1.

The lesson of Keynesian economics is that:

a. changes in aggregate demand can affect output, employment, and prices in the shortrun.
b. changes in aggregate demand will have no affect on output, employment and prices in
the short-run, but will in the long-run.
c. changes in aggregate supply are the driving force in determining recessions and
periods of economic boom.
d. none of the above.
2. Fluctuations in total national output, income, and employment, usually lasting 2-10
years, marked by periods of expansion or contraction in most sectors of the economy
are called:
a. recessions.
b. depressions.
c. booms.
d. business cycles.
3. A _______ is a recurring period of decline in total output, income, and employment,
usually lasting from 6 months to a year and marked by widespread contractions in
many sectors of the economy.
a. recession
b. depression
c. boom
d. business cycle
4. A _______ is a large, long recession.
a. recession
b. depression
c. boom
d. business cycle
5. Which of the following does not occur during an expansion?
a. Consumer purchases increase.
b. Demand for labor rises.
c. Business profits increase.
d. None of the above.
6. Shifts in aggregate demand will:
a. occur because consumers, businesses, or governments change total spending
relative to the economy's productive capacity.
b. necessarily increase GDP.
c. both a and b.
d. neither a nor b.
7. Which of the following attributes business fluctuations to the expansion and
contraction of money and credit?
a. monetary theories
b. the multiplier-accelerator model
c. equilibrium-business cycle theories
d. real-business cycle theory
8. Which of the following claims that misperceptions about price and wage movements

lead individuals to supply too much or too little labor, which leads to fluctuations of
output and employment?
a. monetary theories
b. the multiplier-accelerator model
c. equilibrium-business cycle theories
d. real-business cycle theory
9. Which of the following holds that innovations or productivity shocks in one sector can
spread to the rest of the economy and cause recessions and booms?
a. monetary theories
b. the multiplier-accelerator model
c. equilibrium-business cycle theories
d. real-business cycle theory
10. Which of the following proposes that exogenous shocks are propagated by the
multiplier mechanism?
a. monetary theories
b. the multiplier-accelerator model
c. equilibrium-business cycle theories
d. real-business cycle theory
11. A(n) _______ is a set of equations, presenting the behavior of the economy, that
has been estimated using historical data.
a. historical model
b. graph
c. econometric model
d. economic model
12. What do economists call the total amount of output that is willingly bought at a
given level of prices?
a. an econometric model
b. aggregate supply
c. aggregate demand
d. GDP
13. Why does the AD curve slope downward?
a. The money-supply effect causes the AD curve to slope downward.
b. Higher prices operating on a fixed nominal money supply produce tight money and
lower aggregate spending.
c. both a and b.
d. neither a nor b.
14. An increase in taxes is a(n):
a. expansionary fiscal policy.
b. expansionary monetary policy.
c. contractionary fiscal policy.
d. contractionary monetary policy.
15. An increase in the money supply is a(n):
a. expansionary fiscal policy.
b. expansionary monetary policy.
c. contractionary fiscal policy.
d. contractionary monetary policy.

Question
1.

Correct Answer
a. The lesson of Keynesian economics is that changes in aggregate demand
can affect output, employment, and prices in the short-run. See page 476.
d. Business cycles are fluctuations in total national output, income, and

2.

employment, usually lasting 2-10 years, marked by periods of expansion or

contraction in most sectors of the economy. See page 478.
a. A recession is a recurring period of decline in total output, income, and

3.

employment, usually lasting from 6 months to a year and marked by

widespread contractions in many sectors of the economy. See page 478.

4.

b. A depression is a large, long recession. See page 478.

d. We would expect that during an expansion, consumer purchases will

5.

increase, demand for labor will rise, and business profits will increase. See
page 479.
a. Shifts in aggregate demand will occur because consumers, businesses, or

6.

governments change total spending relative to the economy's productive

capacity. See page 480.

7.

a. Monetary theories attribute business fluctuations to the expansion and

contraction of money and credit. See page 481.
c. Equilibrium-business cycle theories claim that misperceptions about price

8.

and wage movements lead individuals to supply too much or too little labor,
which leads to fluctuations of output and employment. See page 481.
d. Real-business cycle theory holds that innovations or productivity shocks in

9.

one sector can spread to the rest of the economy and cause recessions and
booms. See page 481.

10.

11.

12.

b. The the multiplier-accelerator model proposes that exogenous shocks are

propagated by the multiplier mechanism. See page 481.
c. An econometric model is a set of equations, presenting the behavior of the
economy, that has been estimated using historical data. See page 482.
c. Aggregate demand if the total amount of output that is willingly bought at a
given level of prices. See page 483.
c. The AD curve slopes downward because of the money-supply effect which

13.

explains that higher prices operating on a fixed nominal money supply

produce tight money and lower aggregate spending. See page 484.

14.
15.

c. An increase in taxes is a contractionary fiscal policy. See page 486.

b. An increase in the money supply is an expansionary monetary policy. See
page 486.