ECON Macro Principles of Macroeconomics 1st Canadian Edition by Moir OShaughnessy – Test Bank

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1. What is the ultimate objective of macroeconomics?

a. to reduce the unemployment rate
b. to stabilize the economy’s growth rate
c. to develop and test theories about how the overall economy works
d. to improve the international competitiveness of Canadian financial markets

 

ANSWER:   c

 

2. Which of the following news headlines is most closely related to what macroeconomists study?

a. Unemployment Rate Rises from 5 Percent to 5.5 Percent
b. Price of Gold Grows by 3.1 Percent in Third Quarter
c. Number of Tourists Visiting Canadian National Parks Declines
d. Price of Oranges Rises after Early Frost

 

ANSWER:   a

 

3. What is gross world product?

a. the value of all final goods and services produced in the world during a given period
b. the value of all final goods produced in the world during a given period
c. the value of all final goods and services produced in Canada during a given period
d. the value of all final goods and services produced in all countries of the world except Canada during a given period

 

ANSWER:   a

 

4. Which of the following is NOT the proper subject matter for macroeconomics?

a. unemployment levels
b. inflation rates
c. levels of national output
d. the price of corn

 

ANSWER:   d

 

5. Which country has the largest and most complex economy in world history?

a. China
b. the United States
c. Mexico
d. Germany

 

ANSWER:   b

 

6. Which of the following is a stock variable?

a. business spending on capital equipment
b. consumer income
c. the federal government’s debt
d. the federal government’s budget deficit

 

ANSWER:   c

 

7. Which of the following is a stock variable?

a. gross domestic product
b. consumption spending
c. the money supply
d. federal income tax

 

ANSWER:   c

 

8. Which of the following is a stock variable?

a. sales by corporations
b. borrowing by the federal government
c. household wealth
d. net exports

 

ANSWER:   c

 

9. Which of the following is a flow variable?

a. the Canadian population
b. money supply
c. investment spending
d. household debt

 

ANSWER:   c

 

10. Which of the following is NOT a flow variable?

a. the amount of spending by consumers this holiday season
b. the number of times a dollar bill is spent in a day
c. the number of shares of stock traded per week
d. the $100 Susan keeps in her purse, in case an emergency arises

 

ANSWER:   d

 

11. An economic variable can be measured in units of time, such as spending per year. What is this economic variable known as?

a. as a stock variable
b. as a periodic variable
c. as an expectations variable
d. as a flow variable

 

ANSWER:   d

 

12. Suppose that firms expect greater demand for their products, invest in more capital, and hire more labour. Which of the following characterizes how the economy will be affected?

a. Inflation will likely increase and taxation will likely rise.
b. The business cycle is likely to move from peak to trough.
c. The expected prosperity will likely be encouraged.
d. Consumers will probably spend less in anticipation of a decline in economic activity.

 

ANSWER:   c

 

13. If GDP rises, what happens to income and expenditure?

a. Income must rise and expenditure must rise.
b. Income must fall and expenditure must fall.
c. Income must rise, but expenditure may rise or fall.
d. Expenditure must rise, but income may rise or fall.

 

ANSWER:   a

 

14. If GDP falls, what happens to income and expenditure?

a. Income must rise and expenditure must rise.
b. Income must fall and expenditure must fall.
c. Income must rise, but expenditure may rise or fall.
d. Expenditure must rise, but income may rise or fall.

 

ANSWER:   b

 

15. If all firms expect greater demand for their products or services, they will hire more resources. What will the economy experience in this case?

a. recession
b. growth
c. federal budget deficits
d. stagnation

 

ANSWER:   b

 

16. Which of the following describes a stock variable?

a. You save $100 each week.
b. You buy $10 worth of gasoline each week.
c. You earn $500 per week at your job.
d. You own $5,000 worth of government bonds.

 

ANSWER:   d

 

17. Which of the following describes a flow variable?

a. You own $5,000 worth of government bonds.
b. You own a $100,000 house.
c. You own a coin collection valued at $10,000.
d. You earn $500 per week.

 

ANSWER:   d

 

18. During the Great Depression of the 1930s, U.S. president Herbert Hoover introduced an economic policy that turned out to be flawed. What was this policy?

a. a decrease in taxes
b. an increase in taxes
c. an increase in government spending
d. a decrease in government spending

 

ANSWER:   b

 

19. Which of the following characterizes the nature of economic fluctuations?

a. The number of businesses started changes.
b. The TSX average fluctuates relative to a long-term economic growth trend.
c. Consumption spending changes.
d. The level of economic activity fluctuates, relative to a long-term economic growth trend.

 

ANSWER:   d

 

20. While economic expansions average about 3.5 years in duration, what is the average duration of an economic contraction?

a. about 1 year
b. about 2 years
c. about 3 years
d. about 4 years

 

ANSWER:   a

 

21. Which of the following best characterizes the meaning of a recession?

a. a period during which the percentage of the population employed is declining
b. a period during which employment, output, and income are declining
c. a period during which the price level is declining
d. a period during which more resources are being used

 

ANSWER:   b

 

22. What is the definition of a recession?

a. a period during which employment, production, and income are decreasing
b. a period during which the price level is increasing
c. a period during which inventories are falling dramatically
d. a period during which the unemployment rate is falling while the price level is rising

 

ANSWER:   a

 

23. Which of the following can partially explain long-term growth in production?

a. improvements in the “rules of the game” that facilitate production and exchange
b. the peaks and troughs of the business cycle (or economic fluctuations)
c. trade surpluses that lead to accumulations of precious metals
d. federal government budget deficits

 

ANSWER:   a

 

24. Which of the following can partially explain long-term growth in production?

a. trade surpluses that lead to accumulations of precious metals
b. a gradual but consistent increase in the price level
c. general optimism about the future and the pioneering spirit of Canada
d. improvements in technology

 

ANSWER:   d

 

25. Which of the following can partially explain long-term growth in production?

a. increases in government spending
b. increases in availability of resources
c. reductions in federal taxes
d. a gradual but consistent increase in the price level

 

ANSWER:   b

 

26. What is the distinction between a recession and a depression?

a. A recession is longer than a depression.
b. A recession is more severe than a depression.
c. A recession is accompanied by a price increase, and a depression is accompanied by a price decrease.
d. A recession is shorter and less severe than a depression.

 

ANSWER:   d

 

27. Which statement best characterizes Canadian business cycle activity since 1980?

a. Only one business cycle has occurred.
b. No recessions have occurred.
c. Expansions have generally lasted longer than contractions.
d. Each cycle has lasted longer than the previous one.

 

ANSWER:   c

 

28. What is the definition of a depression?

a. a mild reduction in total production coupled with a rising unemployment rate that lasts for several years
b. a decline in total production that lasts less than 6 months
c. a severe fall in stock prices that causes financial panic and lasts several years
d. a severe reduction in total production coupled with high unemployment that lasts several years

 

ANSWER:   d

 

29. Which term refers to a period of sustained growth of output in the economy?

a. expansion
b. contraction
c. peak
d. trough

 

ANSWER:   a

 

30. Which term refers to a period of sustained decline of output in the economy?

a. expansion
b. peak
c. trough
d. contraction

 

ANSWER:   d

 

31. Which statement best characterizes how economic fluctuations affect the global economy?

a. Economic fluctuations can be experienced by the world economy as well as by a single nation.
b. Economic fluctuations tend to be equal in length and intensity regardless of country.
c. Economic fluctuations have become more severe since the government has attempted to stabilize the economy.
d. Economic fluctuations have been completely offset by appropriate government policy during the last 40 years.

 

ANSWER:   a

 

32. Which statement about economic fluctuations best characterizes how nations interact with each other?

a. Economic fluctuations in one nation are usually independent of economic fluctuations in its major trading partner nations.
b. Economic fluctuations in one nation are usually independent of economic fluctuations in bordering nations.
c. Economic fluctuations in one nation are often linked to economic fluctuations in other economies.
d. Economic fluctuations in one nation are linked internationally such that that a recession in one nation means an expansion in the economy of its major trading partner.

 

ANSWER:   c

 

33. Which statement best describes how economic fluctuations in one country are related to fluctuations in other countries?

a. Economic fluctuations are linked, but NOT perfectly synchronized, across countries.
b. Economic fluctuations are perfectly synchronized across countries.
c. Economic fluctuations in one country are independent of fluctuations in other countries.
d. Economic fluctuations in Canada always lag behind fluctuations in other developed economies.

 

ANSWER:   a

 

34. In terms of growth rates in output, what do the data from 1978 until 2011 illustrate about the relationship between Canada and the United States?

a. Canadian real GDP grew faster than U.S. real GDP despite similar patterns of economic fluctuations.
b. U.S. real GDP doubled while Canadian GDP was stagnant.
c. The United States and Canada experienced recession in roughly the same years.
d. Canada experienced only one recession while the United States experienced three.

 

ANSWER:   d

 

35. Which of the following would indicate the beginnings of an expansion of the economy?

a. Fewer new firms are being started.
b. Stock market prices are declining.
c. Consumer confidence is improving.
d. Housing construction is slowing.

 

ANSWER:   c

 

36. Which of the following could be a leading economic indicator?

a. interest rates
b. the unemployment rate
c. personal income
d. unsold goods

 

ANSWER:   d

 

37. What do economists mean by a “leading economic indicator”?

a. an indicator of future economic activity
b. an indicator that measures current economic activity
c. a highly accurate indicator that is easily measured
d. an indicator that is accurate most of the time

 

ANSWER:   a

 

38. Certain economic activities signal forthcoming changes in the economy. What are these activities known as?

a. coincidental economic indicators
b. lagging economic indicators
c. composite economic indicators
d. leading economic indicators

 

ANSWER:   d

 

39. Which of the following is a lagging economic indicator?

a. the unemployment rate
b. unsold goods
c. a decline in new home purchases
d. an increase in new car purchases

 

ANSWER:   a

 

40. What do economists mean when they refer to the economy’s price level?

a. the rate of inflation
b. the price of goods and services relative to consumers’ incomes
c. a general measure of prices of all goods and services
d. a period of level, or steady, prices

 

ANSWER:   c

 

41. What is aggregate output?

a. the total amount of goods and services produced during a given period in the economy
b. only the total amount produced of goods during a given period in the economy
c. the relationship between the price level and the quantity of output demanded during a given period in the economy
d. the relationship between the price level and the quantity of output supplied during a given period in the economy

 

ANSWER:   a

 

42. Why does the aggregate demand curve slope downward?

a. because when the price level increases, consumers feel poorer and therefore buy less
b. because when the price level increases, consumers feel richer and therefore buy more
c. because when domestic prices increase, consumers substitute domestic goods for imported ones
d. because when the price of a particular good increases, consumers substitute away from that good

 

ANSWER:   a

 

43. Why does the aggregate demand curve slope downward?

a. because, at a higher price level, fewer goods and services are available
b. because the periods when the price level is rising are usually times of swift declines in economic activity
c. because households feel poorer when average prices increase
d. because if the Canadian price level rises, foreigners will buy more Canadian goods, leaving fewer Canadian goods for domestic consumers

 

ANSWER:   c

 

44. Which of the following is an explanation for the negative slope of the aggregate demand curve?

a. because as prices rise nominal income falls and so does the demand for real goods and services
b. because as prices rise government spends less to drive the price level back down
c. because businesses increase spending when inflation is high and rising
d. because as prices rise domestic goods become more expensive relative to foreign goods, which reduces exports

 

ANSWER:   d

 

45. Why is the aggregate demand curve downward sloping?

a. because, as prices fall, nominal income rises and so does the demand for real goods and services.
b. because rising prices reduce people’s wealth, thereby reducing spending
c. because the government decides to spend less to increase the price level
d. because, as prices fall, domestically produced goods become more expensive relative to foreign-produced products, which increases production

 

ANSWER:   b

 

46. As the price level increases, the amount of goods and services that consumers, businesses, and governments desire to purchase will change. How will this be reflected in the aggregate demand curve?

a. as a leftward movement of the aggregate demand curve
b. as a rightward movement of the aggregate demand curve
c. as a movement upward along the aggregate demand curve
d. as a movement downward along the aggregate demand curve

 

ANSWER:   c

 

47. Which statement best characterizes what happens to the aggregate demand curve when the price level falls?

a. A fall in the price level moves the economy rightward along the aggregate demand curve.
b. A fall in the price level moves the economy leftward along the aggregate demand curve.
c. A fall in the price level shifts the aggregate demand curve to the left.
d. A fall in the price level shifts the aggregate demand curve to the right.

 

ANSWER:   a

 

48. Which statement best characterizes what happens to the aggregate demand curve when the price level rises?

a. A rise in the price level moves the economy rightward along the aggregate demand curve.
b. A rise in the price level moves the economy leftward along the aggregate demand curve.
c. A rise in the price level shifts the aggregate demand curve to the left.
d. A rise in the price level shifts the aggregate demand curve to the right.

 

ANSWER:   b

 

49. Suppose the Canadian price level decreases. What happens to the aggregate quantity of Canadian output demanded?

a. It decreases because Canadian products become cheaper relative to foreign products.
b. It decreases because Canadian products become more expensive relative to foreign products.
c. It increases because Canadian products become cheaper relative to foreign products.
d. It increases because Canadian products become more expensive relative to foreign products.

 

ANSWER:   c

 

50. Suppose the Canadian price level increases. What happens to the aggregate quantity of Canadian output demanded?

a. It decreases because Canadian products become cheaper relative to foreign products.
b. It decreases because Canadian products become more expensive relative to foreign products.
c. It increases because Canadian products become cheaper relative to foreign products.
d. It increases because Canadian products become more expensive relative to foreign products.

 

ANSWER:   b

 

51. Which statement best characterizes why an aggregate demand curve slopes downward?

a. because a decrease in the price level decreases the real value of household wealth
b. because a decrease in the domestic price level increases imports
c. because an increase in the price level leads to a decrease in demand for money, which decreases interest rates
d. because a decrease in the domestic price level increases exports

 

ANSWER:   d

 

52. Which of the following best characterizes what an aggregate demand curve depicts?

a. the quantity of goods and services demanded during a given time period at different interest rates, other things held constant
b. the final quantity of goods and services actually produced by the economy during a given time period, other things held constant
c. the quantity of goods and services demanded at different price levels during a given time period, other things held constant
d. the quantity of goods and services that the economy is capable of producing during a given time period, other things held constant

 

ANSWER:   c

 

53. Suppose the wealth of consumers increases substantially. How would this be reflected in the aggregate demand curve?

a. The aggregate demand curve would shift outward.
b. The aggregate demand curve would NOT change.
c. The aggregate demand curve would shift inward.
d. The aggregate demand curve would become vertical.

 

ANSWER:   a

 

54. Which statement characterizes a short-run aggregate supply curve?

a. The short-run aggregate supply curve portrays an inverse relationship between the price level and quantity of aggregate output.
b. Resource utilization is constant along the short-run aggregate supply curve.
c. A movement along a short-run aggregate supply curve that is reflected in a decrease in the price level encourages firms to expand production.
d. A movement along a short-run aggregate supply curve that is reflected in an increase in the price level encourages firms to expand production.

 

ANSWER:   d

 

55. What does the aggregate supply curve indicate?

a. the quantity of aggregate output that producers are willing and able to supply at each possible price level
b. the total quantity of a particular good that all producers are willing to supply at each possible price level
c. the total quantity of a particular good that all producers are willing to supply at the equilibrium price level
d. the quantity of aggregate output that producers are willing and able to supply at the equilibrium price level

 

ANSWER:   a

 

56. In reference to the aggregate supply curve, what would an increase in the price level cause?

a. an increase in the quantity of aggregate output supplied
b. a decrease in the quantity of aggregate output supplied
c. a leftward shift of the aggregate supply curve
d. a rightward shift of the aggregate supply curve

 

ANSWER:   a

 

57. In reference to the aggregate supply curve, what would a decrease in the price level cause?

a. an increase in the quantity of aggregate output supplied
b. a decrease in the quantity of aggregate output supplied
c. a leftward shift of the aggregate supply curve
d. a rightward shift of the aggregate supply curve

 

ANSWER:   b

 

58. What type of slope does the aggregate supply curve have?

a. a negative slope
b. a positive slope
c. a zero slope
d. an infinite slope

 

ANSWER:   b

 

59. In the history of the Canadian economy, which economic era saw both high unemployment and high inflation at the same time?

a. before and during the Great Depression
b. from after the Great Depression to the early 1970s
c. from the early 1970s to the early 1980s
d. since the early 1980s

 

ANSWER:   c

 

60. The global financial panic in September 2008 led to a sharp fall in business investment spending and in consumer spending. How could these sharp falls be viewed?

a. as a sharp decrease in aggregate supply
b. as a sharp decrease in aggregate demand
c. as a sharp decrease in aggregate supply and in aggregate demand
d. as a modest increase in aggregate supply

 

ANSWER:   b

 

61. With reference to aggregate demand and aggregate supply, when output rises what would be expected to happen to employment?

a. Employment would rise.
b. Employment would fall.
c. Employment would remain constant.
d. Employment would first rise, and then fall.

 

ANSWER:   a

 

62. Which of the following best describes the equilibrium of aggregate supply and aggregate demand?

a. a situation in which the slope of aggregate demand equals the slope of aggregate supply
b. a situation in which quantity demanded exceeds quantity supplied
c. a situation in which quantity demanded equals quantity supplied at a unique price level
d. a situation in which quantity supplied exceeds quantity demanded at a unique price level

 

ANSWER:   c

 

63. Suppose the Canadian price level increased relative to price levels in foreign countries. How would domestic aggregate supply and aggregate demand curves be affected?

a. The aggregate supply curve would shift outward, and the aggregate demand curve would remain unchanged.
b. The aggregate supply curve would shift inward, and the aggregate demand curve would remain unchanged.
c. The aggregate demand curve would shift outward, and the aggregate supply curve would remain unchanged.
d. The aggregate demand curve would shift inward, and the aggregate supply curve would remain unchanged.

 

ANSWER:   d

 

Aggregate demand
(quantity demanded,
in billions of dollars)
Price level Aggregate supply
(quantity supplied,
in billions of dollars)
$ 100 150 $1,200
200 125 1,000
400 100 800
600 75 600
800 50 400
1,000 25 200

 

64. Refer to the aggregate demand and aggregate supply schedules in the exhibit. What is the equilibrium price level?

a. 25
b. 50
c. 75
d. 100

 

ANSWER:   c

 

65. Refer to the aggregate demand and aggregate supply schedules in the exhibit. What is the equilibrium level of output?

a. 200
b. 400
c. 600
d. 800

 

ANSWER:   c

 

 

66. Refer to the graph in the exhibit. What represents equilibrium?

a. line a
b. line b
c. line c
d. point e

 

ANSWER:   d

 

67. Refer to the exhibit. Which line represents aggregate demand?

a. line a
b. line b
c. line c
d. line d

 

ANSWER:   c

 

68. Refer to the graph in the exhibit. Which line represents aggregate supply?

a. line a
b. line b
c. line c
d. line d

 

ANSWER:   d

 

69. Refer to the graph in the exhibit. Which line represents the price level?

a. line a
b. line b
c. line c
d. line d

 

ANSWER:   b

 

70. Refer to the graph in the exhibit. Which line represents real GDP?

a. line a
b. line b
c. line c
d. line d

 

ANSWER:   a

 

71. Suppose the economy was initially in equilibrium, and the aggregate demand curve shifted to the left. Which of the following would likely occur in this model?

a. Employment would likely fall.
b. The price level would likely rise.
c. The aggregate supply curve would likely shift rightward.
d. The aggregate supply curve would likely shift leftward.

 

ANSWER:   a

 

72. In terms of the aggregate demand and supply framework, how can the Great Depression be viewed?

a. as a rightward shift of the aggregate demand curve
b. as a rightward shift of the aggregate supply curve
c. as a leftward shift of the aggregate demand curve
d. as a leftward shift of the aggregate supply curve

 

ANSWER:   c

 

73. A laissez-faire doctrine was in vogue before the Great Depression of the 1930s. How did this perspective influence the Canadian government’s view of business downturns?

a. The Canadian government viewed business downturns as natural phases in an otherwise healthy system, and therefore it took short-term deficit spending measures to help recovery.
b. The Canadian government viewed business downturns as natural phases in an otherwise healthy system, and therefore it waited for recovery to occur naturally.
c. The Canadian government viewed business downturns as serious maladies in an otherwise healthy system, and therefore it worked to redesign the system to avoid such failure in the future.
d. The Canadian government viewed business downturns as failures of the type of system Adam Smith envisaged, and therefore it worked to move toward a modern, more managed economy.

 

ANSWER:   b

 

74. What happened to unemployment, prices, and output during the Great Depression of the early 1930s?

a. Unemployment and prices increased while output decreased.
b. Unemployment increased while output and prices decreased.
c. Unemployment and prices decreased while output increased.
d. Unemployment and output decreased while prices increased.

 

ANSWER:   b

 

75. According to John Maynard Keynes’ The General Theory of Employment, Interest, and Money, what should the government do in order to get an economy out of a depression?

a. increase spending
b. decrease spending
c. reduce taxes
d. increase taxes

 

ANSWER:   a

 

76. On an aggregate demand and aggregate supply graph, how can the Great Depression be pictured?

a. as a leftward shift of the aggregate supply curve
b. as a rightward shift of the aggregate supply curve
c. as a leftward shift of the aggregate demand curve
d. as a rightward shift of the aggregate demand curve

 

ANSWER:   c

 

77. What does Adam Smith’s “invisible hand” explain?

a. why people act in their own best interests
b. why the government intervenes to overcome failures in private markets
c. how people, acting out of self-interest, unintentionally promote the general good
d. how comparative advantage and specialization promote international trade

 

ANSWER:   c

 

 

78. Refer to the graphs in the exhibit. From the beginning of period 1 to the end of period 2, what happened to real GDP?

a. Real GDP decreased, and then it increased.
b. Real GDP increased, and then it decreased.
c. Real GDP fell from $10,000 to $6,000.
d. Real GDP rose from $6,000 to $10,000.

 

ANSWER:   a

 

79. Refer to the graphs in the exhibit. From the beginning of period 1 to the end of period 2, what happened to real GDP?

a. It increased from $6,000 to $10,000 and stayed there.
b. It decreased from $10,000 to $6,000 and stayed there.
c. It decreased from $10,000 to $,6,000 in period 1, and it increased from $6,000 to $10,000 in period 2.
d. It increased from $6,000 to $10,000 in period 1, and it decreased from $10,000 to $6,000 in period 2.

 

ANSWER:   c

 

80. Refer to the graphs in the exhibit. What happens to the equilibrium price level in period 1 as the aggregate demand curve shifts from AD to AD’?

a. It falls from 4 to 1.
b. It falls from 4 to 3.
c. It rises from 3 to 4.
d. It rises from 1 to 4.

 

ANSWER:   b

 

81. Refer to the graphs in the exhibit. Which of the following might cause a shift in the aggregate demand curve from AD to AD’ in period 1?

a. an increase in household wealth
b. a fall in domestic interest rates
c. an increase in government spending
d. an appreciation of the dollar relative to other currencies

 

ANSWER:   d

 

82. Refer to the graphs in the exhibit. In period 4, the price level starts at 2. When the aggregate supply curve shifts from AS’ to AS’’ what happens to the price level?

a. It changes to 1.
b. It changes to 2.
c. It changes to 3.
d. It changes to 4.

 

ANSWER:   d

 

83. Refer to the graphs in the exhibit. In period 2, which of the following would cause the aggregate supply curve to shift from AS to AS’?

a. an increase in resource prices, improved technology, or an extension of patent protection
b. a decrease in resource prices, improved technology, or an extension of patent protection
c. an appreciation of the dollar, higher inflation in Europe, or a decrease in resource prices
d. a depreciation of the dollar, higher inflation in Asia, or improved technology

 

ANSWER:   b

 

84. Consider the period between 1929 and the depth of the Great Depression in 1933. In terms of aggregate demand and aggregate supply, which of the following best describes what happened in Canada during this period?

a. The aggregate supply curve shifted inward with no change in the aggregate demand curve.
b. The aggregate demand curve shifted inward with no change in the aggregate supply curve.
c. The aggregate demand curve shifted outward with no change in the aggregate supply curve.
d. The aggregate supply curve shifted outward with no change in the aggregate demand curve.

 

ANSWER:   b

 

85. What would an increase in government spending cause, other things constant?

a. a leftward shift of the aggregate supply curve
b. a rightward shift of the aggregate supply curve
c. a leftward shift of the aggregate demand curve
d. a rightward shift of the aggregate demand curve

 

ANSWER:   d

 

86. According to Keynes, what does the term “animal spirits” refer to?

a. unstable investment spending
b. unstable consumption spending
c. unstable government spending
d. unstable exports

 

ANSWER:   a

 

87. Which of the following policy prescriptions for overcoming a depression is most closely associated with John Maynard Keynes?

a. He believed that a serious economic contraction is a natural phase in an otherwise healthy system, and thus no intervention is needed during a depression.
b. He advocated for tax increases in order to balance the federal government’s budget during the Great Depression.
c. He advocated for a decrease in the money supply to stabilize the economy during the Great Depression.
d. He argued that increased government demand should offset reduced private sector demand in order to prevent depression.

 

ANSWER:   d

 

88. According to Keynes, what should the government do in order to get the economy out of a recession?

a. plan for a budget deficit
b. encourage firms to export to other nations, thereby jump-starting the economy
c. follow an expansionary monetary policy
d. follow a contractionary monetary policy

 

ANSWER:   a

 

89. According to Keynes, the policy of incurring budget deficits will cause the equilibrium price level to rise. What is the corresponding effect on equilibrium output?

a. It rises.
b. It falls.
c. It remains the same.
d. It first rises, and then falls.

 

ANSWER:   a

 

90. According to Keynes, the policy of incurring budget surpluses will cause the equilibrium price level to fall. What is the corresponding effect on equilibrium output?

a. It rises.
b. It falls.
c. It remains the same.
d. It first rises, and then falls.

 

ANSWER:   b

 

91. Which of the following best describes the Keynesian approach to economic policy?

a. supply-sided
b. classical
c. demand-sided
d. laissez-faire

 

ANSWER:   c

 

92. How did Keynes propose that government should shock the economy out of the Great Depression?

a. by increasing aggregate supply
b. by increasing aggregate demand
c. by raising prices in order that firms could earn higher profits and employ more people
d. by reducing prices in order that people could afford to buy more goods and services

 

ANSWER:   b

 

93. What did Keynes believe was the best method for ending the Great Depression?

a. increase the money supply in order that individuals would have more to spend
b. cut government spending and increase taxes in order to reduce or even eliminate the government’s deficit
c. increase government spending and cut taxes in order that consumers could spend more
d. cut government spending and taxes in order that government would NOT be such a large part of the economy

 

ANSWER:   c

 

94. What does the Keynesian approach to government economic policy emphasize?

a. the role of individual self-interest as a powerful stabilizing force
b. the role of money in the economy
c. the role of supply-side economics
d. the role of aggregate demand

 

ANSWER:   d

 

95. According to Keynes, what should the government do if private-sector demand is insufficient to maintain full employment?

a. It should act to make the economy’s natural transition to the lower level of employment as easy as possible.
b. It should shock the economy with an increase in aggregate demand.
c. It should reduce aggregate supply to reduce inflation.
d. It should print money to promote consumer spending.

 

ANSWER:   b

 

96. Keynes advocated federal budget deficits. What did he believe that such a deficit would overcome?

a. inflation
b. unemployment
c. trade deficits
d. trade surpluses

 

ANSWER:   b

 

97. What did the Keynesian approach to fiscal policy call for?

a. budget deficits during periods of inflationary pressure
b. budget surpluses during periods of high unemployment
c. a balanced budget despite the state of the economy
d. tax cuts during recession

 

ANSWER:   d

 

98. According to Keynesian economics, what does fine-tuning the economy mean?

a. making government economic policy more “people oriented”
b. using government policies to adjust the economy and promote economic stability
c. tinkering with microeconomic problems, such as externalities and losing sight of the big picture
d. placing fewer regulations on the private sector, thereby eliminating the need for government intervention

 

ANSWER:   b

 

99. In the 1960s, what did government policy makers believe that they could do?

a. stabilize the economy by letting the market system solve all problems
b. reduce unemployment by running federal budget surpluses
c. eliminate government’s role in stabilization policy
d. use taxation and government spending to fine-tune the economy

 

ANSWER:   d

 

100. Which decade is known as the golden age of Keynesian economics?

a. the 1930s
b. the 1950s
c. the 1960s
d. the 1970s

 

ANSWER:   c

 

101. Which of the following best explains what inflation is?

a. a rise in the value of money
b. a decline in nominal income
c. a sustained increase in the price level
d. a general reduction in prices

 

ANSWER:   c

 

102. Who wrote The General Theory of Employment, Interest, and Money?

a. Adam Smith
b. Jean Baptiste Say
c. François Quesnay
d. John Maynard Keynes

 

ANSWER:   d

 

103. Which of the following was a central argument of Keynes’s General Theory?

a. Competition does NOT allocate resources efficiently in a modern industrial economy.
b. Full employment can be maintained even during a major recession if wage rates are lowered far enough.
c. Modern industrial economies do NOT tend automatically toward full employment rates of output.
d. Government can best stabilize the economy by letting the market system automatically adjust toward full employment.

 

ANSWER:   c

 

104. What is the outcome if spending by the federal government exceeds revenue?

a. The price level tends to fall.
b. The aggregate demand curve shifts leftward.
c. The aggregate supply curve shifts rightward.
d. A federal budget deficit occurs.

 

ANSWER:   d

 

105. Suppose the economy is initially in equilibrium, and then an energy shock occurs, such as when OPEC raised oil prices in the 1970s. In terms of inflation and unemployment, which of the following is likely to result?

a. Prices and unemployment will likely rise.
b. Prices and unemployment will likely fall.
c. Prices will rise and unemployment will likely fall.
d. Prices will fall and unemployment will likely rise.

 

ANSWER:   d

 

106. When did confidence in Keynesian economics diminish?

a. in the 1960s, as the unemployment rate fell
b. in the 1970s, as inflation increased and unemployment decreased
c. in the 1960s, as unemployment increased
d. in the 1970s, as inflation occurred simultaneously with unemployment

 

ANSWER:   d

 

107. What does stagflation refer to?

a. a simultaneous reduction in output and the price level
b. a simultaneous increase in output and the price level
c. a decline in the price level accompanied by increases in real output and employment
d. an increase in the price level accompanied by decreases in real output and employment

 

ANSWER:   d

 

108. Which of the following events did NOT occur in the 1970s?

a. crop failures in major grain-producing countries
b. substantial increases in oil prices
c. growing confidence that Keynesian policies could stabilize the economy
d. stagflation

 

ANSWER:   c

 

109. What does stagflation refer to?

a. a combination of rising unemployment and rising trade deficits
b. a combination of high unemployment and rising prices
c. high, rapidly increasing inflation
d. a combination of rising trade deficits and rising federal government budget deficits

 

ANSWER:   b

 

110. On an aggregate demand and aggregate supply graph, how can the stagflation of the 1970s be represented?

a. as a leftward shift of the aggregate supply curve
b. as a rightward shift of the aggregate supply curve
c. as a rise in the price level that caused an excess demand for output
d. as a rightward shift of the aggregate demand curve

 

ANSWER:   a

 

111. Which of the following occurs simultaneously with a higher price level to create stagflation?

a. higher employment
b. economic growth
c. lower aggregate output
d. federal budget deficits

 

ANSWER:   c

 

112. Which of the following occurs simultaneously with a higher price level and leads to stagflation?

a. lower employment
b. higher aggregate output
c. federal budget deficits
d. federal budget surpluses

 

ANSWER:   a

 

113. Suppose an economy experiences stagflation. All things equal, which of the following remedies would be the most effective?

a. increased aggregate demand for goods and services
b. decreased aggregate demand for goods and services
c. increased aggregate supply of goods and services
d. decreased aggregate supply of goods and services

 

ANSWER:   c

 

114. Why are Keynesian policies ineffective at combating stagflation?

a. because stagflation is caused by budget surpluses
b. because stagflation is caused by decreases in aggregate supply
c. because stagflation is caused by trade deficits
d. because stagflation is caused by trade surpluses

 

ANSWER:   b

 

115. In combating stagflation, how may an increase in government spending affect inflation and unemployment?

a. It may increase aggregate demand, which may help reduce inflation but aggravate unemployment.
b. It may increase aggregate demand, which may increase unemployment and inflation.
c. It may increase aggregate demand, which may help reduce unemployment but aggravate inflation.
d. It may increase aggregate demand, which may help reduce unemployment and inflation.

 

ANSWER:   c

 

116. Which of the following best describes stagflation?

a. increasing output and decreasing prices
b. increasing output and increasing prices
c. decreasing output and decreasing prices
d. decreasing output and increasing prices

 

ANSWER:   d

 

117. What will an increase in aggregate supply result in, all things equal?

a. lower levels of employment
b. a rightward shift of the aggregate demand curve
c. a leftward shift of the aggregate demand curve
d. an economic expansion

 

ANSWER:   d

 

118. Suppose the government owes $3,500 billion and then borrows $300 billion more this year. What is the debt and the deficit?

a. The debt is $3,800 billion, and the deficit is $3,500 billion.
b. The debt is $3,800 billion, and the deficit is $300 billion.
c. The debt is $300 billion, and the deficit is $3,800 billion.
d. The debt is $300 billion, and the deficit is $3,200 billion.

 

ANSWER:   b

 

119. In terms of budget deficits, which is a flow variable and which is a stock variable?

a. A budget deficit is a flow variable; debt is a stock variable.
b. A budget deficit is a stock variable; debt is a flow variable.
c. A budget deficit and the debt are both stock variables.
d. A budget deficit and the debt are both flow variables.

 

ANSWER:   a

 

120. What is the aim of supply-side economics?

a. to increase government spending in order to stimulate aggregate supply
b. to stimulate exports in order to increase the balance of payments
c. to decrease wages in order to make production cheaper
d. to lower taxes in order to increase the supply of resources

 

ANSWER:   d

 

121. Which of the following would NOT be considered a supply-side approach to increasing growth?

a. improving the quality of human capital
b. investing in research and development
c. replacing obsolete plants with new ones
d. increasing transfer payments to retirees

 

ANSWER:   d

 

122. According to a supply-side economist, what would be the effect of a cut in personal income tax rates?

a. It would decrease government revenues.
b. It would increase government revenues.
c. It would have no effect on government revenues.
d. It would increase unemployment.

 

ANSWER:   b

 

 

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