8-1. Alternating periods of economic growth and contraction in real GDP define: Capitalism. The business cycle.

. Macro equilibrium. Say's Law.

8-2. Unlike the Classical economists, Keynes asserted that: The economy was inherently unstable. Laissez-faire policies would lead to macro equilibrium. Prices and wages were flexible. Markets would naturally self-adjust.

8-3. The government can "prime the pump" by doing all of the following except: Buying more output. Employing more people. Making more money available. Raising taxes.

8-4. Which of the following is characteristic of a downturn in the business cycle? Lower unemployment rates Lower real output Higher prices Higher interest rates

8-5. The inflation-adjusted value of all goods and services produced is: GDP deflator. Nominal GDP. GDP per capita. Real GDP.

8-6. A recession can be represented by a point: Inside the production possibilities curve. Outside the production possibilities curve. On the production possibilities curve. At either end of the production possibilities curve.

8-7. The aggregate demand curve is downwardsloping because, other things being equal: People buy fewer goods and services at lower average incomes. People buy more goods and services at lower average prices. A higher average price level will induce producers to offer more output than otherwise. People buy more goods and services at higher average prices. 8-9. Ceteris paribus, if average prices in the U.S. economy fall, then the: Real-balances effect will lead to a lower quantity of output demanded. Foreign-trade effect will lead to a lower quantity of output demanded. Interest-rate effect will lead to a higher quantity of output demanded. Cost effect will lead to a higher quantity of output demanded.

8-8. Assume you have $2,000 in a savings account at the beginning of the year and the price level is equal to 100. If the price level is equal to 120 at the end of the year, the real value of your savings is closest to: $1,667. $1,880. $2,120. $2,400.

8-10. A positively sloped aggregate supply curve reflects: The idea that greater production lowers profit margins, which raises quantity demanded. That costs rise simultaneously with rising prices. The rising costs associated with increased capacity utilization. The decrease in the real value of money as the price level rises.

8-2. The Keynesian model holds that the government should intervene to ensure stability.

8-1. The business cycle is a repetition of expansion followed by contraction, then expansion again.

8-4. During an economic downturn, production falls and unemployment rises leading to underutilization of resources.

8-3. Raising taxes would actually decrease aggregate demand, and therefore lead to greater unemployment and less production.

8-6. During a recession, the underutilized resources cause the economy to be operating below its production possibilities curve.

8-5. Real GDP is designed to measure production only and not changes in the price level.

8-8. Take the balance of $2,000 and divide it by the new price level over the old price level; this results in an answer close to $1,667.

8-7. As the price level falls, buyers are willing and able to purchase more goods and services.

8-10. As resources become fully utilized, inflationary pressures develop as competition for the resources ensues; this leads to a higher price level being required for firms to produce higher levels of output.

8-9. As the price level falls, interest rates fall, and so spending on interest sensitive items such as cars and plasma screen TVs increases.

8-11. If aggregate demand decreases and aggregate supply decreases, the level of real output will: Decrease and the price level will definitely decrease. Decrease and the price level will definitely increase. Either increase or decrease, but the price level will stay the same. Decrease, but the price level may increase, decrease, or stay the same.

8-12. Which of the following results if the aggregate quantity supplied exceeds the aggregate quantity demanded? Aggregate demand shifts to the right Aggregate supply shifts to the left A surplus causes the price level to rise A surplus causes the price level to fall

8-13. Ceteris paribus, the price level will decrease if the aggregate: Supply curve shifts to the left. Demand curve shifts to the left. Demand curve shifts to the right. Supply and demand curves both shift to the right.

8-14. Which combination of shifts of aggregate demand and supply would definitely cause an increase in real GDP? Demand shifts to the left and supply shifts to the right Demand shifts to the left and supply shifts to the left Demand shifts to the right and supply shifts to the right Demand shifts to the right and supply shifts to the left

8-15. When the AS curve is vertical, increases in AD will: Increase the average price level but have no impact on unemployment. Increase the average price level and decrease unemployment. Increase both the average price level and unemployment. Have no impact on either the average price level or unemployment.

8-16. Fiscal policy is the use of: Government spending and taxes to alter macroeconomic outcomes. Money and credit controls to alter macroeconomic outcomes. Tax incentives, deregulation, and other mechanisms to increase the ability and willingness to produce goods and services. Trade policy to alter macroeconomic outcomes.

8-17. In Figure 8.1, an increase in government spending, ceteris paribus, is best represented as a movement from point: A to point B. C to point A. B to point C. A to point C.

8-12. Overproduction of goods and services will result in falling prices in order to eliminate the excess inventory or surpluses.

8-11. Since both the aggregate demand and aggregate supply curves shift to the left, the output, which is on the horizontal axis, must be lower, but the price level could rise, fall, or stay the same depending on the relative changes in aggregate demand and aggregate supply.

8-14. When both curves shift to the right, output must rise since output is the variable on the horizontal axis.

8-13. If aggregate demand decreases, people are purchasing less, so surpluses build up, leading to a falling price level.

8-16. By spending more or taxing less the government can increase aggregate demand to restore full employment.

8-15. Since the AS curve is vertical, it will be positioned at a fixed point on the horizontal axis exactly at the full employment level of output.

8-17. An increase in government spending actually increases aggregate demand, causing the curve to shift to the right.

8-18. In Figure 8.2, an improvement in technology is best represented as a movement from point: A to point B. C to point A. C to point B. B to point A. 8-19. In Figure 8.2, an increase in the cost of an input in the production process is best represented as a movement from point: A to point B. A to point C. C to point B. B to point A.

8-20. Given AD2 and AS1, the equilibrium price level in Figure 8.3 is: P1. P2. P3. P4. 8-21. Given AD1 and AS1, if the average price level in Figure 8.3 were at P3: A surplus would exist initially. The aggregate quantity demanded would exceed the aggregate quantity supplied. The average price level would rise. The equilibrium price level would be P3. 8-22. Given AD1 and AS1 in Figure 8.3, the Keynesian approach to achieving a higher level of output would be to: Impose price controls. Increase the growth of the money supply to shift AS1 to AS2. Do nothing. Employ an expansionary fiscal policy.

8-18. An improvement in technology leads to an increase in the AS curve, shifting the curve to the right.

8-19. An increase in input costs leads to a decrease in AS, causing the curve to shift to the left.

8-20. The equilibrium price level can be found along the vertical axis corresponding to the intersection of the AD and AS curves. 8-21. A surplus would exist since at price level P3, the output produced exceeds the amount purchased, leading to large pileups in inventory, eventually causing the price level to fall. 8-22. Either cutting taxes or increasing government spending would restore the full employment level of output.