aggregate supply curve. Other things being equal, unit costs will tend to increase if
A) there is a rise in the price of oil.
B) the government reduces payroll taxes.
C) wage increases exceed productivity increases. D) wages rise.
E) wage and price controls are in effect.
C
302
Consider the economy's aggregate supply curve. Other things being equal, unit costs will tend to fall if
A) there is a fall in the price of oil.
B) the government increases payroll taxes.
C) wage increases are less than productivity increases. D) wages fall.
E) wage and price controls are in effect.
C
303
```
Consider the basic AD/AS model. When wage rates rise faster than the increase in labour productivity, the
A) AD curve shifts left.
B) AS curve shifts upward.
C) output gap falls.
D) output gap increases.
E) AS curve shifts downward.
```
B
304
Suppose there is a drop in the price of an important factor input. What will be the effect on the aggregate supply curve?
A) There will be movement to the left, along the AS curve.
B) The AS curve will shift to the left.
C) There will be movement to the right, along the AS curve.
D) The AS curve will shift to the right.
E) There will be no change in the AS curve.
D
305
Consider the basic AD/AS model. Suppose that a rising percentage of high-school graduates are illiterate, resulting in a decrease in average labour productivity. This change will
A) shift the AD curve to the left.
B) shift the AD curve to the right.
C) shift the AS curve to the left.
D) shift the AS curve to the right.
E) cause a movement to the right along the AS curve.
C
306
Consider the basic AD/AS model. Suppose that high-school graduates have better computing skills than did graduates in the past, resulting in an increase in average labour productivity. This change will
A) shift the AS curve to the left.
B) shift the AS curve to the right.
C) shift the AD curve to the left.
D) shift the AD curve to the right.
E) cause a movement along the AS curve to the right.
B
307
Consider the basic AD/AS model. If their unit costs rise as output increases, price-taking firms will be prepared to produce ________ only if ________.
A) more; prices decrease
B) more; the economy is in equilibrium
C) their current output; prices increase D) less; prices increase
E) more; prices increase
E
308
```
The aggregate supply curve will shift as a result of a change in 1) the wage rate;
2) the price level;
3) technology.
A) 1 only
B) 2 only
C) 3 only
D) 1 and 3
E) 2 and 3
```
D
309
```
The aggregate supply curve tends to be relatively steep when GDP is above potential output because firms are operating above ________ and ________ are rising rapidly.
A) equilibrium output; unit costs
B) profit-maximizing output; total costs
C) capacity; unit costs
D) equilibrium output; total costs
E) equilibrium output; average costs
```
C
310
The aggregate supply curve is usually assumed to get progressively steeper at relatively higher levels of output because
A) of increasing factor prices.
B) of increasing productivity of the factors of production.
C) of diminishing marginal productivity of the factors of production.
D) of rising competition among price setters.
E) of excess capacity at higher levels of output.
C
311
```
Consider the basic AD/AS model. If firms' unit costs remained constant as firms increased their output levels, this would lead to a
A) vertical AD curve.
B) horizontal AD curve.
C) vertical AS curve.
D) horizontal AS curve.
E) horizontal AE curve.
```
D
312
The concept of "demand-determined output" requires ________ to remain constant as output increases.
A) technology of production
B) government purchases
C) firms' unit costs
D) labour productivity
E) the ratio of price setters to price takers
C
313
Macroeconomic equilibrium is described as the combination of
A) potential output and price level that is on both the AD curve and AS curve. B) real GDP and price level that is on both the AD curve and 45-degree line.
C) real GDP and price level that is on both the AD curve and AS curve.
D) all individual demand curves and all individual supply curves.
E) all individual demand curves and potential GDP.
C
314
RED Macroeconomic equilibrium is described as the combination of
A) potential output and price level that is on both the AD curve and AS curve. B) real GDP and price level that is on both the AD curve and 45-degree line. C) real GDP and price level that is on both the AD curve and AS curve.
D) all individual demand curves and all individual supply curves.
E) all individual demand curves and potential GDP.
B
315
Consider the nature of macroeconomic equilibrium. If, at a particular price level, the total output demanded is greater than that supplied by producers, then
A) the price level will decline toward its equilibrium value.
B) the price level will rise toward its equilibrium value.
C) the aggregate demand curve will shift to the left, re-establishing an equilibrium.
D) the aggregate supply curve will shift to the right, re-establishing an equilibrium.
E) the aggregate supply curve will shift to the left, re-establishing equilibrium.
B
316
If the AS curve is vertical and there is a decrease in aggregate demand, the result is A) a decrease in the price level with no change in real GDP.
B) an equal decrease in national income.
C) an increase in the price level.
D) an increase in national income.
E) no change in either price level or real GDP.
A
317
Consider the AD/AS model. An increase in government purchases will have no impact on equilibrium real GDP if
A) the AS curve slopes upward.
B) the AS curve is vertical.
C) the AS curve is horizontal.
D) the marginal propensity to spend is very small.
E) the simple multiplier is very small.
B
318
Consider the basic AD/AS model. Real GDP is demand determined along the A) upward-sloping portion of the AS curve.
B) downward-sloping portion of the AS curve.
C) vertical portion of the AS curve.
D) horizontal portion of the AS curve.
E) None of the above - real GDP cannot be demand determined.
D
319
Over the horizontal range of the economy's AS curve (assuming such a range exists), a rightward shift of the AD curve will result in
A) an increase in prices and no change in real GDP.
B) an increase in real GDP and no change in prices.
C) an increase in both real GDP and prices.
D) a decrease in both real GDP and prices.
E) a decrease in real GDP but no change in prices.
B
320
If the economy's AS curve is upward sloping, a negative shock to aggregate demand will result in
A) an increase in prices and no change in real GDP.
B) a decrease in prices but no change in real GDP.
C) an increase in real GDP and no change in prices. D) an increase in both real GDP and prices.
E) a decrease in both real GDP and prices.
E
321
Which of the following will cause a negative aggregate demand shock? A) an increase in the price of raw materials
B) a decrease in the domestic price level
C) an increase in the domestic price level
D) an increase in government expenditures
E) an increase in tax rates
E
322
Aggregate demand shocks have a large effect on real GDP and a small effect on the price level
A) the steeper the AS curve.
B) on the downward-sloping portion of the AS curve.
C) the flatter the AS curve.
D) when the AS curve is vertical.
E) if the AD curve is steep.
C
323
If the economy's AS curve is upward sloping, a positive aggregate demand shock will result in
A) an increase in prices but not output.
B) an increase in output but not prices.
C) an increase in both output and prices.
D) a decrease in both output and prices.
E) a decrease in output and an increase in prices.
C
324
Consider the basic AD/AS model with an upward-sloping AS curve. A positive aggregate demand shock will cause
A) a decrease in the price level.
B) the equilibrium point to move rightward along the AS curve.
C) a movement along the AD curve to the right.
D) a shift to the right in the AS curve.
E) the unemployment rate to remain constant.
B
325
If the economy's AS curve is very steep and there is a negative aggregate demand shock, the result will be
A) an increase in the price level and a decrease in real national income.
B) an increase in both the price level and real national income.
C) a decrease in the price level with almost no change in real national income.
D) a decrease in the price level and an increase in real national income.
E) no change in either price level or output.
C
326
Consider the basic AD/AS model. Suppose firms are currently producing beyond their normal capacity. A change in AD leads to a relatively
A) large change in price level and a large change in real GDP.
B) large change in price level and a small change in real GDP.
C) small change in price level and a large change in real GDP.
D) small change in price level and a small change in real GDP.
E) no change in both price and output.
B
327
Suppose firms are currently producing output at a level beyond their normal capacity. In this situation, the AS curve will be relatively ________ and a positive AD shock will result in ________.
A) steep; an increase in the price level with a small increase in real GDP
B) flat; an equal increase in the price level and in real GDP
C) flat; a very small increase in prices but a large increase in real GDP
D) flat; a very small decrease in the price level and a decrease in real GDP
E) steep; a decrease in the price level and a very small decrease in real GDP
A
328
In the basic AD/AS model, the effect of an aggregate demand shock is divided between a change in output and a change in the price level. How the effect is divided depends on the
A) amount of inflation in the economy.
B) position of the AE curve.
C) size of the simple multiplier. D) slope of the AD curve.
E) slope of the AS curve.
E
329
Which of the following would cause a positive aggregate demand shock, but leave the aggregate supply curve unaffected?
A) A free trade agreement between Canada and the United States that leads Canadian businesses to increase investment expenditures.
B) A severe drought lasting for six months that destroys agricultural and forestry production.
C) A medical report confirming that improved health for Canadian workers caused fewer lost days of production.
D) An improvement in the computer literacy of workers.
E) A substantial increase in world oil prices
A
330
RED If the economy is in macroeconomic equilibrium with a vertical AS curve, and then aggregate demand increases, we expect the AE function to shift to a
A) higher level and stay there.
B) higher level, but then shift part of the way down to its original position as the price level rises. C) higher level but then return to its original position as the price level rises.
D) lower level and stay there.
E) lower level, but then return to its original position as the price level rises.
C
331
If the economy is in macroeconomic equilibrium with a vertical AS curve, and then aggregate demand decreases, we expect the AE function to shift to a
A) higher level and stay there.
B) higher level, but then shift part of the way down to its original position as the price level falls. C) higher level but then return to its original position as the price level falls.
D) lower level and stay there.
E) lower level, but then return to its original position as the price level falls.
E
332
Which of the following represents a positive aggregate supply shock? A) an outbreak of war among oil-exporting countries
B) a general labour strike across the country
C) bad weather which cripples telecommunications for one month
D) improved computer literacy for the typical worker
E) an increase in exports
D
333
Which of the following will cause a positive aggregate supply shock? A) an increase in the price of raw materials
B) a decrease in the price of foreign output
C) an increase in the price of foreign output
D) a decrease in the price of oil
E) a decrease in productivity
D
334
Aggregate supply shocks cause the price level and real GDP to change in A) the same direction with price changing by more than output.
B) the same direction and by the same amount.
C) opposite directions with price changing by less than output.
D) opposite directions but not necessarily by the same amount.
E) opposite directions but by the same amount.
D
335
Consider the basic AD/AS macro model. A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level
A) and real GDP are higher than in the initial equilibrium.
B) and real GDP are lower than in the initial equilibrium.
C) is lower and real GDP higher than in the initial equilibrium.
D) is higher and real GDP remained the same as in the initial equilibrium.
E) is higher and real GDP lower than in the initial equilibrium.
E
336
Consider the basic AD/AS model. A rise in an input price like the wage rate would be expected to create a new macroeconomic equilibrium, which in comparison to the original equilibrium, has a price level that is
A) higher and a real GDP that is higher.
B) higher and a real GDP that is lower.
C) higher and a real GDP that is the same.
D) lower and a real GDP that is higher.
E) lower and a real GDP that is lower.
B
337
Consider the AD/AS macro model. Suppose there is an increase in aggregate demand and, simultaneously, a decrease in aggregate supply. The result will be a
A) rise in real GDP but price level changes will be indeterminate.
B) rise in real GDP and a rise in the price level.
C) rise in real GDP and a fall in the price level.
D) an indeterminate change in real GDP and a rise in the price level.
E) an indeterminate change in real GDP and a fall in the price level.
D
338
Consider the AD/AS model. Suppose there is a decrease in aggregate demand and, simultaneously, an increase in aggregate supply. The result will be a
A) rise in real GDP but price level changes will be indeterminate.
B) rise in real GDP and a rise in the price level.
C) rise in real GDP and a fall in the price level.
D) an indeterminate change in real GDP and a rise in the price level.
E) an indeterminate change in real GDP and a fall in the price level.
E
339
Consider the following news headline: "World commodity prices rise sharply." Choose the statement below that best describes the likely macroeconomic effects in Canada. (Remember that Canada is both a producer and a consumer of commodities.)
A) there is no change in either the AD or the AS curves
B) the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate
C) the AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP decreases
D) the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP increases
E) the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate
E
340
Consider the following news headline: "Governments plan massive hospital construction programs across the country." Choose the statement below that best describes the likely macroeconomic effects.
A) the AD curve shifts to the left; the price level falls and real GDP falls
B) the AD curve shifts to the right; the price level rises and real GDP rises
C) the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate
D) the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate
E) the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises
B
341
Consider the following news headline: "Information technology costs for Canadian firms continue to drop." Choose the statement below that best describes the likely macroeconomic effect.
A) the AD curve shifts to the right; the price level rises and real GDP rises
B) the AD curve shifts to the left; the price level falls and real GDP falls
C) the AS curve shifts to the left; the price level rises and real GDP falls
D) the AS curve shifts to the right; the price level falls and real GDP rises
E) the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises
342
Consider the following news headline: "Threat of widespread labour unrest leads to generous wage increases in several industries." Choose the statement below that best describes the likely macroeconomic effects.
A) The AS curve shifts to the left; the price level rises and real GDP falls.
B) The AS curve shifts to the right; the price level falls and real GDP rises.
C) The AD curve shifts to the left; the price level falls and real GDP falls.
D) The AD curve shifts to the right; the price level rises and real GDP rises.
E) The AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP falls.
A
343
Consider the following two headlines appearing in the same day: "Federal government announces major new infrastructure investments" and "New technology drives down transport costs." Choose the statement below that best describes the likely macroeconomic effects.
A) The AS curve shifts to the left; the price level rises and real GDP falls.
B) The AS curve shifts to the right; the price level falls and real GDP rises.
C) The AD curve shifts to the left; the price level falls and real GDP falls.
D) The AD curve shifts to the right; the price level rises and real GDP rises.
E) The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises.
E
344
```
Suppose the economy is hit by a shock and we observe that the price level has decreased whereas real GDP has increased. We can conclude that this shock was
A) a positive AD shock.
B) a negative AD shock.
C) a positive AS shock.
D) a negative AS shock.
E) a negative technology shock.
```
C
345
```
If the economy's AS curve is completely horizontal, the multiplier in the AD/AS model is
A) infinitely large.
B) equal to the simple multiplier.
C) smaller than the simple multiplier.
D) is zero.
E) negative.
```
B
346
```
When the economy's AS curve is positively sloped, the multiplier in the AD/AS model is
A) constant.
B) equal to one.
C) equal to the simple multiplier.
D) smaller than the simple multiplier.
E) larger than the simple multiplier.
```
D
347
```
If the economy's AS curve is vertical, the multiplier in the AD/AS model is
A) infinitely large.
B) equal to the simple multiplier.
C) smaller than the simple multiplier.
D) zero.
E) negative.
```
D
348
What is the size of the multiplier if the AS curve is vertical?
0
349
```
When the price level varies, the multiplier is ________ the simple multiplier.
A) larger than
B) smaller than
C) definitionally the same as
D) not comparable to
E) equal to
```
B
350
Defining assumptions of the SR in macro
Factor prices are EXOGENOUS, and technology and factor prices are CONSTANT
351
defining assumptions of the long run in macroeconomics
Factor prices ADJUST to output gaps, and technology and factor supplies are CHANGING
352
```
In macroeconomic analysis, the assumption that potential output (Y*) is changing is a characteristic of
A) the short run.
B) the adjustment process.
C) the national accounts model.
D) the long run.
E) the business cycle model.
```
D
353
Which of the following is a defining assumption of the AD/AS macro model in the short run? A) factor supplies are assumed to be flexible
B) technology used in production is endogenous and variable
C) the level of potential output fluctuates with the price level
D) factor prices are assumed to be exogenous
E) firms cannot operate near their normal capacity
D
354
In the basic AD/AS model, which of the following is a defining assumption of the adjustment process that takes the economy from the short run to the long run?
A) factor supplies are assumed to be varying
B) technology used in production is endogenous
C) the level of potential output fluctuates with the price level
D) factor prices are assumed to respond to output gaps
E) firms cannot operate near their normal capacity
D
355
Which of the following is a defining assumption of the AD/AS macro model in the long run? A) factor supplies are assumed to be fixed
B) technology used in production is constant
C) the level of potential output is constant
D) factor prices are assumed to be fixed
E) changes in real GDP are determined by the changes in potential output
E
356
Which of the following best describes the concept of potential output?
A) The total output that can be produced when all factors of production (land, labour, and capital) are fully employed.
B) The total output that can be produced when the economy is in short-run economic equilibrium.
C) The total output that can be produced when all productive resources (land, labour, and capital) are used at their maximum capacity.
D) The total output that could be produced in the future when technological advances allow for a higher level of output.
E) The total output that could be produced if no productive resource (land, labour, and capital) was ever left idle.
A
357
An inflationary output gap occurs when
A) actual GDP exceeds potential GDP.
B) nominal GDP exceeds real GDP.
C) demand for labour services is very low.
D) equilibrium national income is below potential national income.
E) potential GDP exceeds actual GDP.
A
358
An inflationary output gap implies that
A) the demand for all factor services will be relatively low.
B) the intersection of AD and AS occurs at real GDP below potential output.
C) the economy's resources are being used beyond their normal capacity.
D) there is a pressure for wages to decrease.
E) there is excess supply of most factors of production.
C
359
A recessionary output gap implies that
A) the demand for all factor services will be relatively low.
B) the intersection of AD and AS occurs where real GDP exceeds potential output.
C) the economy's resources are being used at more than their normal capacity.
D) there is upward pressure on wages.
E) there is excess demand for most factors of production.
A
360
An inflationary output gap would generate which of the following conditions in the economy?
A) Firms are making low profits.
B) Workers have a relatively large amount of bargaining power with employers.
C) There is an unusually small demand for labour. D) There is downward pressure on wages.
E) There is much idle capacity.
B
361
An inflationary output gap is characterized by
A) falling prices.
B) constant prices.
C) real output that varies one-for-one with aggregate demand.
D) real GDP exceeding potential output.
E) real GDP falling below potential output.
D
362
A recessionary output gap is characterized by
A) rising prices.
B) constant prices.
C) real output that varies one-for-one with aggregate demand.
D) real GDP exceeding potential output.
E) real GDP falling below potential output.
E
363
```
Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap?
A) falling prices
B) increasing investment
C) declining government purchases
D) rising wages
E) increasing tax rates
```
D
364
Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap?
A) rising prices
B) decreasing investment
C) increasing government purchases D) falling tax rates
E) decreasing wages
E
365
If the short-run macroeconomic equilibrium occurs with real GDP less than Y*, the economy is
A) at its full-employment level of output.
B) experiencing a recessionary gap.
C) experiencing an inflationary gap.
D) threatened with an acceleration of inflation.
E) operating at full capacity.
B
366
If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output, the economy is
A) at its full-employment level of output.
B) experiencing a recessionary output gap.
C) experiencing an inflationary output gap.
D) threatened with a demand shock.
E) operating at full capacity.
C
367
If wages rise faster than increases in labour productivity, then unit labour costs will A) fall and the AS curve will shift left.
B) fall and the AS curve will shift right.
C) rise and the AS curve will shift left.
D) rise and the AS curve will shift right.
E) not change because only total labour costs change.
C
368
A common assumption among macroeconomists is that when real GDP exceeds potential output, factor prices adjust and the
A) AS curve shifts to the left fairly rapidly.
B) AS curve shifts to the left only very slowly.
C) AS curve shifts to the right very rapidly.
D) AD curve shifts to the left rapidly.
E) none of the above— the AS curve remains unchanged.
A
369
A common assumption among macroeconomists is that when real GDP is less than potential output, factor prices adjust and the
A) AS curve shifts to the left fairly rapidly.
B) AS curve shifts to the right only very slowly.
C) AS curve shifts to the right very rapidly.
D) AD curve shifts to the left rapidly.
E) None of the above - the AS curve remains unchanged.
B
370
If the economy is experiencing an inflationary output gap, the adjustment process operates as follows:
A) wages do not adjust, but the AD curve shifts to the right.
B) wages fall, unit costs fall, and the AD curve shifts rightward.
C) wages rise, unit costs rise, and the AS curve shifts leftward.
D) wages rise, unit costs rise, and the AS curve shifts rightward.
E) wages fall, unit costs fall, and the AS curve shifts rightward.
C
371
The Phillips curve describes the relationship between A) aggregate expenditure and aggregate demand.
B) the money supply and interest rates.
C) unemployment and the rate of change of wages.
D) inflation and interest rates.
E) the output gap and potential GDP.
C
372
The Phillips curve provides a theoretical link between
A) the liquidity preference and investment demand schedules.
B) labour markets and foreign-exchange markets.
C) the goods market and productivity.
D) the goods market and the labour market.
E) inflation and the demand for money.
D
373
Which of the following describes the distinction between the Phillips curve and the AS curve?
A) The AS curve has the price level on the vertical axis whereas the Phillips curve has the interest rate on the vertical axis.
B) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of change in the interest rate on the vertical axis.
C) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis.
D) The AS curve has the rate of price inflation on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis.
E) There is no distinction: the two curves are essentially the same thing.
C
374
If the economy in the short run is experiencing a recessionary gap, we are likely to see A) severe and widespread labour shortages.
B) quickly rising output prices.
C) many workers receiving employment-insurance benefits.
D) the number of employment-insurance recipients the lowest ever.
E) consumers optimistic about the future.
C
375
Which of the following statements about output gaps is true?
A) When actual GDP is below potential GDP, there is upward pressure on wages.
B) When actual GDP is below potential GDP, there is upward pressure on output prices. C) When actual GDP is above potential GDP, there is downward pressure on wages.
D) When actual GDP is above potential GDP, there is downward pressure on output prices.
E) When actual GDP is above potential GDP, there is upward pressure on wages.
E
376
Consider the basic AD/AS diagram. The vertical line at Y* shows the relationship between the price level and the amount of output ________ have adjusted to output gaps.
A) demanded by households after all factor prices
B) supplied by firms after all factor prices
C) demanded by households before all factor prices
D) supplied by firms before all factor prices
E) supplied by firms after all output prices
B
377
As the macro economy adjusts from the short run to the long run,
A) wages and other factor prices adjust to close output gaps.
B) potential output is adjusting to close inflationary or recessionary gaps.
C) wages and other factor prices remain constant.
D) aggregate demand shocks cause deviations from potential output.
E) aggregate supply shocks cause deviations from potential output.
A
378
Following any AD or AS shock, economists typically assume that the adjustment process continues until
A) the AD and AS curves intersect each other at the correct price level.
B) real GDP returns to Y*.
C) factor prices have returned to their levels previous to the shock.
D) Y* adjusts to its long-run equilibrium level.
E) the output gap is at a stable level.
B
379
```
Suppose that the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level increases. We can conclude that ________ has increased and there is now a(n) ________ gap.
A) aggregate supply; inflationary
B) aggregate demand; recessionary
C) aggregate supply; recessionary
D) aggregate demand; inflationary
```
D
380
```
Suppose that the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level increases. We can conclude that ________ has increased and there is now a(n) ________ gap.
A) aggregate supply; inflationary
B) aggregate demand; recessionary
C) aggregate supply; recessionary
D) aggregate demand; inflationary
```
D
381
Suppose the following conditions are present in the economy:
- firms are facing lower-than normal sales and have reduced output
-there is an excess supply of labour and firms are starting to reduce their workforces
Which of the following statements describes the adjustment that will happen in the AD/AS macro model?
A) Output is below potential; aggregate demand will fall, causing the AD curve to shift to the left. The price level will fall until equilibrium is restored at .
B) The economy is in equilibrium at , but wages are falling. The AS curve will shift to the right until a new equilibrium is reached at a lower price level.
C) Output is below potential; wages will eventually fall; the AS curve will slowly shift to the right until equilibrium is restored at .
D) Output is above potential; wages will fall, causing the AS curve to shift to the right until equilibrium is restored at .
E) Output is above potential; aggregate demand will fall, causing the AD curve to shift to the left until equilibrium is restored at .
C
382
Consider the adjustment of factor prices to output gaps in the basic AD/AS macro model. The experience of many economies suggests that
A) downward pressure on wages during slumps results in sharply increased labour costs.
B) upward pressures on wages are largely ineffective in booms.
C) downward pressure on wages during slumps is not as intense as upward pressure on wages during booms.
D) unit labour costs fall quickly during booms.
E) slumps and booms are not common; the economy is usually in equilibrium at potential output.
C
383
An important asymmetry in the behaviour of the AS curve is that
A) prices are sticky but wages are not.
B) positive output gaps can persist for a long time without causing increases in wages and prices, whereas negative output gaps lead to immediate reductions in wages and prices.
C) negative output gaps can persist for a while without causing large decreases in wages and prices, whereas positive output gaps lead more quickly to increases in wages and prices.
D) wages are very flexible in the downward direction, but not in the upward direction.
E) wages and prices are equally sticky in both directions.
C
384
The wage-adjustment process is asymmetrical because
A) factor prices fluctuate more frequently than goods prices.
B) goods prices rise more quickly than factor prices.
C) employers delay wage increases in a boom but lay off workers quickly during a slump. D) taxes rise quickly in a boom but do not fall during a slump.
E) wages rise quickly in a boom but fall slowly during a slump.
E
385
An important asymmetry in the behaviour of aggregate supply is the A) changing slope of the aggregate demand curve.
B) difference between actual and potential output.
C) different relative sizes of inflationary versus recessionary gaps.
D) economy's path of potential output as a result of labour force growth.
E) different speeds at which factor prices adjust to positive and negative output gaps.
E
386
An economy may not quickly and automatically eliminate a recessionary output gap because wages
A) never change in response to changes in the demand for labour.
B) have a tendency to be sticky downward.
C) have a tendency to fall too quickly.
D) have a tendency to rise too quickly.
E) are flexible but prices have a tendency to be sticky downward.
B
387
An adjustment "asymmetry" in aggregate supply is
A) the concave shape of the AS curve.
B) the convex shape of the AS curve.
C) the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps).
D) the difference in speed of increases in factor prices versus wage rates. E) the difference in speed of decreases in output levels.
C
388
Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will
A) allow a stable expansion of real income over time.
B) always reverse itself.
C) be negated in the long run, through the economy's adjustment process.
D) result in a price level lower than that preceding the demand shock.
E) set off an endless cycle of price rises and increases in unemployment.
C
389
Consider an AD/AS model in long-run equilibrium. An output gap, caused by a leftward shift of the AD curve, will be eliminated if
A) wages rise quickly.
B) the AS curve shifts upward.
C) wages and other factor prices fall sufficiently. D) real national income decreases.
E) prices rise quickly.
C
390
```
Consider an economy with a relatively steep AS curve. If there is a shift to the right in the AD curve, there will be a ________ in the price level and ________ in national output.
A) small increase; a large increase
B) small increase; a large decrease
C) large increase; a small increase
D) large increase; a small decrease
E) large increase; no change
```
C
391
Consider an economy with a relatively steep AS curve. If the AD curve shifts to the left, then the price level will ________ and national output will ________.
A) increase slightly; significantly increase
B) increase slightly; significantly decrease
C) increase sharply; increase slightly
D) fall sharply; will not change.
E) fall sharply; decrease slightly.
E
392
Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in world demand for Canada's goods. In the short run, ________. In the long run, ________.
A) real GDP and the price level both fall; real GDP is below its original level with a lower price level
B) real GDP and the price level both rise; real GDP is above its original level with a higher price level
C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level
C
393
Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, ________. In the long run, ________.
A) real GDP and the price level both fall; real GDP is at its original level with a lower price level
B) real GDP and the price level both fall; real GDP is above its original level with a higher price level
C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level
A
394
Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output will ________.
A) decrease; decrease; decrease further; decrease further
B) decrease; decrease; decrease further; be restored to potential output
C) increase; decrease; increase further; increase further
D) increase; decrease; increase further; be restored to potential output
E) increase; increase; increase further; be restored to potential output
E
395
```
Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock would have ________ output effect in the short run and ________ output effect in the long run. A) a positive; no
B) a positive; a positive
C) no; a positive
D) no; no
E) not enough information to know
```
A
396
```
Consider the basic AD/AS macro model in long-run equilibrium. A permanent expansionary
AD shock has ________ price-level effect in the short run and ________ price-level effect in the long run.
A) a positive; no
B) a negative; no
C) a positive; an even larger
D) a positive; a smaller
E) a negative; a positive
Red
```
C
397
Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in the Canadian-dollar price of all imported raw materials. In the short run, ________. In the long run, ________.
A) real GDP and the price level both fall; real GDP is below its original level with a lower price level
B) real GDP and the price level both rise; real GDP is above its original level with a higher price level
C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E) real GDP falls and the price level rises; real GDP and the price level return to their original levels
E
398
Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the Canadian price of all imported raw materials. In the short run, ________. In the long run, ________.
A) real GDP and the price level both fall; real GDP is below its original level with a lower price level
B) real GDP and the price level both rise; real GDP is above its original level with a higher price level
C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D) real GDP rises and the price level falls; real GDP and the price level return to their original levels
E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level
D
399
```
Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________.
A) rightward; AS
B) rightward; AD
C) leftward; AS
D) leftward; AD
E) leftward; Y*
```
C
400
```
Consider the AD/AS model and suppose the economy begins at potential output. The effect of a negative AS shock on real GDP will be reversed in the long run with a ________ shift in ________.
A) rightward; AS
B) rightward; AD
C) leftward; AS
D) leftward; AD
E) leftward; Y*
```
A
401
Red
In the basic AD/AS macro model, which of the following events would cause stagflation?
A) a large decrease in wages
B) a large increase in business confidence
C) a large increase in the net tax rate
D) a large increase in the price of raw materials
E) a large increase in labour productivity
D
402
Consider the basic AD/AS macro model in long-run equilibrium. A negative AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________.
A) decrease; decrease; decrease further; will decrease further
B) decrease; decrease; decrease further; will be restored to potential output
C) increase; decrease; decrease; will be restored to potential output
D) increase; decrease; increase further; will be restored to potential output
E) increase; increase; increase further; will be restored to potential output
C
403
Consider the basic AD/AS macro model, initially in a long-run equilibrium. A positive AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________.
A) decrease; decrease; decrease further; will decrease further
B) decrease; increase; decrease further; will be restored to potential output
C) decrease; increase; return to its initial level; will be restored to potential output
D) increase; increase; decrease; will be restored to potential output
E) increase; increase; return to its initial level; will be restored to potential output
C
404
The curve that is sometimes called the "long-run aggregate supply curve" (vertical Y*) relates the aggregate price level to real GDP
A) in the short run.
B) when wages are in adjustment but prices are unstable.
C) when national income is at less than potential income.
D) when technology is allowed to change.
E) after factor prices have fully adjusted to eliminate output gaps.
E
405
```
What economists sometimes call the "long-run aggregate supply curve" is
A) vertical.
B) horizontal.
C) nonlinear.
D) negatively sloped.
E) positively sloped.
```
A
406
What is sometimes called the "long-run aggregate supply curve" shows the relationship between the price level and aggregate supply over a time period long enough to permit
A) changes in the capital stock.
B) wages and other factor prices to adjust.
C) changes in technology to occur.
D) changes in the size of the resource base to occur.
E) population to increase.
B
407
The "long-run aggregate supply curve," vertical at Y*, shows that
A) potential output will rise as prices rise.
B) potential output will fall as prices rise.
C) potential output is compatible with any price level.
D) potential output is compatible with one particular price level.
E) prices will always rise in the long run.
C
408
Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output gaps, real GDP
A) and the price level are determined by aggregate demand.
B) and the price level are determined by "long-run aggregate supply."
C) is determined by aggregate demand and the price level by potential output.
D) is determined by potential output and the price level by aggregate demand.
E) is determined by AD and the price level is determined by the AS curve.
D
409
Consider the AD/AS model. Since output in the long run is determined by Y*, the only role of the AD curve is to determine the price level. This is true because the
A) Y* is independent of the price level.
B) aggregate demand curve is vertical.
C) aggregate demand curve is horizontal.
D) Y* depends on the price level.
E) AS curve is upward sloping.
A
410
Red
Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction
in the level of potential output, with aggregate demand constant, will A) leave real output unaffected and increase the price level.
B) decrease real output and decrease the price level.
C) decrease real output and leave the price level unchanged.
D) decrease real output and increase the price level.
E) increase real output and decrease the price level.
D
411
Consider the AD/AS model after factor prices have fully adjusted to output gaps. An increase in the level of potential output, with aggregate demand constant, will
A) affect only the price level.
B) decrease real GDP and the price level.
C) affect only the level of real GDP.
D) increase real GDP and lower the price level.
E) decrease real GDP and raise the price level.
D
412
Consider the AD/AS macro model. The study of short-run cyclical fluctuations usually assumes, for simplicity, that there are no changes in
A) the AS curve.
B) potential GDP.
C) either the AS curve or potential GDP.
D) either the AD or AS curves.
E) the intersection of the AD and AS curves.
B
413
In the long run in the AD/AS macro model we can say that
A) both real GDP and the price level are determined by aggregate demand.
B) both real GDP and the price level are determined by Y*.
C) long-run real GDP is determined by Y* and the long-run price level by the AD curve. D) real GDP is determined by aggregate demand and the price level by Y*.
E) long-run real GDP is determined by aggregate demand and the price level is determined solely by the AS curve.
C
414
Suppose the economy begins in a long-run equilibrium with Y = Y*. A permanent increase in aggregate demand will have its short-run effect on real GDP reversed in the long run with a ________ shift of ________.
A) rightward; the aggregate supply curve
B) rightward; the aggregate demand curve
C) leftward; the aggregate supply curve
D) leftward; the aggregate demand curve
E) rightward; Y*
C
415
Consider the AD/AS macro model. The main source of increases in material living standards over the long term is the
A) maintenance of a continuous inflationary gap.
B) continual avoidance of recessionary gaps.
C) continuous outward shift of aggregate demand.
D) continual increase in potential national income.
E) positive slope of the aggregate supply curve.
D
416
In the basic AD/AS macro model, permanent increases in real GDP are possible only if A) potential output is increasing.
B) the correct fiscal policy is implemented.
C) the economy's automatic stabilizers are allowed to operate.
D) the aggregate supply curve is vertical.
E) aggregate demand responds positively to demand shocks.
A
417
Fiscal policy refers to the
A) government's attempts to maintain a vertical AS curve so as to stabilize output.
B) government's use of spending and taxing policies to influence equilibrium real GDP.
C) government's use of trade-related policy tools to influence the net export function, thereby influencing GDP.
D) business sector's influence on investment and GDP.
E) households' attempts to change saving to encourage growth.
B
418
One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to recover from a recessionary gap is that
A) the economy will overshoot potential GDP and a boom will be underway.
B) inflation will not be as stimulated.
C) price level will rise higher than otherwise.
D) the recovery may be more rapid.
E) the recovery will be slower, thereby causing less disruption.
D
419
```
Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts right unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP.
A) too weak; stay below
B) too weak; rise above
C) too strong; stay below
D) too strong; rise above
E) appropriate; equal
```
D
420
```
Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts leftward unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP.
A) too weak; stay below
B) too weak; rise above
C) too strong; stay below
D) too strong; rise above
E) appropriate; equal
```
A
421
Suppose the economy has a high level of unemployment and a low level of aggregate output. Which of the following policies could the government implement to alleviate these conditions?
A) an expansionary fiscal policy that increases tax rates
B) a contractionary fiscal policy that increases government purchases C) automatic fiscal stabilizers
D) a contractionary fiscal policy that increases tax rates
E) an expansionary fiscal policy that increases government purchases
E
422
Red Suppose the economy is experiencing an inflationary gap in the short run. The advantage of
using a contractionary fiscal policy rather than allowing the economy's natural adjustment process to operate is that
A) it will reduce the upward pressure on the price level that would otherwise occur.
B) if private-sector expenditures increase on their own, the policy will stabilize real GDP. C) it will shorten what might otherwise be a long recession.
D) it will reduce the downward pressure on the price level that would otherwise occur. E) it will close the output gap.
A
423
As a global recession began in late 2008, the governments of all major economies searched for policy responses to dampen the effects of the recession. In general, governments were aiming to
A) shift the AD curve to the left by decreasing tax rates.
B) increase potential GDP.
C) shift the AS curve to the right through large increases in government spending.
D) shift the AD curve to the right through large increases in government spending.
E) shift the AS curve to the left by increasing wage rates.
D
424
Consider the global recession that began in late 2008. In terms of the AD/AS model, which of the following statements best describes the macroeconomic effect on Canada's economy?
A) The AD curve shifted to the right due to reduced demand for Canadian exports, which created a recessionary gap.
B) The AD curve shifted to the left due to reduced demand for Canadian exports, which created a recessionary output gap.
C) The AS curve shifted to the right due to increased factor prices, which created a recessionary gap.
D) The AS curve shifted to the left due to increased factor prices, which created a recessionary gap.
E) Potential GDP fell, which reduced actual national income.
B
425
Income taxes in Canada can be considered to be automatic stabilizers because tax
A) revenues increase when income increases, thereby offsetting some of the increase in aggregate demand.
B) revenues decrease when income increases, thereby intensifying the increase in aggregate demand.
C) structures can be changed when the Minister of Finance brings down a budget.
D) revenues are changed through discretionary fiscal policy to keep the budget balanced.
E) revenues are changed through discretionary fiscal policy to create surpluses in recessions.
A
426
An important automatic fiscal stabilizer in Canada is A) the exchange rate.
B) the marginal propensity to consume.
C) the marginal propensity to import.
D) the income-tax system.
E) government purchases of goods and services.
D
427
Automatic fiscal stabilizers are most helpful in A) making discretionary fiscal policy effective.
B) removing persistent output gaps.
C) promoting economic growth.
D) eliminating price fluctuations in the economy.
E) reducing the intensity of business cycles.
E
428
Automatic fiscal stabilization" in the economy refers to
A) the properties of government spending and taxation that cause the simple multiplier to be increased.
B) the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap.
C) the properties of government spending and taxation that cause the simple multiplier to be reduced.
D) the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap.
E) all discretionary fiscal policies.
C
429
```
Net tax revenues that rise with national income act as an automatic stabilizer by ________ the marginal propensity to spend and thereby causing the simple multiplier to ________.
A) increasing; increase
B) increasing; decrease
C) decreasing; equal one
D) decreasing; decrease
E) decreasing; increase
```
D
430
```
Consider the simplest macro model with demand-determined output. Other things being equal, the ________ the value of the simple multiplier, the ________ stable is real GDP in response to shocks to autonomous spending.
A) larger; more
B) larger; less
C) smaller; more
D) smaller; less
E) both B and C are correct
```
E
431
Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since government's net tax revenues ________ during booms and ________ during recessions.
A) magnify; increase; decrease
B) magnify; decrease; increase
C) dampen; increase; decrease
D) dampen; decrease; increase
E) does not affect; are constant; are constant
C
432
Red Suppose the government implements a permanent reduction in the net tax rate in an effort to
increase real GDP. One disadvantage of this policy is that
A) the effect of economic shocks on government revenues becomes more volatile, while the economy becomes more stable.
B) further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer.
C) private investment is crowded out, which may reduce the future growth rate of potential output.
D) the effect of the automatic stabilizer is reduced and the economy will be more unstable.
E) —both C and D are correct.
E
433
```
The "paradox of thrift" refers to the understandable tendency of people who are worried about their economic situation to ________ their saving, but in aggregate this behaviour causes a ________ recession.
A) decrease, more severe
B) decrease; less severe
C) increase; more severe
D) increase; less severe
E) increase; shorter
```
C
434
In the long run, aggregate demand is ________ for determining real GDP, and the paradox of thrift ________.
A) not important; applies
B) not important; does not apply
C) the only influence; applies
D) the most important influence; does not apply E) stable and important; applies
B
435
The paradox of thrift does not exist in the long run because
A) not everyone increases saving in the long run.
B) aggregate supply has an impact on real GDP only in the short run.
C) everyone increases consumption in the long run.
D) changes in aggregate demand have no impact on real GDP in the long run.
E) potential output is determined by changes in the price level.
D
436
In the basic AD/AS macro model, the "paradox of thrift" is only a short-run phenomenon because
A) consumers exhibit cyclical consumption behaviour.
B) in the long run output is determined by potential output.
C) savings are transformed into expenditures in the long run.
D) the marginal propensity to consume is fixed in the long run.
E) consumers base their consumption expenditures only on their lifetime income.
B
437
Many economists think discretionary fiscal policy is of limited effectiveness in stabilizing the economy because
1) the multiplier effects associated with fiscal policy take a long time;
2) government deficits tend to reduce the value of the multiplier;
3) there are long and uncertain lags in implementing fiscal policy. A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 1 and 3
E
438
```
Given current limitations, fiscal policy as a macroeconomic stabilizer is more defensible the ________ the output gap being suffered, an argument supporting ________.
A) larger; fine tuning
B) larger; gross tuning
C) smaller; fine tuning
D) smaller; crowding out
E) larger; crowding out
```
B
439
```
Suppose the economy is experiencing a significant recessionary gap, but it has taken the government six months to determine that it will change fiscal policy. This is an example of
A) an execution lag.
B) fine tuning.
C) gross tuning.
D) a decision lag.
E) automatic fiscal stabilizers.
```
D
440
Which of the following statements about fiscal policy is the best description of "fine tuning"?
A) The government continuously alters its spending and taxing plans to hold real GDP at potential.
B) The government cuts taxes to remove a large and persistent recessionary gap. C) The government increases its spending to reduce an inflationary gap.
D) The government decreases tax rates to decrease an inflationary gap.
E) The government uses automatic stabilizers to reduce any output gaps.
A
441
Which of the following statements about fiscal policy is the best example of "gross tuning"?
A) The government continuously alters its spending and taxing plans to hold real GDP at potential.
B) The government cuts taxes to remove a large and persistent recessionary gap.
C) The government increases its spending to reduce an inflationary gap.
D) The government decreases tax rates to decrease an inflationary gap.
E) The government uses automatic stabilizers to reduce any output gaps.
B
442
```
Suppose the government had made a decision to change fiscal policy, but it then took nine months to implement a tax reduction. This is an example of
A) a decision lag.
B) fine tuning.
C) gross tuning.
D) automatic fiscal stabilizers.
E) an execution lag.
```
E
443
An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________.
A) rises to an unsustainable level; real GDP is reduced
B) is crowded out; corporate tax revenue is reduced
C) increases; aggregate demand increases
D) increases; net exports increases
E) is crowded out; potential output is reduced
E
444
Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long-run effects on potential output?
A) The growth rate of potential output may be reduced due to the crowding out of investment. B) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy.
C) Potential output will drop below its starting point because of the crowding out of investment. D) The growth rate of potential output will rise due to the higher level of aggregate demand.
E) The level of potential output is fixed and will not be affected by fiscal policy.
A
445
In any decision about stimulating the economy with a fiscal expansion (increasing government purchases), the government must weigh the short-run benefits of ________ against the long-run costs of ________.
A) a higher price level; unemployment
B) increased potential output; a higher price level
C) a higher price level; lower real GDP
D) increased real GDP; higher economic growth
E) increased economic activity; lower economic growth
E
446
Suppose that the government announces temporary tax cuts to stimulate consumers' consumption expenditures but the impact of this tax change on consumption is observed to be very small. This outcome might be explained by the fact that
A) this economy is already at its long-run equilibrium.
B) this economy is suffering from the paradox of thrift.
C) the impact of the policy is dampened by the automatic fiscal stabilizers.
D) the government has little credibility.
E) the consumers anticipate that the tax change is only temporary and thus is unlikely to affect their "lifetime" income.
E
447
```
The ________ associated with fiscal policy make(s)________ tuning difficult to implement successfully.
A) execution lag; gross
B) execution lag; fine
C) decision lag; gross
D) decision lag; fine
E) execution and decision lags; fine
```
E
448
The growth rate of potential output might be decreased by an expansionary fiscal policy if
A) the budget deficits are persistent.
B) the simple multiplier is small.
C) the policy crowds out private investment.
D) public investment has high productivity.
E) the composition of output is not altered.
C
449
A reduction in the net tax rate might lead to an increase in the growth rate of potential output if
A) the simple multiplier is large.
B) the tax cuts stimulate private investment.
C) firms are operating at their normal capacity.
D) households are not forward looking.
E) the marginal propensity to consume is large.
B
450
The use of government purchases (G) as a fiscal policy tool can have an effect on long-run growth in the economy. Under what circumstances might an increase in G cause the level of potential output ( ) to increase?
A) If the increase in G crowds out private investment.
B) If the increase in G causes a permanent increase in the marginal propensity to consume, which causes a permanent rightward shift of the AD curve.
C) If the increase in G is spent on public infrastructure that increases the productivity of private- sector production.
D) If the increase in G leads to a permanent increase in the level of autonomous saving in the economy.
E) If the increase in G is offset by an equal decrease in C, I, and NX.
c
