Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) The graph that shows the relationship between the aggregate quantity of output supplied by all the
firms in an economy and the overall price level is
A) the production possibilities frontier.
B) the aggregate demand curve.
C) the aggregate production function.
D) the aggregate supply curve.

1)

Answer: D
2) The quantity of output supplied at different price levels is represented by the
A) aggregate expenditures curve.
B) aggregate supply curve.
C) aggregate demand curve.
D) production function.

2)

Answer: B
3) The aggregate supply curve
A) relates output with the price level.
B) embodies the same logic that lies behind an individual firm's supply curve.
C) is a market supply curve.
D) is the sum of the individual supply curves in the economy.

3)

Answer: A
4) It is very important to distinguish between the short run and the long run when we are discussing
A) the aggregate expenditures.
B) changes in the price level.
C) the aggregate supply.
D) the aggregate demand.

4)

Answer: C
Refer to the information provided in Figure 13.3 below to answer the questions that follow.

Figure 13.3

5) Refer to Figure 13.3. Between the output levels of $500 billion and $1,000 billion, the relationship
between the price level and output is
A) indeterminate.
B) negative.
C) constant.
D) positive.
Answer: D

5)

6) Refer to Figure 13.3. This economy reaches capacity at

A) $500 billion.
B) $1,000 billion.
C) $1,500 billion.
D) an output level that is indeterminate from this information because aggregate demand is not
given.

6)

Answer: C
7) Refer to Figure 13.3. At aggregate output levels below $500 billion, this economy is most likely
experiencing
A) rapid increases in the growth rate of the money supply.
B) a boom.
C) excess capacity.
D) excess demand.

7)

Answer: C
8) Refer to Figure 13.3. At aggregate output levels above $1,500 billion, firms in this economy are most
likely experiencing
A) costs falling as prices output increase.
B) costs lagging behind increases in output prices.
C) costs increasing as fast as output prices.
D) costs rising faster than output prices.

8)

Answer: C
Refer to the information provided in Figure 13.4 below to answer the questions that follow.

Figure 13.4

9) Refer to Figure 13.4. Between the output levels of $300 billion and $600 billion, the relationship
between the price level and output is
A) positive.
B) negative.
C) constant.
D) There is no relationship between the price level and output.
Answer: A

9)

10) Refer to Figure 13.4. This economy reaches capacity at

A) $300 billion.
B) $600 billion.
C) $900 billion.
D) an output level that is indeterminate from this information because aggregate demand is not
given.

10)

Answer: C
11) What determines the slope of the aggregate supply curve is
A) how much more the economy can produce without any change in the price level.
B) how fast the price of factors of production respond to changes in the price level.
C) how fast the output level changes after a technological advance.
D) none of the above

11)

Answer: B
12) When the aggregate supply curve is horizontal,
A) the price of factors of production is fixed, with little or no upward pressure on price.
B) resources are being utilized at full capacity.
C) the prices level increases with additional production.
D) the economy is close to full capacity.

12)

Answer: A
13) When the aggregate supply curve is vertical, which of the following is NOT true?
A) The economy is at capacity.
B) The economy is expanding quickly.
C) Any increase in the price level will not cause an increase in aggregate output.
D) The economy is producing the maximum sustainable level of output.

13)

Answer: B
14) If the economy is operating on the relatively vertical segment of the aggregate supply curve, an
increase in aggregate demand causes a ________ change in the price level and a ________ change in
output.
A) big; big
B) small; big
C) big; small
D) small; small

14)

Answer: C
15) If the economy is operating way below capacity, an increase in aggregate demand causes a
________ change in the price level and ________ change in output.
A) small; small
B) big; big
C) small; big
D) big; small

15)

Answer: C
16) An increase in aggregate demand when the economy is operating at high levels of output is likely
to result in
A) an increase in the overall price level but little or no increase in output.
B) little or no increase in either output or the overall price level.
C) a large increase in both output and the overall price level.
D) an increase in output but little or no increase in the overall price level.
Answer: A

16)

17) An increase in aggregate demand when the economy is operating at full capacity is likely to result
in
A) an increase in output but no increase in the overall price level.
B) an increase in the overall price level but no increase in output.
C) no increase in either output or the overall price level.
D) an increase in both output and the overall price level.

17)

Answer: B
18) An increase in the price level is likely to increase the aggregate amount of output supplied in the
short run because
A) interest rate is high in the short-run.
B) wages change in the short-run.
C) the aggregate supply curve is vertical in the short-run.
D) wages and interest rates are relatively fixed in the short-run.

18)

Answer: D
19) When the economy is producing at full capacity, the aggregate supply curve becomes
A) upward sloping.
B) horizontal.
C) downward sloping.
D) vertical.

19)

Answer: D
20) If input prices changed at exactly the same rate as output prices, the aggregate supply curve would
be
A) horizontal.
B) downward sloping.
C) upward sloping.
D) vertical.

20)

Answer: D
21) A movement down the aggregate supply curve is caused by a(n)
A) decrease in the price level.
B) increase in aggregate supply.
C) decrease in aggregate supply.
D) increase in the price level.

21)

Answer: A
22) If there is a decrease in the percentage of employees whose wages adjust automatically with
changes in the price level, the aggregate supply curve will become
A) vertical.
B) steeper.
C) horizontal.
D) flatter.

22)

Answer: D
23) If there is an increase in the percentage of employees whose wages adjust automatically with
changes in the price level, the aggregate supply curve will become
A) horizontal.
B) flatter.
C) steeper.
D) vertical.

23)

Answer: C
24) Coal is used as a source of energy in many manufacturing processes. Assume a long strike by coal
miners reduced the supply of coal and increased the price of coal. This would cause
A) the short-run aggregate supply curve to become nearly vertical at all levels of output.
B) the short-run aggregate supply curve to shift to the left.
C) the short-run aggregate supply curve to become flatter.
D) the short-run aggregate supply curve to shift to the right.
Answer: B

24)

25) If the United States were to pass legislation that would make it easier for people to emigrate to the
United States, this would cause
A) the short-run aggregate supply curve to shift to the right.
B) the short-run aggregate supply curve to shift to the left.
C) the short-run aggregate supply curve to become nearly vertical at all levels of output.
D) the short-run aggregate supply curve to become flatter.

25)

Answer: A
26) All of the following shift the short-run aggregate supply curve EXCEPT
A) a change in wages as a result of a labor strike.
B) a change in the price of oil.
C) a change in the price level.
D) a change in the price of raw material.

26)

Answer: C
27) Which of the following would cause the short-run aggregate supply curve to shift to the right?
A) retired workers reentering the labor force
B) higher energy prices
C) an increase in taxes
D) increases in government regulation

27)

Answer: A
Refer to the information provided in Figure 13.5 below to answer the questions that follow.

Figure 13.5

28) Refer to Figure 13.5. Hurricane Katrina destroyed a large portion of the infrastructure along the
Gulf of Mexico coast. This caused
A) the short-run aggregate supply curve to shift from AS1 to AS0.
B) the economy to move from Point B to Point A along AS1 .
C) the economy to move from Point C to Point B along AS1 .
D) the short-run aggregate supply curve to shift from AS1 to AS2.

28)

Answer: D
29) Refer to Figure 13.5. An increase in aggregate supply is represented by
A) a shift from AS1 to AS2 .
B) a movement from Point B to Point A along AS1 .
C) a shift from AS1 to AS0 .
D) a movement from Point B to Point C along AS1 .
Answer: C

29)

30) Refer to Figure 13.5. During the 1980s, many firms in the United States were not investing in new
capital. This would have caused
A) the short-run aggregate supply curve to shift from AS1 to AS0.
B) the economy to move from Point B to Point A along AS1 .
C) the short-run aggregate supply curve to shift from AS1 to AS2.
D) the economy to move from Point C to Point B along AS1 .

30)

Answer: C
31) Refer to Figure 13.5. A decrease in aggregate supply is represented by
A) a shift from AS1 to AS2 .
B) a shift from AS1 to AS0 .
C) a movement from Point B to Point A along AS1 .
D) a movement from Point B to Point C along AS1 .

31)

Answer: A
Refer to the information provided in Figure 13.6 below to answer the questions that follow.

Figure 13.6

32) Refer to Figure 13.6. Which of the following causes the economy to move from Point A to Point E?
A) an increase in the price level
B) technological progress
C) an influx of immigrants
D) an oil embargo that increases the price of oil

32)

Answer: D
33) Refer to Figure 13.6. Suppose the economy is at Point A, an increase in the price level moves the
economy to Point
A) E.
B) B.
C) C.
D) D.

33)

Answer: B
34) Refer to Figure 13.6. During the 1990s, many firms in the United States were investing in new
capital. If the economy was originally at Point A, this would have caused a movement to Point
A) E.
B) B.
C) C.
D) D.
Answer: D

34)

35) Refer to Figure 13.6. Suppose the economy is at Point A, an increase in aggregate demand moves
the economy to Point
A) E.
B) B.
C) C.
D) D.

35)

Answer: B
36) Refer to Figure 13.6. Suppose the economy is at Point A, an oil price increase could move the
economy to Point
A) E.
B) B.
C) C.
D) D.

36)

Answer: A
37) The rationale underlying policies to deregulate the economy is that these policies would
A) increase short-run aggregate supply.
B) increase aggregate demand.
C) decrease short-run aggregate supply.
D) decrease aggregate demand.

37)

Answer: A
38) An oil price increase would
A) increase aggregate demand.
C) increase short-run aggregate supply.

B) decrease aggregate demand.

D) decrease short-run aggregate supply.

38)

Answer: D
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
39) If input prices change at exactly the same rate as output prices, the aggregate supply curve will be
vertical.
Answer:

True

False

40) If the price level falls, the aggregate supply decreases as a result of the aggregate demand curve
shifting left.
Answer:

True

True

True

True

42)

False

43) A decrease in taxes on business investments will increase aggregate supply.

Answer:

41)

False

42) An increase in the price level will cause a decrease in the aggregate amount of output supplied.
Answer:

40)

False

41) An increase in the price of a key input in production, like oil, increases aggregate supply.
Answer:

39)

False

43)

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Refer to the information provided in Figure 13.7 below to answer the questions that follow.

Figure 13.7

44) Refer to Figure 13.7. Suppose the equilibrium output is initially $600 billion. An expansionary
monetary policy ________ equilibrium output and ________ the price level.
A) increases; increases
B) increases; decreases
C) leaves unchanged; increases
D) decreases; leaves unchanged

44)

Answer: A
45) Refer to Figure 13.7. Suppose the equilibrium output is initially $600 billion. An oil embargo would
probably
A) decrease both the equilibrium output and the price level.
B) increase both the equilibrium output and the price level.
C) increase the equilibrium output and decrease the price level.
D) decrease the equilibrium output and increase the price level.

45)

Answer: D
46) Refer to Figure 13.7. Suppose the equilibrium output is initially $600 billion. A decrease in wages
and an increase in government spending will, for sure, increase
A) the price level.
B) equilibrium output.
C) equilibrium output and decrease the price level.
D) both the equilibrium output and the price level.

46)

Answer: B
47) Refer to Figure 13.7. Which of the following will, unambiguously, increase the price level?
A) a decrease in personal income tax and an increase in corporate profit tax
B) an increase in money supply and an influx of immigrants
C) an increase in personal income tax and an oil embargo
D) an increase in government spending and a decrease in the price of raw material
Answer: A

47)

48) Refer to Figure 13.7. To unambiguously decrease the price level

A) the Fed could sell bonds and the government could lower the corporate profit tax.
B) personal income taxes could decrease and corporate profit taxes could increase.
C) government spending could increase and the price of raw materials could decrease.
D) the Fed could buy bonds and the government could increase the corporate profit tax.

48)

Answer: A
49) To increase the price level the government could adopt policies that
A) increase aggregate supply and aggregate demand.
B) decrease aggregate supply and increase aggregate demand.
C) increase aggregate supply and decrease aggregate demand.
D) decrease aggregate supply and aggregate demand.

49)

Answer: B
50) To increase output the government could adopt policies that
A) increase aggregate supply and decrease aggregate demand.
B) increase aggregate supply and aggregate demand.
C) decrease aggregate supply and increase aggregate demand.
D) decrease aggregate supply and aggregate demand.

50)

Answer: B
51) To decrease the price level the government could
A) raise taxes on corporate profits and lower federal income taxes.
B) encourage education and increase government spending.
C) lower the corporate profits tax and have the Fed raise the discount rate.
D) adopt policies that increase input prices and increase net taxes.

51)

Answer: C
52) To decrease output the government could
A) encourage education and increase government spending.
B) adopt policies that increase input prices and increase net taxes.
C) raise taxes on corporate profits and lower federal income taxes.
D) lower the corporate profits tax and have the Fed raise the discount rate.

52)

Answer: B
53) To increase output the government could
A) lower the corporate profits tax and have the Fed buy bonds in the open market.
B) encourage education and decrease net taxes.
C) lower payroll taxes and increase government spending.
D) all of the above

53)

Answer: D
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
54) Whenever the aggregate supply curve intercepts the aggregate demand curve, the economy is
producing full employment output.
Answer:

True

False

55) An increase in the price of inputs will most likely lead to a higher price level.
Answer:

True

54)

False

55)

56) If the Fed sells securities on the open market, the price level will rise.
Answer:

True

False

57) Decreasing government expenditures and decreasing taxes on corporate profits are two policies
that both work to decrease the price level.
Answer:

True

True

57)

False

58) Raising net taxes and and an oil embargo will both have an effect towards increasing the price
level.
Answer:

56)

58)

False

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Refer to the information provided in Figure 13.8 below to answer the questions that follow.

Figure 13.8

59) Refer to Figure 13.8. Which of the following statements characterizes an output level of $800
billion?
A) It is attainable in the short run but it is associated with increases in the price level.
B) It is sustainable over the long run without inflation.
C) It is achievable only in the long run.
D) It can be achieved only if investment is independent of the interest rate.

59)

Answer: A
60) Refer to Figure 13.8. Potential output
A) is $400 million.
B) is $700 million.
C) is $800 million.
D) cannot be determined from this information because aggregate demand is not given.

60)

Answer: B
61) Refer to Figure 13.8. The level of aggregate output that can be sustained in the long run without
inflation
A) is $400 million.
B) is $700 million.
C) is $800 million.
D) cannot be determined from this information because aggregate demand is not given.
Answer: B
10

61)

62) The level of aggregate output that can be sustained in the long run without inflation is known as
A) nominal output.
B) money output.
C) potential output.
D) real output.

62)

Answer: C
63) If ________ equilibrium output ________ , the price level rises.
A) actual; exceeds potential GDP
B) actual; is below potential GDP
C) potential; is equal to actual GDP
D) potential; exceeds actual GDP

63)

Answer: A
64) When the ________ increases, then potential output increases.
A) long-run aggregate supply
B) short-run aggregate demand
C) long-run aggregate demand
D) short-run aggregate supply

64)

Answer: A
65) Potential output is equal to
A) long-run aggregate supply.
C) short-run aggregate supply.

B) long run aggregate demand.

D) short-run aggregate demand.

65)

Answer: A
66) The long-run aggregate supply curve is vertical if
A) wages and other costs fully adjust to changes in prices in the long-run.
B) the Fed follows optimal monetary policy.
C) technology is fixed.
D) the government follows optimal fiscal policy.

66)

Answer: A
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
67) If the economy produces full employment output, an expansionary monetary policy increases
output but not the price level.
Answer:

True

False

68) A recessionary gap means that aggregate planned expenditures are less than potential output.
Answer:

True

True

True

True

True

71)

False

72) If wages do not fully adjust to changes in prices, the aggregate supply curve is vertical.
Answer:

70)

False

71) Potential output is the most that can be produced in an economy at a particular point in time.
Answer:

69)

False

70) Keynes believed that fiscal policy and monetary policy are effective.
Answer:

68)

False

69) An inflationary gap happens when aggregate planned expenditure is greater than full capacity.
Answer:

67)

False

11

72)

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
73) If a decrease in net taxes in the United States resulted in a very large increase in aggregate output
and a very small increase in the price level, then the U.S. economy must have been
A) on the very steep part of the short-run aggregate demand curve.
B) on the very steep part of the short-run aggregate supply curve.
C) on the very flat part of the short-run aggregate demand curve.
D) on the very flat part of the short-run aggregate supply curve.

73)

Answer: D
74) If a decrease in the U.S. money supply resulted in a very large change in the price level and a very
small change in aggregate output,
A) then the U.S. economy must have been on the very steep part of its short-run aggregate
supply curve.
B) then in the U.S. economy investment demand must not be sensitive to the interest rate.
C) then the U.S. aggregate demand curve must be very steep.
D) then the U.S. economy must have been on the very flat part of its short-run aggregate supply
curve.

74)

Answer: A
75) An increase in government spending will completely crowd out investment if
A) the economy is operating well below capacity.
B) money supply is increased at the same time.
C) money demand is not sensitive to the interest rate.
D) the economy is operating at capacity.

75)

Answer: D
76) Economic policies are ineffective concerning quantities of output directly when
A) the aggregate supply curve is flat.
B) the aggregate supply is vertical.
C) the economy is not producing at capacity.
D) the aggregate demand is flat.

76)

Answer: B
77) Economic policies are effective at changing output when
A) the economy is not producing at capacity.
B) the unemployment rate is at the natural rate.
C) the economy is producing at its potential output.
D) the aggregate supply curve is vertical.

77)

Answer: A
78) If the long-run aggregate supply curve is vertical, the multiplier effect of a change in net taxes on
aggregate output in the long run
A) depends on the price level.
B) is zero.
C) is one.
D) is infinitely large.

78)

Answer: B
79) A sustained increase in the overall price level is
A) a price index.
B) inflation.

C) stagflation.

Answer: B

12

D) a recession.

79)

Refer to the information provided in Figure 13.9 below to answer the questions that follow.

Figure 13.9

80) Refer to Figure 13.9. Suppose the economy is currently at Point A producing potential output Y0. If
the government increases spending, the economy moves to Point ________ in the short-run and to
Point ________ in the long-run.
A) C; B
B) B; C
C) B; D
D) D; E

80)

Answer: B
81) Refer to Figure 13.9. If the economy is currently at Point D producing output level Y2 , which of the
following is NOT true?
A) Input prices are likely to fall.
B) Aggregate supply shifts to the right and the economy ends up at Point E.
C) The economy is operating above full employment.
D) The economy is operating below full employment.

81)

Answer: C
82) Refer to Figure 13.9. If the economy is at point A currently producing Y0 and the Fed decreases the
money supply, the economy will move to Point ________ in the short run and to Point ________ in
the long run.
A) D; E
B) E; D
C) C; B
D) B; C

82)

Answer: A
83) Refer to Figure 13.9. This economy cannot continue to produce Y1 (or at point B) because
A) the price of raw material and wages will increase shifting the aggregate supply curve to AS1 .
B) the price of raw material will increase, shifting the aggregate demand curve to AD2.
C) the price of inputs will decrease, shifting the aggregate supply curve to AS2 .
D) all of the above

83)

Answer: A
84) Refer to Figure 13.9. For this economy to produce Y1 and sustain it without inflation
A) the price of oil must increase.
B) potential output must increase.
C) the government must implement an expansionary fiscal policy.
D) the government must implement an expansionary monetary policy.
Answer: B

13

84)

85) Related to the Economics in Practice on p. 564: In the simple "Keynesian" view, maximum output is
NOT defined by the
A) level of consumption.
B) existing labor force.
C) current capital stock.
D) existing state of technology.

85)

Answer: A
86) Related to the Economics in Practice on p. 564: In the simple "Keynesian" view, the aggregate supply
curve
A) is completely vertical.
B) is horizontal in part, and vertical in part.
C) is completely horizontal.
D) is downward sloping.

86)

Answer: B
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
87) Expansionary economic policies are things the government can do to decrease aggregate demand
or aggregate supply.
Answer:

True

False

88) If the economy is on the steep part of its aggregate supply curve, expansionary policy will mostly
increase the price level.
Answer:

True

True

True

True

90)

False

91) If the aggregate supply curve is vertical in the long-run, then neither monetary nor fiscal policy
will affect aggregate output in the long-run.
Answer:

89)

False

90) An earthquake and a foreign oil embargo would be contractionary policies.

Answer:

88)

False

89) Decrease in net taxes, increase in the money supply and increase in government spending are
contractionary policies.
Answer:

87)

False

14

91)

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Refer to the information provided in Figure 13.10 below to answer the questions that follow.

Figure 13.10

92) Refer to Figure 13.10. Cost-push inflation occurs if

A) the aggregate supply curve shifts from AS1 to AS2.
B) the economy moves from Point A to Point C on the aggregate supply curve AS1 .
C) the economy moves from Point A to Point B on aggregate supply curve AS1 .
D) the aggregate supply curve shifts from AS1 to AS0.

92)

Answer: A
93) Refer to Figure 13.10. Assume the economy is at Point A. Higher oil prices shift the aggregate
supply curve to AS2 . If the government decides to counter the effects of higher oil prices by
increasing government spending, then the price level will be ________ than P2 and output will be
________ than Y2.
A) less; less
B) less; greater
C) greater; greater
D) greater; less

93)

Answer: C
94) Refer to Figure 13.10. Assume the economy is at Point A. Higher oil prices shift the aggregate
supply curve to AS2 . If the government decides to counter the effects of higher oil prices by
increasing net taxes, then the price level will be ________ than P2 and output will be ________ than
Y2 .
A) less; less
B) greater; less
C) greater; greater
D) less; greater

94)

Answer: A
95) Refer to Figure 13.10. Assume the economy is currently at Point A on aggregate supply curve AS1 .
An increase in inflationary expectations that causes firms to increase their prices
A) moves the economy to Point C on aggregate supply curve AS1 .
B) shifts the aggregate supply curve to AS0 .
C) shifts the aggregate supply curve to AS2 .
D) moves the economy to Point B on aggregate supply curve AS1 .
Answer: C

15

95)

96) A rightward shift in the aggregate demand curve generates a ________ inflation and ________
output.
A) demand-pull; lower
B) cost-push; lower
C) demand-pull; higher
D) cost-push; higher

96)

Answer: C
97) A sudden increase in the price of oil causes a ________ inflation and ________ output.
A) cost-push; higher
B) demand-pull; higher
C) demand-pull; lower
D) cost-push; lower

97)

Answer: D
98) An earthquake destroyed 50% of the Moldovian manufacturing base. The Moldovian government
decided to use a contractionary fiscal policy to counter the effects of the earthquake on the
economy. The use of the contractionary fiscal policy would have caused
A) both the price level and the output level to be higher than they would have been without the
policy action.
B) both the price level and output level to be lower than what they would have been without the
policy action.
C) the price level to be higher and the output level to be lower than they would have been
without the policy action.
D) the price level to be lower and the output level to be higher than they would have been
without the policy action.

98)

Answer: B
99) For an economy to experience both a recession and inflation at the same time,
A) the aggregate supply curve must shift to the left.
B) the aggregate demand curve must shift to the left.
C) the aggregate demand curve must shift to the right.
D) the aggregate supply curve must shift to the right.

99)

Answer: A
100) A(n) ________ in inflationary expectations that causes firms to decrease their prices shifts the
aggregate supply curve to the ________.
A) increase; right
B) decrease; right
C) increase; left
D) decrease; left

100)

Answer: B
101) An increase in inflationary expectations that causes firms to increase their prices shifts the
A) aggregate demand curve to the left.
B) aggregate supply curve to the right.
C) aggregate supply curve to the left.
D) aggregate demand curve to the right.

101)

Answer: C
102) During the fall of 1993, prices were increasing by 1% an hour in Bosnia. This is an example of
A) an expectations inflation.
B) monetary inflation.
C) hyperinflation.
D) natural inflation.

102)

Answer: C
103) During the early 1980s, prices were increasing by approximately 2,000% a year in Argentina. This is
an example of
A) monetary inflation.
B) moderate inflation.
C) an expectations inflation.
D) hyperinflation.
Answer: D
16

103)

104) Economists generally agree that for a sustained inflation to occur,

A) the Federal Reserve must be accommodating it by decreasing the money supply.
B) the government must be accommodating it by increasing government spending.
C) the government must be accommodating it by decreasing taxes.
D) the Federal Reserve must be accommodating it by increasing the money supply.

104)

Answer: D
105) For the Fed to keep the interest rate unchanged as the government increases spending, the Fed
must continue to
A) decrease the money supply.
B) increase the demand for money.
C) decrease the demand for money.
D) increase the money supply.

105)

Answer: D
106) Many economists believe that sustained inflation is accommodated by a(n)
A) expansionary fiscal policy.
B) contractionary monetary policy.
C) expansionary monetary policy.
D) contractionary fiscal policy.

106)

Answer: C
107) According to the "simple" Keynesian view, the aggregate supply curve is
A) vertical until it reaches full capacity and then becomes horizontal.
B) upward sloping over all levels of output.
C) horizontal until it reaches full capacity and then becomes vertical.
D) downward sloping over all levels of output.

107)

Answer: C
108) According to the "simple" Keynesian view, if the economy is at capacity, an expansionary policy
will
A) increase the price level, but not output.
B) increase neither the price level nor output.
C) increase output, but not the price level.
D) increase both the price level and output.

108)

Answer: A
109) According to the "simple" Keynesian view, if the economy has excess capacity, an expansionary
policy will ________, given that the economy continues to have excess capacity even after the
policy.
A) increase both the price level and output
B) increase neither the price level nor output
C) increase output , but not the price level
D) increase the price level, but not output

109)

Answer: C
110) A(n) ________ gap occurs when planned aggregate expenditure is ________ capacity output.
A) recessionary; equal to
B) inflationary; equal to
C) recessionary; greater than
D) inflationary; greater than
Answer: D

17

110)

111) According to the "simple" Keynesian view, if the economy is below full capacity, an increase in
aggregate demand will cause
A) the price level to increase, but no change in output will occur in the short run.
B) both output and the price level to rise in the short run.
C) output to fall and the price level to increase in the short run.
D) the level of output to rise, but no change in the price level will occur in the short run.

111)

Answer: D
112) Related to the Economics in Practice on p. 570: A survey conducted by Horizon Research
Consultancy Group found that many people in China had inflation expectations that were higher
than the official government expectations. Expectations of inflation will cause firms to raise prices,
shifting the
A) AS curve to the right.
B) AS curve to the left.
C) AD curve to the left.
D) AD curve to the right.

112)

Answer: B
113) Related to the Economics in Practice on p. 570: A survey conducted by Horizon Research
Consultancy Group found that many people in China had inflation expectations that were higher
than the official government expectations. If these expectations of inflation cause firms to change
prices, then ceteris paribus, the price level will ________ and aggregate output will ________.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

113)

Answer: A
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
114) Inflation due to a decrease in aggregate demand is called demand-pull inflation.
Answer:

True

False

115) Inflation is an increase in the overall price level.

Answer:

True

115)

False

116) Supply-side inflation is caused by increases in the aggregate supply curve.

Answer:

True

True

True

117)

False

118) Expectations of higher future prices cause firms to lower prices today to sell their product before
prices rise.
Answer:

116)

False

117) Rising output coupled with falling prices is called stagflation.

Answer:

114)

False

18

118)

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Refer to the information provided in Figure 15.3 below to answer the questions that follow.

Figure 15.3

119) Refer to Figure 15.3. If the economy is currently at the intersection of AS and AD, the Fed is most
likely to
A) decrease the money supply to move the economy closer to capacity.
B) increase the money supply to reduce unemployment.
C) increase the money supply to reduce inflationary pressures.
D) decrease the money supply to reduce the inflationary pressures.

119)

Answer: B
120) Refer to Figure 15.3. If the economy is currently at the intersection of AS and AD, an expansionary
monetary policy which does not shift AD to the upward sloping portion of the AS curve will
A) not be an inflationary policy.
B) not be effective.
C) increase the price level without increasing output.
D) be an inflationary policy.

120)

Answer: A
121) Refer to Figure 15.3. If the economy is currently at the intersection of AS and AD, stagflation would
be caused by
A) a decrease in AS.
B) an increase in AD.
C) an increase in AS.
D) a decrease in AD.

121)

Answer: A
122) Refer to Figure 15.3. Stagflation would cause
A) a lower price level and lower output.
C) a higher price level and lower output.

B) a lower price level and higher output.

D) a higher price level and higher output.

122)

Answer: C
123) Refer to Figure 15.3. Stagflation would NOT be caused by a
A) higher price level with lower output.
B) shift to the right of AD.
C) higher price level with higher unemployment.
D) decrease in AS.
Answer: B

19

123)

124) When there is stagflation, the policy choices facing the Fed are
A) reducing monetary growth to reduce inflation, but that will make shortfall in aggregate
output worse.
B) increasing monetary growth to increase aggregate output and reduce inflation.
C) increasing monetary growth to increase aggregate output but that will make inflation worse.
D) A and C

124)

Answer: D
Refer to the information provided in Figure 15.4 below to answer the questions that follow.

Figure 15.4

125) Refer to Figure 15.4. If the economy is currently at the intersection of AS and AD, the Fed should
A) increase money supply to move closer to capacity.
B) decrease money supply to reduce inflationary pressures.
C) decrease money supply to increase output.
D) increase money supply to reduce the unemployment rate.

125)

Answer: B
126) Refer to Figure 15.4. If the economy is currently at the intersection of AS and AD, a contractionary
monetary policy which does not shift AD to the horizontal portion of the AS curve
A) does not create a recession.
B) is a recessionary policy.
C) is an inflationary policy.
D) none of the above

126)

Answer: A
127) The Federal Reserve's policy to "lean against the wind" means that
A) interest rates are increased gradually as the economy expands.
B) reserve requirements are decreased as the economy expands.
C) interest rates are decreased as the economy expands.
D) reserve requirements are decreased significantly during an economic expansion.

127)

Answer: A
128) The Federal Reserve's policy to "lean against the wind" means that
A) the Fed raises required reserves as the economy slows.
B) the Fed slows money growth as the economy slows.
C) the Fed lowers taxes as the economy slows.
D) the Fed increases money growth as the economy slows.
Answer: D

20

128)

129) An economic condition characterized by high unemployment and excessive inflation is called
A) expansionary growth.
B) stagflation.
C) depression.
D) recessionary downturn.

129)

Answer: B
130) During periods of stagflation, a decrease in the money supply will
A) increase exports.
B) increase output.
C) increase prices.
D) decrease prices.

130)

Answer: D
131) During periods of stagflation, a decrease in the money supply will
A) lower inflation and the level of output.
B) increase exports.
C) increase inflation and the level of output.
D) increase inflation and lower the level of output.

131)

Answer: A
132) Related to the Economics in Practice on p. 573: In 2010, many economists revised their expectations
of when the Fed would raise interest rates. Raising interest rates is a way the Fed can implement
A) contractionary fiscal policy.
B) expansionary monetary policy.
C) contractionary monetary policy.
D) expansionary fiscal policy.

132)

Answer: C
133) Related to the Economics in Practice on p. 573: In 2010, many economists revised their expectations
of when the Fed would raise interest rates. Raising interest rates will shift the ________ curve to the
________.
A) AS; left
B) AD; right
C) AS; right
D) AD; left

133)

Answer: D
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
134) When it decreases the money supply during an inflation the Fed is "leaning against the wind."
Answer:

True

False

135) An increase in aggregate demand causes stagflation.

Answer:

True

True

True

True

True

138)

False

139) The Fed is leaning against the wind when it raises the discount rate during a recession.
Answer:

137)

False

138) Contractionary Fed policy increases aggregate demand.

Answer:

136)

False

137) The danger with expansionary Fed policy is that it may bring on an inflation.
Answer:

135)

False

136) The Fed is most likely to increase the money supply when there is excess capacity in the economy.
Answer:

134)

False

21

139)

140) A decrease in money supply is an expansionary policy.

Answer:

True

False

22

140)