Practice exam 2

Question 1

Aggregate demand is:

Answer 1

total expenditure in the economy

Question 2

An increase in exports from the US to other countries would shift:

Answer 2

aggregate demand to the right

Question 3

A government “stimulus package” would shift:

Answer 3

aggregate demand to the right

Question 4

A government “stimulus package” would:

Answer 4

increase prices and raise Real GDP

Question 5

A ban on international tourism from Ebola would shift:

Answer 5

aggregate demand to the left

Question 6

Natural Real GDP is represented by:

Answer 6

the long run aggregate supply curve

Question 7

A personal income tax cut in the US should shift:

Answer 7

aggregate demand to the right

Question 8

A personal income tax cut in the US should:

Answer 8

increase prices and raise Real GDP

Question 9

A decrease in investment spending in the US would shift:

Answer 9

aggregate demand to the left

Question 10

A decrease in investment spending in the US would:

Answer 10

decrease prices and lower Real GDP

Question 11

In the Classical view of the world, what factor makes savings equal to investment?

Answer 11

interest rates

Question 12

(True/False) Workers in the Classical world are willing to accept wage cuts because
they consider only the nominal value of their wages, which will be unchanged.

Answer 12

False

-They care about the real value

Question 13

(True/False) Classical economists believe that the economy is stable and selfcorrecting.

Answer 13

True

Question 14

The graph above represents a(n):

Answer 14

recessionary gap

look at 14 on test

Question 15

On Figure 1, draw a line to represent how the Classical economists believed the gap would be
eliminated

Answer 15

The line a will move to the right

Question 16

The change you drew in #15 would happen, according to Classical economists:

Answer 16

because wages fall, without any government action

Question 17

In Figure 1, the curve labeled ____________________ is the AD.

Answer 17

C

Question 18

In Classical theory, if a recession starts in the economy, what will happen?

Answer 18

wages and prices will fall to correct it

Question 19

(True/False) Classical economics believes that we need to look at the economy in
the long run, not the short run

Answer 19

True

Question 20

Bread costs $1 per loaf, my hourly wage is $6. If my wage goes to $8 and bread to $2, the
real wage has _____ and the nominal wage has ______.

Answer 20

fallen, risen

Question 21

(True/False) Classical economics depends on markets working correctly in a world of
competitive markets.

Answer 21

True

Question 22

Keynesian economics is:

Answer 22

a. demand oriented

Question 23

Suppose my income this week is $6,000 and I spent $4,500, and last week my income was
$4,000 and I spent $3,000. What is my MPC?

Answer 23

Income up by 2000
Spending went up by 1500
.75 MPC. 1 / 1 - MPC = 4

Question 24

If my MPC is what you calculated in #23, a $10 billion increase in government spending
would cause how big a change in GDP?

Answer 24

40

Question 25

According to Keynesians, if investment falls by $10 billion, the economy will:

Answer 25

fall by more than $10 billion

Question 26

(True/False) Minsky’s theory comes from Keynes’ theory.

Answer 26

True

Question 27

Classical economists believed that interest rates are determined by:

Answer 27

savings and investment

Question 28

Keynesian economists believed that interest rates are determined by:

Answer 28

supply and demand for money

Question 29

Draw a new line on Figure 2 to represent how a Keynesian would argue that this gap should
be closed.

Answer 29

C moves to the right in the Keynesian world

since the government makes it move

Question 30

The change you drew in #29 would happen, according to Keynesian economists:

Answer 30

only through government spending and taxing changes

Question 31

_________ (True/False) According to the Keynesians, the economy may be in disequilibrium.

Answer 31

True

Question 32

According to a Keynesian, __________ is the most volatile factor of the following:

Answer 32

investment

Question 33

The key to supply side economics is _________________

Answer 33

Incentive

Question 34

_________________ was the first president to believe in

supply side economics.

Answer 34

Ronald Reagan

Question 35

The legacy of supply side economics is that we now all care about ______ as a major
macroeconomic variable, when we didn’t before.

Answer 35

productivity

Question 36

A “Supply shock” is:

Answer 36

an unexpected change in aggregate supply that is disruptive to the economy

Question 37

(True/False) New Classicals argue that new technologies destroy old jobs before
they create many new jobs.

Answer 37

True

Question 38

(True/False) New Classicals believe the economy adjusts to changes almost
instantaneously.

Answer 38

True

Question 39

Most modern economists are:

Answer 39

New Keynesians

Question 40

List all the names associated with the LRAS, and explain why the LRAS is considered to be
all of those things.

Answer 40

1. LRAS ( long run aggregate supply) 2. Full employment GDP (if we are on that line we are at
   full employment. 3. Natural GDP (in the long run the economy will go there

Question 41

Draw the aggregate demand and supply graph as a Classical would in the long run, and
explain what it means.

Answer 41

• Classical believe nominal and real is separate

◦Like a cross

Question 42

If you are new keynesians you believe in the

word _____. Wages and prices adjust slowly

Answer 42

sticky

Question 43

John Leonard was killed by _________.

Answer 43

income tax

Question 44

In the long run we are all ________.

Answer 44

dead

Question 45

According to Keyne most important thing to investment is _______

Answer 45

Expectations

Question 46

Keynes phrase on investment is ________ ______.

Answer 46

Animal Spirits

Question 47

Bipmetalism example william jennings bryan cross of gold

he first see the scarecrow and factory workers

Answer 47

Wizard of Oz