Current Events:
Hassett Says Regulatory Overhaul to Create Bigger Crisis
(Bloomberg) -- Kevin Hassett, director of economic-policy studies at the American Enterprise Institute and a Bloomberg news columnist, talks with Bloomberg's Betty Liu about Obama's proposed overhaul of financial regulation. Hassett, speaking from Washington, also discusses the political tactics of White House economic adviser Larry Summers. (Source: Bloomberg)
Economists: The stimulus didn't help
The Chapter 21 Multiple Choice Test, composed of 50 questions, is on Tuesday: per the 4th Quarter procedure, there are no Test Prep pages.
In the meantime, re-arrange yourselves into your three small groups and you can review sample Chapter multiple choice questions to answer. Decide within the groups how you want to sub-divide the questions and we can then review the suggested answers.
As we have time we can attempt diagnostic, full-length tests, and detailed answer explanations as well.
Ch. 15 Multiple Choice 67 Sample Questions
Some sample Questions do not display properly because of the proprietary nature of their source.
1. The reason the government collects aggregate economic statistics on the economy is that:
A) aggregate data are less prone to political bickering.
B) the law requires it.
C) aggregate statistics are less costly to compute.
D) different firms experience the business cycle differently.
2. An example of an indicator tracked by macroeconomists is:
A) the price of apples.
B) gross domestic product.
C) employment in the mining industry.
D) the production of laptops.
3. Which of the following events has exerted a strong influence on the development of macroeconomic theory?
A) Great Depression
B) fall of feudalism
C) periods of rapid deflation
D) excessive government budgetary surplus
4. The Great Depression:
A) occurred in the period before World War I.
B) led economists to begin studying macroeconomic activity.
C) was caused by hyperinflation.
D) can be cured by administering Prozac to the entire population.
5. Whose analysis serves as the foundation of modern macroeconomics?
A) Milton Friedman
B) John Maynard Keynes
C) Adam Smith
D) Joseph Schumpeter
6. Which of the following occurrences is NOT referred to as a major event that has shaped macroeconomic ideas?
A) massive budget deficits
B) hyperinflation
C) large trade deficits
D) Great Depression
7. One of the reasons excessive budget deficits create a macroeconomic problem is that:
A) savers quit saving money because the interest rate declines.
B) businesses quit investing because the interest rate increases.
C) consumers quit spending because taxes are too high.
D) government quits spending because taxes are too low.
8. The Employment Act of 1946:
A) was an attempt to reduce the unemployment rate to zero percent.
B) made the federal government officially responsible for the national goal of full employment.
C) was later repealed by the Humphrey-Hawkins Act.
D) unintentionally resulted in high inflation.
9. According to the Full Employment and Balanced Growth Act of 1978, all of the following are macroeconomic goals EXCEPT:
A) full employment.
B) price stability.
C) economic growth.
D) interest rate stability.
10. Major macroeconomic data in the early 1980s show:
A) high unemployment and high inflation.
B) high unemployment and low inflation.
C) low unemployment and high inflation.
D) low unemployment and low inflation.
11. For the last 45 years, the growth of the U.S. GDP has varied between approximately:
A) –4% and +7%.
B) 0% and 2%.
C) –25% and +25%.
D) 7% and 10%.
12. A business cycle is:
A) the periodic fluctuation of economic activity.
B) the engine of economic growth.
C) a period lasting about 50 years.
D) identical to the consumption life cycle.
13. Each business cycle has the same basic elements of peak, recession, trough, and recovery. Furthermore:
A) the business cycle cannot be on an upward trend.
B) no two business cycles are exactly alike in cause and duration.
C) the business cycle has a steady cycle of ten years.
D) the recession and recovery are of equal duration and magnitude.
14. In order, the four phases of the business cycle are:
A) peak, recession, expansion, and trough.
B) trough, expansion, recession, and peak.
C) peak, recession, trough, and expansion.
D) trough, recession, expansion, and peak.
15. The high point of a business cycle is called the:
A) trough.
B) expansion.
C) recession.
D) peak.
16. A recession historically lasts between:
A) 6 and 16 months.
B) 2 and 4 years.
C) 1 and 11 years.
D) 2 and 3 months.
17. During a typical economic recovery:
A) inflation drops.
B) people become pessimistic.
C) unemployment drops.
D) incomes fall.
18. U.S. business cycles since 1950 have shown:
A) expansions to be just as lengthy as recessions.
B) expansions to be longer than recessions.
C) expansions to be shorter than recessions.
D) stable unemployment rates.
19. Which organization dates business cycles?
A) Federal Reserve
B) National Bureau of Economic Research
C) Bureau of Commerce and Labor Department
D) Bureau of Economic Analysis
20. Since 1983, the intensity of the business cycle has been reduced due to all but which of the following factors?
A) reduction in the size of the budget deficit relative to real GDP
B) better supply chain management
C) increasing shift to a service economy
D) technological improvements in computers and communications
21. Since 1982, recessions have:
A) disappeared from the American economy.
B) become more severe.
C) become less severe.
D) not changed.
22. In the last few decades, recessions have been becoming less pronounced. However, at the same time:
A) rising interest rates have reduced the strength of the expansions.
B) inflation has rapidly accelerated.
C) fewer jobs have been created during economic recoveries.
D) the unemployment rate has risen considerably during periods of expansion.
23. One of the problems with recessions since 1982 is that:
A) they have become more severe.
B) they last longer.
C) the recovery in job creation has been slow.
D) the NBER dates them incorrectly.
24. Which of the following changes is a reason for the recent change in the characteristics of business cycles?
A) innovations in supply chain management
B) shift to manufacturing in the GDP
C) increasing effectiveness of trade barriers
D) global warming
25. The event that stimulated the U.S. government's commitment to tracking the economy's health through a national income accounting system was the:
A) Civil War and Reconstruction.
B) Panic of 1907.
C) Great Depression.
D) Oil Embargo of 1973.
26. Richard Stone is credited with inventing:
A) the idea of gross domestic product.
B) the idea of supply-side economics.
C) a system of national income accounts.
D) the wheel.
27. Simon Kuznets:
A) created the gross national product as a way of measuring a nation's economic output.
B) created the National Bureau of Economic Research.
C) was Secretary of Treasury during World War II.
D) created the hair net.
28. In the simple circular flow model:
A) income is equal to spending.
B) saving is equal to consumer spending.
C) factor payments are equal to goods and services.
D) goods and serves are equal to consumer spending.
29. A simple circular flow diagram shows that the services of the factors of production are:
A) owned by the government.
B) purchased by households.
C) purchased by businesses.
D) traded in the market for goods and services.
30. In a simple circular flow diagram, total spending on goods and services in the product market:
A) is greater than the total income earned in the resource market.
B) is less than the total income earned in the resource market.
C) is done by the government.
D) equals the total income earned in the resource market.
31. The two approaches used by government in estimating GDP are:
A) statistical and nonstatistical.
B) survey and nonsurvey.
C) income and earnings.
D) expenditure and income.
32. The total market value of all final goods and services produced in a country is called:
A) gross national product.
B) gross domestic product.
C) net national income.
D) gross national income.
33. Gross domestic product is the total market value of all:
A) final goods and services produced in the United States by labor and property.
B) final and intermediate goods and services produced in the United States by labor and property.
C) final goods produced in the United States by labor and property.
D) garbage produced in the United States.
34. What is an example of a final good?
A) tartar sauce purchased by a fish restaurant
B) corn purchased by a pig farmer
C) bacon purchased at a grocery store
D) rubber purchased by a bicycle company
35. A sheep ranch produces $30 worth of wool. A suit manufacturer produces $60 worth of suits. A retail outlet sells a suit to a customer for $180. The GDP would be:
A) $30.
B) $180.
C) $270.
D) zero, because wool suits are worthless.
36. Suppose a builder in New York City hires an Italian artist to create a major work of art made from Italian marble for an atrium. The artist learned the craft in Italy and normally resides in Rome. The value of the artist's work is included in:
A) Italy's GDP.
B) neither the Italian nor the U.S. GDP because the artist crossed international boundaries.
C) the U.S. GDP.
D) the U.S. GNP.
37. GDP measures the final value of goods and services produced to avoid the problem of:
A) disintermediation.
B) double counting.
C) production by foreign citizens working in the United States.
D) undervaluing the output produced.
38. Company DEF produces gizmos. One particular batch cost $50,000 to produce. Because market conditions were bad at the time of sale, they were sold at a loss for $40,000. The value of the gizmos included in the GDP is:
A) $10,000.
B) $40,000.
C) $50,000.
D) impossible to compute because there is negative profit.
39. If I hire a lawn service to mow my grass, the monies I pay the service are included in the GDP, whereas if I mow my own lawn, the value of this service is not included in the GDP. This fact represents a criticism of the GDP's focus on:
A) avoidance of “double counting.”
B) market-produced goods and services.
C) domestic versus national product.
D) final values of goods and services.
40. Which of the following items would be a durable good?
A) college education
B) horseradish
C) refrigerator
D) Mohawk hair cut
41. The three types of consumption are:
A) compulsive, impulsive, and deliberate.
B) durables, nondurables, and services.
C) investments, nondurables, and services.
D) investments, durables, and services.
Use the following to answer question 42:
42. (Table 15.1) Using the expenditure approach, GDP is:
A) $1,320.
B) $1,720.
C) $1,330.
D) $2,020.
43. Services constitute approximately % of GDP.
A) 70
B) 60
C) 40
D) 10
44. The largest component of GDP is:
A) consumption expenditure.
B) gross private domestic investment.
C) government spending.
D) net exports.
45. Inventories are included in which component of GDP?
A) consumption
B) investment
C) government spending
D) Inventories are not included in GDP
46. Which of the following items is NOT included in gross private domestic investment?
A) residential housing
B) new equipment purchased by businesses
C) purchases of common stock
D) increase in business inventories
47. Economists believe that changes in investment spending are important for forecasting the business cycle because:
A) increases in investment spending raise tax revenues, which allows government to spend more.
B) investment closely reflect consumer sentiment.
C) changes in inventory show where the economy has been.
D) investment is a key determinant of economic growth.
48. Net exports equals:
A) imports divided by exports.
B) imports plus exports.
C) exports minus imports.
D) zero, by definition.
49. What component of American GDP is usually negative in boom years?
A) consumption
B) investment
C) government spending
D) net exports
50. Everything else the same, if investment expenditures rise by $300 billion and imports increase by $300 billion, then GDP:
A) increases by $600 billion.
B) increases by $300 billion.
C) decreases by $600 billion.
D) does not change.
51. Which equation summarizes the expenditures approach to measuring GDP?
A) Y = C + S
B) total spending = total income
C) GDP = C + I + G + (X – M)
D) GDP = NDP + depreciation
52. The largest component of national income is:
A) corporate profits.
B) compensation of employees.
C) proprietor's income.
D) rental income.
53. Income payments to the rest of the world are:
A) zero.
B) added to the GDP.
C) subtracted from the GDP.
D) not included in the GDP.
Use the following to answer question 54:
54. (Table 15.1) Using the income approach, national income is:
A) $1,320.
B) $1,330.
C) $1,570.
D) $1070.
55. Which of the following statements does NOT describe an adjustment to national income to obtain GDP?
A) Net exports are added to national income.
B) A capital consumption allowance is added to national income.
C) Income payments from the rest of the world are added to national income.
D) Payments U.S. corporations and residents send to foreign residents are subtracted from national income.
56. Net domestic product measures:
A) C + I + G + (X – M).
B) GDP minus depreciation.
C) GDP plus income payments from the rest of the world minus income payments to the rest of the world.
D) national income plus income payments from the rest of the world minus income payments to the rest of the world.
Use the following to answer question 57:
57. (Table 15.1) Net domestic product is:
A) $1,770.
B) $1,280.
C) $1,080.
D) $1,580.
58. Which of the following two things can people do with money received as disposable personal income?
A) pay taxes or put money into savings
B) pay taxes or spend the money
C) spend the money or put money into savings
D) pay taxes or buy government bonds
59. Last year, Marian earned $25,000, paid $2,000 in taxes, and saved $5,000. Marian's personal income is , disposable personal income is , and consumption spending is .
A) $20,000; $18,000; $13,000
B) $25,000; $23,000; $18,000
C) $25,000; $18,000; $13,000
D) $23,000; $21,000; $18,000
60. Which of the following activities is an example of a nonmarket transaction?
A) hiring a maid to clean your home
B) employing a lawn service worker to trim your bushes
C) hiring a nanny to take care of your kids
D) growing your own food in a vegetable garden
61. Which of the following items would be included in the GDP accounts?
A) personal time spent learning how to use accounting software
B) personally rotating the tires on your neighbor's car
C) caring for your aged grandmother at home
D) $50 consultation on the phone with a psychic advisor
62. Which of the following is NOT a problem in using GDP to measure standard of living?
A) failure to include environmental impacts
B) failure to include the value of nonmarket work
C) failure to include exports and imports
D) failure to include the value of investments in human capital
63. One difficulty in expanding the NIPA statistics to include nonmarket transactions is that:
A) theoretically, such transactions are not part of a nation's production.
B) there is no price to record.
C) such transactions are not a reliable indicator of what households value.
D) nonmarket transactions are typically illegal.
64. Schumpeter's term “creative destruction” describes the:
A) Luddite's destruction of machines.
B) innovative dynamism of capitalism.
C) working class movement of communism.
D) destruction of buildings.
65. The sector of the economy that may have created the boom of the 1990's was:
A) automobiles.
B) nuclear power.
C) information technology.
D) Wal-Mart.
66. According to Schumpeter, is linked to the first historical wave of innovation, and __ is linked to the second wave of innovation.
A) textiles; railroads
B) textiles; telecommunications
C) textiles; automobile
D) Macintosh computer; iPhone
67. According to Schumpeter, the most important activity that drives business cycles is:
A) consumption.
B) savings.
C) innovation.
D) government direction of the economy.
Ch. 16 Multiple Choice 77 Sample Questions
1. Which is a primary goal of macroeconomic policy?
A) maintaining a zero unemployment rate
B) achieving low inflation
C) reducing prices to their previous historical levels
D) keeping interest rates as low as possible
2. Marge got a 5% raise while the rate of inflation was 6%. Marge's standard of living:
A) grew by about 1%.
B) grew by about 2%.
C) fell by about 3%.
D) fell by about 1%.
3. For your purchasing power to stay the same, your wages must:
A) increase at a rate faster than the rate of inflation.
B) increase at the same rate as the rate of inflation.
C) decrease as the rate of inflation increases.
D) increase at a rate slower than the rate of inflation.
4. If the rate of inflation falls from 10% to 6% to 3%, this episode is described as a:
A) deflation.
B) hyperinflation.
C) disinflation.
D) reflation.
5. An increase of the inflation rate from 10% to 100% is called:
A) inflation.
B) deflation.
C) disinflation.
D) hyperinflation.
6. The CPI measures the:
A) average change in prices paid by urban consumers for a typical market basket of consumer goods and services.
B) average change in prices of goods and services that compose the GDP.
C) average change in prices paid by urban consumers for food, gas, and housing.
D) marginal change in prices paid by urban consumers for a typical market basket of consumer goods and services.
7. The measure of the average change in prices paid by urban consumers for a typical market basket of goods is called the:
A) GDP deflator.
B) producer price index.
C) personal consumption expenditures index.
D) consumer price index.
8. Measuring changes in a fixed basket of goods is a ______ method of measuring changes in price.
A) cost-of-goods index
B) cost-of-living index
C) cost-of-production
D) utility maximization
9. Which of the following statements regarding the CPI is NOT correct?
A) The CPI is a true cost of living measure.
B) The CPI measures the average change in prices paid by urban consumers.
C) The CPI is a conditional cost-of-goods index.
D) The CPI must be adjusted for quality changes in products.
10. Suppose the market basket of goods and services cost $3,500 in 1996 but today costs $4,250. Using 1996 as the base year, the CPI for today is:
A) 79.6.
B) 120.0.
C) 82.4.
D) 121.4.
11. The CPI does NOT include which of the following items?
A) doctor's office visit
B) property taxes
C) apartment rental rates
D) bananas
12. When the BLS calculates the CPI, it assumes that:
A) each consumer maximizes his or her utility.
B) consumers do not substitute cheaper goods for goods whose prices have risen.
C) consumers overspend.
D) there is no unemployment.
13. Suppose the Bureau of Labor Statistics collects the data presented in the following table.
If 2007 is the base year, then the CPI for 2009 is:
A) 100.
B) 114.
C) 115.
D) 125.
14. Most economists believe that the BLS ______ the rate of inflation.
A) understates
B) overstates
C) accurately states
D) disinflates
15. Which of the following assumptions is NOT a problem in using the CPI to accurately state the rate of inflation?
A) The CPI assumes that people do not substitute goods.
B) The CPI does not account for quality changes.
C) The CPI does not include new products.
D) The CPI does not deal with producer prices.
16. Which of the following statements represents a problem involved in accurately measuring the price of health care?
A) Medicaid and Medicare are not tracked.
B) People with good health insurance policies overuse health facilities.
C) Doctors charge excessive and often inaccurate prices.
D) Pharmaceutical prices are not market prices.
17. The ______ reflects only household out-of pocket costs while the ______ includes expenditures made by businesses on behalf of households.
A) CPI; PCE
B) PCE: CPI
C) CPI; PPI
D) PCE; PPI
18. Which of the following statements represents a difference between the CPI and PCE?
A) The PCE has a heavier weighting on food and housing than does the CPI.
B) The CPI is a fixed market basket, updated each period.
C) The PCE is based on GDP components.
D) The CPI includes expenditures made by businesses on behalf of households.
19. Which of the following statements names a difference between the CPI and the PPI?
A) Only the CPI suffers from the problem of quality changes.
B) Only the PPI is plagued by the problem of deleted products.
C) The PPI measures net revenues received by firms, whereas the CPI measures the average change in prices paid by urban consumers.
D) Only the PPI has a fixed market basket.
20. Which statement is correct?
A) The CPI's basket is based on what consumers purchase while the PCE's basket is based on what the economy produces.
B) The CPI and PCE give very different views on the rate of inflation.
C) Business spending on employee health benefits is included in the CPI but not the PCE.
D) Most economists agree that the PCE is a much better indicator than the CPI.
21. What is removed from the full CPI in the definition of “core” CPI?
A) housing
B) medical care
C) food and energy
D) producer prices
22. The price of crude oil would be included in which inflation index?
A) CPI
B) PCE
C) PPI
D) QPI
23. Which of the following measures of inflation is the broadest?
A) CPI
B) GDP deflator
C) PPI
D) PCE
24. Which of the following items is NOT included in the GDP deflator?
A) bubble gum
B) turbines
C) fire engine
D) imported mangos
25. The period of U.S. history that represented the highest rate of inflation was:
A) the Great Depression.
B) World War II.
C) the 1970s.
D) the 1980s.
26. The inflation rate is 4%. Social Security payments automatically rise 4%. This is called an:
A) inflation rate.
B) escalator clause.
C) elevator clause.
D) insanity clause.
27. If the current year's CPI is 214 and last year's CPI is 209, then the rate of inflation is:
A) 2.4%.
B) 5%.
C) 3%.
D) 2.8%.
28. Dave brags to his dad that his starting salary as a computer programmer of $45,000 is much higher than his dad's starting salary of $28,000 some years ago. If the CPI the year Dave begins work is 180.5 and the CPI the year his dad started work was 110.8, Dave is:
A) correct. Adjusting for price changes, his salary is more than his dad's salary.
B) correct. Adjusting for quantity changes, his salary is more than his dad's salary.
C) wrong. Adjusting for price changes, his salary is less than his dad's salary.
D) wrong. Adjusting for quantity changes, his salary is less than his dad's salary.
29. John feels that, due to his substantial increase in productivity last year, he deserves an increase in his salary that is two percentage points above a cost-of-living increase tied to the CPI. The CPI has gone from 160 to 164. If John's salary last year was $50,000, what will it be next year if his boss grants his request?
A) $51,250
B) $48,750
C) $52,220
D) $52,250
30. The GDP is $10 trillion in 2001. The GDP deflator in 2000 is 100 and in 2001 is 110. What is the real GDP?
A) $10 trillion
B) $11.1 trillion
C) $9.09 trillion
D) $110 trillion
31. The GDP deflator for the base year is:
A) less than 100.
B) always equal to 100.
C) greater than 100.
D) dependent on the quantities of output and the prices at which outputs are sold in the base year.
32. Nominal GDP in 2006 was $13,458.2 trillion. The GDP deflator uses 2000 as the base year. In 2006, the GDP deflator was 116.9. What was the real GDP for 2006?
A) $15,732.6 trillion
B) $15,746.1 trillion
C) $11,512.6 trillion
D) $11,522.5 trillion
33. Suppose that anticipated inflation is 4% for the coming year with loan contracts set at 7%, expecting a 3% return after inflation. If the actual inflation rate at the end of the year is 2%, then:
A) creditors gain at the debtors' expense.
B) people on fixed incomes see the purchasing power of their incomes rising.
C) debtors gain at the creditors' expense.
D) there's a redistribution of income from creditors to debtors.
34. Which group is helped by inflation?
A) senior citizens on a fixed income
B) debtors
C) restaurant owners who must reprint menus
D) creditors
35. Which of the following statements about stopping hyperinflation is NOT correct?
A) The government must rein in the budget deficit.
B) A reduction in the growth of the money supply must occur.
C) Borrowing from foreign governments must take place.
D) A new administration and a new currency are usually required.
36. In the Great Depression, ______ out of ______ people in the labor force had jobs.
A) one; four
B) one; two
C) three; four
D) four; four
37. Since World War II, the unemployment rate has ranged between ______% and ______%.
A) 10; 25
B) 0; 5
C) 4; 10
D) 75; 100
38. Which group had the highest unemployment rates between 1980 and 2000?
A) white males
B) young males
C) young females
D) young black males
39. U.S. unemployment rates for 1980–2000 show:
A) workers under age 24 with lower unemployment rates than older workers.
B) higher unemployment rates for whites than for blacks and Hispanics.
C) unemployment rates for college graduates to average 4%.
D) a drop in the total unemployment rate.
40. Joe Bob is irritated with his boss and tells him to “take this job and shove it.” Joe Bob is now unemployed. What percentage of the unemployed are unemployed for the same reason as Joe Bob?
A) 100%
B) 50%
C) 10%
D) 0%
41. In the United States, the Census Bureau computes the unemployment rate from:
A) data on applications for unemployment compensation.
B) data reported to it by firms when employees leave.
C) the Current Population Survey.
D) tax records.
42. The unemployment rate is equal to the:
A) labor force divided by the number of unemployed.
B) number of unemployed divided by the population of the United States.
C) number of unemployed divided by the working age population.
D) number of unemployed divided by the labor force.
43. How many hours a week does a person have to work for pay to be counted as employed?
A) 1 hour
B) 1 hour a day
C) 20 hours
D) 40 hours
44. Patsy works part time for FedEx. She wants to be full time and is looking for work in other sectors. How is Patsy categorized in the unemployment figures?
A) Patsy is considered unemployed.
B) Patsy is considered employed.
C) Patsy is not part of the labor force.
D) Patsy is considered technologically unemployed.
45. Which of the following statements is not one of the criteria for being classified as unemployed?
A) The person is without a job.
B) The person has looked in the want ads.
C) The person is available for work.
D) The person has been actively seeking work for the previous four weeks.
46. Which of the following people would NOT be considered as employed?
A) person working ten hours a week for pay
B) unionized worker on strike
C) unpaid family worker working 10 hours a week
D) full-time worker on vacation last week
47. A passive job search:
A) involves merely talking to friends about jobs.
B) means doing things like sending off resumes.
C) involves the scheduling of job interviews.
D) includes contacting a private employment agency.
48. The unemployed are included in the labor force count because they are:
A) still citizens regardless of their employment status.
B) willing and able to use their labor as a resource for producing GDP.
C) collecting unemployment benefits.
D) still part of the economy as consumers.
49. Johnny works in his father's bubble gum store 10 hours a week after school. His father pays him no money but buys video games for him. Johnny earns a spot on the high school football team and no longer works in his father's store. How is Johnny categorized in the unemployment figures?
A) Johnny is considered unemployed.
B) Johnny is considered employed because he works hard at his football career.
C) Johnny is not part of the labor force.
D) Johnny is considered underemployed.
50. Robert lost his job and now takes care of the children while his wife works. Robert has decided he likes his “daddy duties.” Robert would take a job similar to one he lost if it was offered, but he is not actively seeking work. How is Robert categorized in the unemployment figures?
A) Robert is considered unemployed.
B) Robert is considered employed because he is providing a useful product.
C) Robert is not part of the labor force.
D) Robert is considered underemployed.
51. Workers who are not at work but have a job to return to after a temporary absence are considered to be:
A) unemployed.
B) in the labor force.
C) temporarily unemployed.
D) part-time employed.
52. Scott has a Ph.D. in sociology and drives a taxicab for a living. Scott is categorized as:
A) unemployed.
B) not part of the labor force.
C) underemployed.
D) discouraged.
53. Which of the following statements about discouraged workers is NOT correct?
A) Discouraged workers have stopped actively seeking work.
B) Discouraged workers are not classified as unemployed.
C) Discouraged workers are considered underemployed.
D) Discouraged workers are considered part of the leisure class, not part of the labor force.
54. Workers who want to work but have been frustrated by the inability to find work and have stopped searching are known as:
A) the invisible unemployed.
B) temporary workers.
C) discouraged workers.
D) the disgruntled unemployed.
55. All of the following types of wages can cause unemployment EXCEPT:
A) minimum wages.
B) union wages.
C) efficiency wages.
D) equilibrium wages.
56. People who are structurally unemployed:
A) are involuntarily unemployed.
B) are voluntarily unemployed.
C) lack structure in their lives and so get fired a lot.
D) work in industries that are service oriented.
57. Which of the following statements regarding the types of unemployment is true?
A) Frictional unemployment is generally short-term, whereas structural unemployment is often long-term.
B) Cyclical unemployment is due to expansions in the business cycle.
C) Frictional unemployment is brought about by changes in technology.
D) Structural unemployment is the result of normal labor turnover.
58. Which of the following actions would reduce frictional unemployment?
A) holding job fairs
B) retraining workers to use computers
C) taming the business cycle
D) subsidizing obsolete technologies
59. During the 1970s when handheld calculators became popular and replaced slide rules in performing computations, workers in the slide rule industry lost their jobs. What type of unemployment did these workers experience?
A) frictional unemployment
B) cyclical unemployment
C) structural unemployment
D) natural unemployment
60. Eliminating the business cycle would eliminate ______ unemployment.
A) frictional
B) structural
C) seasonal
D) cyclical
61. Cyclical unemployment occurs when:
A) workers are fired.
B) workers quit their jobs to raise families.
C) the economy slows down and workers are laid off.
D) workers retire earlier than age 66.
62. Full employment:
A) takes place at an unemployment rate of 0%.
B) consists of frictional and cyclical unemployment.
C) consists of structural and cyclical unemployment.
D) occurs if cyclical unemployment is zero.
63. Suppose an economist breaks the unemployment rate into the following components: frictional (2%), structural (1%), and cyclical (4%). Based on these estimates, the natural rate of unemployment is:
A) 0%.
B) 3%.
C) 5%.
D) 7%.
64. Natural unemployment occurs when:
A) cyclical unemployment is zero.
B) frictional unemployment is zero.
C) structural unemployment is zero.
D) frictional unemployment and structural unemployment are zero.
65. If the actual unemployment rate is at its natural rate, then:
A) inflation is very low.
B) there is deflation.
C) the unemployment rate is zero.
D) interest rates are rising.
66. Full employment, as defined by this book:
A) is the natural rate of unemployment.
B) occurs when the inflation rate is negative.
C) occurs when only frictional unemployment is present.
D) occurs when the entire population has a job.
67. NAIRU would be achieved when unemployment is ______ and inflation is ______.
A) zero; 10%
B) zero; 5%
C) 5%; 5%
D) 8%; 1%
68. The natural rate of unemployment:
A) is the sum of frictional, structural, and cyclical unemployment.
B) is the level of unemployment at which the actual inflation rate equals the expected inflation rate.
C) occurs when the expected unemployment rate equals the actual unemployment rate.
D) depends on the swings in the business cycle.
69. The term “jobless recovery” means that:
A) an expansion never occurs.
B) job loss in the economy continues even after a recession ends.
C) the trough in the business cycle continues.
D) a recession is imminent.
70. The Establishment Survey asks questions about employment in:
A) the agricultural industry.
B) manufacturing and the service industry.
C) Wall Street establishment firms.
D) households.
71. If a worker is laid off from a large firm but quickly finds work in a new start-up company, the Establishment Survey will show:
A) no change in employment.
B) an increase in employment.
C) a drop in employment.
D) first an increase and then a decrease in employment.
72. Suppose Amy works at two jobs. If both employers participate in the Establishment Survey, then:
A) the position at one firm cancels the position at the other.
B) Amy will be called up by the Labor Department for a further interview.
C) Amy is counted as two workers.
D) Amy will be taxed twice.
73. A laid-off worker files for and receives unemployment benefits. However, the worker also finds a job that pays in cash and does not withhold taxes. When asked for employment status on the Household Survey, this person is likely to deny being at a job. This response would:
A) cause the official unemployment rate to be overstated.
B) cause measured frictional unemployment to fall.
C) cause the official unemployment rate to be understated.
D) have no effect on the official unemployment rate.
74. Which statement is correct?
A) The Household and Establishment Surveys imply the same unemployment rate.
B) The Household Survey captures the job status of the self-employed.
C) The Establishment Survey is universally deemed to be more reliable than the Household Survey.
D) The employment figures from both the Household and Establishment Surveys are never revised.
75. The Household Survey is a great source of discovering:
A) entrepreneurial activity.
B) manufacturing activity.
C) inflationary trends.
D) outsourcing trends.
76. Which survey understates job creation?
A) Establishment Survey
B) Household Survey
C) GDP deflator
D) Employment Survey
77. Which of the following is NOT a difference between the Establishment Survey and the Household Survey of the Labor Department?
A) The Establishment Survey has a much larger sample than the Household Survey.
B) The Household Survey counts people employed only once, while the Establishment Survey counts people with multiple jobs several times.
C) The Household Survey covers all workers, including the self-employed, while the Establishment Survey counts only wage and salary workers on non-farm payrolls.
D) The Establishment Survey counts the number of employed individuals, and the Household Survey counts the number of jobs.
AP Economics: Ch. 17 Multiple Choice 75 Sample Questions KEY
1. Which of the following items is primarily a long-run economic concern?
A) standard of living
B) inflation
C) budget deficit
D) interest rates
2. Economic growth deals with
A) the short-term goal of keeping the economy near full employment with low inflation.
B) the short-run government provision of safety nets for the poor.
C) long-term conditions to improve a nation's standard of living.
D) policies that may correct short-run fluctuations in the business cycle.
3. Classical economists broke the economy into the following markets. Pick the one that does not fit.
A) product market
B) labor market
C) capital market
D) entrepreneur's market
4. In the classical model, what determines the price of wages for labor?
A) rate of inflation
B) rate of economic growth
C) forces of demand and supply
D) price of human capital
5. Which economist is NOT considered to be of the classical school?
A) Adam Smith
B) Karl Marx
C) Thomas Malthus
D) John Maynard Keynes
6. Which conclusion is typical of the classical economic model?
A) Monopolies are a significant part of the economy.
B) Markets rarely clear.
C) Markets keep the economy near full employment.
D) Government intervention in pricing is needed for economic stability.
7. Which of the following markets is part of the aggregate economy of the classical model?
A) loanable funds market
B) bond market
C) stock market
D) capital market
8. Which of the following is a component of classical economic thinking?
A) Unemployment problems can persist in the economy.
B) Product, labor, and capital markets are noncompetitive.
C) Government interaction is needed to bring about equilibrium in markets.
D) The competitive interaction of supply and demand in the markets keeps the economy operating near full employment.
9. Which of the following is NOT a factor in the aggregate production function?
A) labor
B) technology
C) money
D) capital
10. In the aggregate production function, Q = Af(K,L):
A) all inputs can change in the long run.
B) all inputs are fixed in the short run.
C) aggregate output can increase only if the labor resource increases.
D) aggregate output is independent of the level of technology.
11. In the aggregate production function, GDP is determined by:
A) technology.
B) technology and capital.
C) technology, capital, and labor.
D) technology, capital, labor, and the forces of demand and supply.
12. In the aggregate production function, when capital and technology are constant and labor increases, what happens to the aggregate economy?
A) inflation decreases
B) GDP decreases
C) labor costs decrease
D) GDP increases
13. The demand for labor slopes down and to the right due to:
A) diminishing returns.
B) productivity increases.
C) ennui.
D) lack of human capital.
14. According to the classical economists, workers decided how much labor they wished to supply by the:
A) purchasing power of their wages.
B) trade-off between work and relaxation.
C) size of their families.
D) need for food.
15. According to the classical theory, all unemployment:
A) is voluntary.
B) is involuntary.
C) can be eliminated by proper public policy.
D) is inversely related to inflation.
16. According to the classical theory, if the demand for labor falls:
A) wages fall, prices fall, and demand for labor increases.
B) wages fall, prices fall, real GDP falls, and demand for labor falls even farther.
C) people starve to death.
D) the supply of labor will increase.
17. In the classical model, the two main factors that can increase long-run employment are
A) increases in capital and technology.
B) tax cuts and government spending.
C) tax cuts and decreases in interest rates.
D) increased consumption spending and decreased capital spending.
18. In the classical labor markets, if the labor force shrinks, the supply of labor will _________ and the real wage will _________.
A) decrease; decrease
B) increase; increase
C) increase; decrease
D) decrease; increase
19. In the classical labor markets, if at the same time that more capital is employed, the labor force shrinks:
A) real wages and the level of employment will both rise.
B) real wages will fall, but the level of employment will rise.
C) the effect on real wages is uncertain, but the level of employment will fall.
D) real wages will rise, but the effect on the level of employment is uncertain.
20. Say's law states that:
A) a glut of goods is possible in the economy.
B) demand creates its own supply.
C) supply creates its own demand.
D) income may be too low to buy goods and services.
21. Which of the following statements does NOT follow from Say's law?
A) Supply creates its own demand.
B) The production of a commodity automatically creates enough income for it to be bought.
C) There can be no deficiency in aggregate spending.
D) People who save hurt the economy.
22. An assumption of Say's law is that:
A) producers will increase production if they see a demand for the product.
B) all income eventually is spent.
C) saving is to be discouraged because it reduces total spending.
D) wages are inflexible.
23. According to the classical theory:
A) savings and investment are inversely related.
B) savings and the interest rate are inversely related.
C) investment and the interest rate are inversely related.
D) savings and investment are not related.
24. In the classical model, if consumption spending decreases:
A) investment spending falls off too.
B) the economy could fall below full employment for some time.
C) investment spending increases, returning the economy to full employment.
D) savings, interest rates, and investment spending all rise.
25. As interest rates fall:
A) the quantity of investment demanded rises.
B) the quantity of savings supplied rises.
C) investment demand rises.
D) investment demand falls.
26. According to the classical model, what mechanism ensures full employment?
A) flexible wages and prices
B) appropriate governmental policy
C) continual fall of real wages
D) technology
27. According to the classical model, which of the following items are perfectly flexible?
A) real wages
B) interest rates
C) prices
D) real wages, interest rates, and prices
28. Malthus believed that population increased ______ and food resources increased ______.
A) arithmetically; geometrically
B) geometrically; arithmetically
C) irresponsibly; economically
D) meagerly; substantially
29. 1000, 2000, 4000, 16,000. Malthus would say that what part of the economy would increase at that rate?
A) population
B) food
C) GDP
D) inflation
30. To have long-term economic growth, the classical economists prescribed:
A) keeping interest rates high to encourage saving.
B) increasing the availability of technology, capital, and labor.
C) increasing government oversight over business decisions.
D) redistributing income from the wealthy to the poor.
31. Which of the following changes will NOT result in economic growth in the classical model?
A) improvements in the productivity of labor
B) increases in consumption spending
C) increases in capital
D) improvements in technology
32. One weakness of the classical model is that:
A) it overemphasizes the role of labor in the economy.
B) markets never clear in reality.
C) it neglects the economic role of prices.
D) it gives little guidance to solving short-term stabilization problems.
33. According to the classical model, which of the following developments does NOT contribute to economic growth?
A) labor productivity
B) more capital
C) technological change
D) higher interest rate
34. The U.S. labor force is expanding faster than the population. What is one reason?
A) increases in family size due to subsidized day care
B) emigration by the elderly from the United States to Europe
C) increased participation in the labor force by women
D) decreases in the rate of immigration in the 1990s
35. Which of the following statements is NOT correct?
A) The American labor force has grown faster than the population over the last few decades.
B) The participation rate of women in the labor force has increased over the last few decades.
C) The progressivity of the income tax has increased over the past several decades.
D) Day care subsidy programs have increased over the last few decades.
36. Earnings are positively correlated with:
A) worker productivity.
B) the supply of workers.
C) the unemployment rate.
D) the tax burden.
37. Suppose the country of Ecoland has seen a decline in its labor force of 5%, mostly due to emigration. If the productivity of labor increased by 6%, then Ecoland's GDP:
A) dropped by 6%.
B) dropped by 1%.
C) rose by 6%.
D) rose by 1%.
38. The higher the productivity of a nation, the:
A) greater is its population growth.
B) lower is its capital to labor ratio.
C) larger is its labor force.
D) higher is its standard of living.
39. Which of the following occurrences is NOT a source of productivity growth?
A) increasing the capital-to-labor ratio
B) increasing the level of consumption spending
C) increasing the quality of the labor force
D) improvements in technology
40. Developed nations tend to have:
A) limited labor supplies but lots of capital.
B) low capital-to-labor ratios.
C) limited amounts of both labor and capital.
D) large amounts of both labor and capital.
41. The capital-to-labor ratio is:
A) high in rich countries.
B) high in poor countries.
C) a key element in decreasing real wages.
D) the ratio of managers to workers.
42. Which of the following strategies is an example of increasing the capital to labor ratio?
A) replacing out-of-date PCs with newer PCs
B) sending workers to training classes
C) giving a construction crew more backhoes
D) increasing the number of workers harvesting the crop in a field
43. Human capital refers to the:
A) equipment, buildings, and inventories that firms have.
B) funds firms raise by selling stocks and bonds.
C) skills, knowledge, and quality of workers.
D) infrastructure of a nation.
44. Which of the following items is NOT an example of investment in human capital?
A) policy of universal education
B) on-the-job training
C) acquisition of skills no longer needed
D) apprenticeship
45. Decreasing the accessibility to college in order to funnel workers into the workforce faster will:
A) decrease productivity for the economy.
B) increase productivity for the economy.
C) increase real wages.
D) have no impact on the economy.
46. The following table shows data for four countries.
The table shows that the country with the most productive workers is:
A) A.
B) B.
C) C.
D) D.
47. Which of the following technologies most strongly affected the growth in U.S. productivity in recent decades?
A) railroad
B) microcomputers
C) ticker tape
D) petrochemicals
48. What is the primary explanation for the rapid growth the U.S. economy has experienced over the last century?
A) increases in the number of immigrants
B) increases in human capital
C) increases in government spending for the infrastructure
D) technological progress
49. Modern growth theory:
A) emphasizes the role that increases in the capital to labor ratio have played in stimulating economic growth.
B) emphasizes the external benefits of knowledge, which results in increasing returns and rising standards of living.
C) assumes that knowledge has only private good aspects.
D) stresses that increasing the quality of the labor force is most important in improving labor productivity.
50. Paul Romer focused attention on the:
A) positive externalities of knowledge.
B) negative externalities of knowledge.
C) declining literacy rate of the United States.
D) need for rigorous enforcement of intellectual rights to prevent spillovers.
51. Increases in the capital to labor ratio tends to:
A) increase productivity.
B) decrease productivity.
C) decrease economic growth.
D) decrease profits.
52. Which of the following activities exhibits increasing returns?
A) mining
B) agriculture
C) scientific experimentation
D) petrochemical production
53. Robert Solow added what variable to modern growth theory?
A) consumption
B) capital-to-labor ratio
C) technology
D) immigration
54. Which of the following resources is an example of infrastructure?
A) computer manufacturing plant
B) coal mine
C) newly drained swamp
D) elementary school
55. Which of the following institutions is NOT an example of our nation's infrastructure?
A) interstate highway system
B) Hoover Dam
C) buildings of General Electric
D) subway system
56. Which of the following institutions is the best example of public capital?
A) accounting network of a public utility
B) mall
C) Department of Motor Vehicles
D) highway system
57. Which of the following factors is NOT generally viewed by economists as among the most critical in economic growth?
A) strong and fair legal system
B) stable monetary system
C) access to large amounts of natural resources
D) economic freedom
58. One of the reasons that property rights are important for economic development is that without legal ownership:
A) loans cannot be obtained.
B) consumption will be lowered.
C) money cannot be passed along to heirs.
D) no one will plant flower gardens.
59. An example of intangible infrastructure is:
A) patent laws.
B) public education facilities.
C) transportation networks.
D) power transmission lines.
60. The reason a legal system that enforces property rights is important to economic growth is that:
A) legal protection of ideas and technologies gives people who innovate the ability to protect their work.
B) the legal system can help the government with tax collection.
C) strong laws demonstrate commitment by legislators to economic growth.
D) bankruptcy laws encourage lending.
61. One of the basic necessary infrastructures for stable economic growth is a:
A) stable financial system.
B) lack of public capital.
C) currency backed by gold.
D) currency backed by silver.
62. One way a stable financial system supports economic growth is that it
A) subsidizes borrowers of financial capital.
B) helps keep inflation low.
C) keeps tax rates low.
D) increases the incidence of unanticipated price changes.
63. A stable financial system is important for all of the following reasons except:
A) keeping the purchasing power of the currency stable.
B) maintaining bank profitability.
C) facilitating transactions.
D) permitting credit institutions to arise.
64. The economic freedom index:
A) measures the quality of a country's intangible infrastructure.
B) is completely objective.
C) measures the distribution of income.
D) measures the degree of tolerance with respect to drugs.
65. The economic freedom index shows that:
A) countries with the most economic freedom have the lowest real per capita GDP.
B) the growth in real per capita GDP during the 1990s was generally lower for those countries with higher levels of economic freedom.
C) that countries with the least economic freedom have the highest real per capita GDP.
D) the growth in real per capita GDP during the 1990s was generally higher for countries with higher levels of economic freedom.
66. Economic freedom is associated with:
A) socialism.
B) anarchy.
C) economic growth.
D) good distribution of income.
67. After World War II, development aid primarily was used for:
A) public capital.
B) private capital.
C) promoting democracy.
D) promoting property and intellectual rights.
68. According to Peter Bauer, the proper role for governments in poor countries in developing their economies is to:
A) seek out foreign aid from rich countries.
B) build large infrastructure projects such as dams and power plants.
C) protect property rights and enforce contracts.
D) establish a variety of state-run businesses.
69. “Creative destruction” occurs when
A) companies attempt to destroy the demand for their competitors' product.
B) the periodic emergence of innovation boosts the economy.
C) new technology is born out of the same theories that lead to the old technology.
D) firms plan for their products to become obsolete so that consumers will be forced to buy replacements.
70. The first major wave of innovation included which innovation?
A) iron smelting
B) steel production
C) telephone
D) nanotechnology
71. The second major wave of innovation included which innovation?
A) canal transport
B) railway transport
C) automobile
D) aviation
72. The third major wave of innovation included which innovation?
A) textile manufacturing
B) telegraph
C) telephone
D) transistor
73. The fourth major wave of innovation included which innovation?
A) internal combustion engine
B) petrochemicals
C) nanotechnology
D) biotechnology
74. According to Stone, the fifth wave of innovation may stem from which innovation?
A) solar power
B) DNA sequencing
C) space exploration
D) virtual worlds
75. According to William Baumol, the innovation wave cycle has become shorter because:
A) most of the economic benefits of innovation spill over into the broader economy.
B) the capitalistic system has stagnated, producing fewer and fewer ideas over time.
C) government involvement in the economy has increased since World War II.
D) large firms have reduced their use of cross licensing.
AP Economics Ch. 18 Multiple Choice 80 Sample Questions
1. After the acceptance of Keynesian analysis, government:
A) played a role in setting the interest rate only.
B) tripled its share of the GDP.
C) reduced its role in the operation of the economy.
D) turned to communism as the only solution to the Great Depression.
2. The book that most influenced post-Great Depression economic thinking on government policy was:
A) Keynes's General Theory of Employment, Interest and Money.
B) Marx's Das Kapital.
C) Samuelson's Economics.
D) Say's Catechism of Political Economy.
3. John Maynard Keynes is most famous for the book:
A) An Inquiry into the Nature and Causes of the Wealth of Nations.
B) Principles of Political Economy.
C) The General Theory of Employment, Interest and Money.
D) An Essay on the Principle of Population as It Affects the Future Improvement of Society.
4. According to Keynes, the most important economic variable that explains fluctuations in the economy is:
A) consumption.
B) investment.
C) the interest rate.
D) property rights.
5. Whereas the classical model focuses on the _____________, the Keynesian model emphasizes the _____________.
A) upcoming quarter; long run
B) short run; long run
C) long run; short run
D) very short run; short run
6. In the Keynesian simple model of the economy:
A) the price level is fixed.
B) the interest rate is zero.
C) GDP is equal to net national product.
D) savings are zero.
7. Personal consumption expenditures:
A) represent 30% of GDP.
B) can be found by subtracting saving from disposable income.
C) primarily depend on interest rates according to Keynes.
D) are very unstable as a percentage of GDP over time.
8. Along the 45-degree line in the graph of consumption and disposable income:
A) consumption is equal to disposable income.
B) consumption is equal to total savings.
C) consumption is equal to marginal savings.
D) the interest rate is zero.
9. In the Keynesian simple model, the only two things you can do with your income are:
A) paying taxes and spending it.
B) spending it and saving it.
C) spending it and investing it.
D) saving it and giving it.
10. Savings are equal to:
A) disposable income minus consumption.
B) consumption minus disposable income.
C) investment minus government taxes.
D) government taxes minus investment.
11. According to Keynes, as income grows:
A) consumption spending alone grows.
B) saving alone grows.
C) saving falls.
D) both consumption spending and saving grow.
12. John Maynard Keynes was:
A) British.
B) American.
C) German.
D) Austrian.
13. Classical economists claim that ______ is the primary determinant of savings, and Keynes claims that ______ is the primary determinant of savings.
A) the interest rate; income
B) income; the interest rate
C) taxes; government spending
D) GDP; disposable income
14. As income increases, consumption ______ but ______ than income increases.
A) increases; slower
B) increases; faster
C) decreases; slower
D) decreases; faster
15. The average propensity to consume is:
A) always stable.
B) equal to consumption divided by income.
C) equal to income divided by consumption.
D) the increase in consumption derived from an increase in income.
16. Which of the following statements is correct?
A) It is possible for both the APS and the MPS to be negative.
B) It is possible for both the APC and the MPC to be negative.
C) Only the APS may be negative.
D) It is possible for both the APC and the APS to be negative.
17. Which of the following statements is NOT correct?
A) MPC + MPS = 1
B) APC + MPS = 1
C) APC + APS = 1
D) Y = C + S
18. The marginal propensity to consume:
A) increases when income increases.
B) is the change in consumption associated with a change in income.
C) is equal to consumption divided by income.
D) decreases when income increases.
19. If the MPC is .9 and income increases from $10,000 to $11,000, how much does consumption increase?
A) $11,000
B) $1,000
C) $900
D) $100
20. MPC + MPS:
A) equals 1.
B) equals .75.
C) equals zero.
D) is always a negative number.
21. When the consumption schedule lies above the 45-degree reference line, consumption spending is:
A) greater than income and saving is positive.
B) less than income and saving is positive.
C) greater than income and saving is negative.
D) less than income and saving is negative.
22. The slope of the saving schedule is:
A) the MPC.
B) 1 – MPC.
C) the APC.
D) the APS.
23. If the stock market collapses, consumption will:
A) not be affected.
B) increase, but stocks can now be purchased cheaply.
C) decrease because people feel less wealthy.
D) mildly increase.
24. Which of the following factors will NOT shift the consumption schedule?
A) income
B) wealth of a family
C) family debt
D) expectations about future prices and income
25. In comparing gross private domestic investment (GPDI) with consumption spending (C), we can determines that GPDI is a ______ component of GDP than is C.
A) more volatile and larger
B) less volatile and larger
C) more volatile and smaller
D) less volatile and smaller
26. Investment constitutes what percentage of GDP?
A) 5%–8%
B) 15%–20%
C) 50%
D) 67%
27. Given the rate of return on capital, the lower the interest rate, the:
A) smaller is the number of feasible investment projects.
B) greater is the quantity of investment demanded.
C) farther to the right lies the investment demand curve.
D) farther to the left lies the investment demand curve.
28. The primary determinant of investment demand is:
A) high levels of consumption in the economy.
B) strong government demand.
C) opportunities for profit.
D) tax incentives.
29. Firms decide how much to invest by comparing the rate of return on their projects with:
A) their total profit.
B) the productivity of the workers assigned to the projects.
C) the interest rate.
D) before-tax rate of return.
30. If the interest rate increases, investment will:
A) decrease.
B) increase.
C) not be affected.
D) fall to zero.
31. A shift in the investment demand curve would NOT be caused by a change in:
A) the market interest rate.
B) expectations.
C) technology.
D) operating costs.
32. Suppose a business's expected rates of return on projects improve because new forecasts of overall economic conditions are more positive than previous forecasts. One would expect:
A) interest rates to rise.
B) the demand for investment to rise.
C) investment in capital goods but not research and development to rise.
D) business investment to remain unchanged.
33. John increases sales of his jalapeño candy peeps 20% and increases the capacity utilization rate for his candy factory from 60% to 75%. This situation will probably:
A) induce new investment.
B) not lead to new investment.
C) increase prices.
D) decrease prices.
34. In a graph displaying autonomous investment, investment is:
A) negatively related to interest rates.
B) positively related to income.
C) positively related to business expectations.
D) a horizontal line at all income levels.
35. With respect to income, the investment schedule in the short run is:
A) infinitely elastic.
B) perfectly inelastic.
C) relatively elastic.
D) relatively inelastic.
36. One of the simplifying assumptions of the simple Keynesian model is to:
A) assume that consumption is fixed.
B) assume that APC is fixed.
C) ignore the trade balance.
D) ignore investment.
37. In the Keynesian model, the variable that guides businesses to produce the equilibrium amount of output is:
A) price changes.
B) the rise and fall in inventory levels.
C) government signaling.
D) consumer income.
38. In the simple Keynesian model, if planned investment is greater than planned saving:
A) the multiplier effect will move the economy to a lower income level.
B) income and output will rise.
C) interest rates will rise to reduce investment.
D) actual savings will fall as the economy moves to a lower output level.
39. The simple Keynesian model (which excludes the government and foreign sectors) shows equilibrium where:
A) Y = C + I and S < I.
B) Y = C + I and S > I.
C) Y = C + I and S = I.
D) Y = C and S = 0.
40. The following table shows some data on consumption at various levels of income.
Investment spending is $600. If there are no government spending or net exports, the equilibrium income level is:
A) $1,000.
B) $2,000.
C) $3,000.
D) $4,000.
41. When the economy is in equilibrium in the simple private sector model:
A) saving is greater than investment.
B) investment is greater than saving.
C) saving is equal to investment.
D) investment is equal to consumption.
42. Macroeconomic equilibrium in the simple Keynesian model occurs where:
A) the consumption plus investment schedule intersects with the reference line.
B) savings is greater than investment.
C) C = Y + S.
D) S = Y + C.
43. Income rises when desired investment is:
A) greater than savings.
B) less than savings.
C) equal to savings.
D) less than required investment.
44. Spending that reduces aggregate income is called:
A) negative spending.
B) withdrawals.
C) injections.
D) reverse spending.
45. Unlike the classical economists, Keynes stated that during the Great Depression in the 1930s:
A) equilibrium output would automatically occur at full employment.
B) savings would equal investment solely due to interest rate changes.
C) equilibrium output could occur at high unemployment rates.
D) if consumption spending dropped, investment spending would increase to keep the economy at the natural rate of unemployment.
46. One of the insights Keynes had regarding the Great Depression was that:
A) economies in real life can never achieve equilibrium.
B) full employment is always present in equilibrium.
C) consumer and investment spending are needed to “spend our way out of a recession.”
D) the economy can be in equilibrium and not be at full employment.
47. In the simple Keynesian model with no government and foreign sectors, assume that full employment occurs at an output of $10,000. With an MPC = 0.5 and equilibrium output currently at $9,600, by how much would investment spending have to increase to move the economy to full employment?
A) $100
B) $400
C) $200
D) $50
48. In the simple Keynesian model with no government and foreign sectors, suppose initially that the economy is in equilibrium at an output of $10 trillion with an MPC = 0.8. If investment spending increases by $0.5 trillion, what is the new equilibrium output level?
A) $10.5 trillion
B) $12.5 trillion
C) $12.0 trillion
D) $10.8 trillion
49. In the simple Keynesian model with no government and foreign sectors, assume that the economy is in equilibrium at an output of $2 billion with an MPC = 0.9. If investment spending decreases by $.05 billion, what is the new equilibrium output level?
A) $1.95 billion
B) $2.50 billion
C) $1.90 billion
D) $1.50 billion
50. One result of the spending multiplier is that it:
A) leads to the taming of the business cycle.
B) reduces the need for government intervention in the economy.
C) contributes to the volatility of the business cycle.
D) reduces the importance of spending in the economy.
51. Suppose that Japan is a nation of savers and has a marginal propensity to consume of .6. Suppose that the United States, a nation of spenders, has a marginal propensity to consume of .9. Which of the following statements is correct?
A) A small increase in spending will have a more powerful effect in starting a recovery in the United States than in Japan.
B) The Japanese economy is not in equilibrium.
C) The Japanese economy is more susceptible to a recession caused by a drop in spending.
D) The United States economy tends to overheat from too much spending.
52. Assume that the marginal propensity to consume is .75. John's Clean Clones builds a factory that cost $1 billion. How much does the macroeconomic equilibrium increase?
A) $1 billion
B) zero
C) $10 billion
D) $4 billion
53. The marginal propensity to save in Keynesland is .25. The value of its spending multiplier is:
A) .25.
B) .75.
C) .50.
D) 4.
54. If the MPC rises, the multiplier:
A) also rises.
B) falls.
C) stays the same.
D) rises or falls, depending on the size of the increase in the MPC.
55. If the MPS rises, the multiplier:
A) also rises.
B) falls.
C) stays the same.
D) rises or falls, depending on the size of the increase in the MPS.
56. The multiplier process points out that:
A) initial changes in spending have magnified effects on income.
B) the initial round of spending leads to additional rounds of spending.
C) saving grows with additional income.
D) initial changes in spending have magnified effects on income, the initial round of spending leads to additional rounds of spending, and saving grows with additional income.
57. The formula for the simple spending multiplier is:
A) 1/(1 – MPC).
B) MPC + MPS.
C) 1/MPC.
D) 1/(MPC + MPS).
58. If the MPC is .9, what is the size of the multiplier?
A) 9
B) .1
C) 1
D) 10
59. During the millennium scare of 2000, Rufus reduced his monthly spending by $1,000 and buried his money in the backyard. If the MPC is .75, how much did national income fall?
A) $1,000
B) zero
C) $4,000
D) It actually increased $4,000.
60. In an economy with three sectors (household, business, and government), government spending is $5 billion, taxes are $4 billion, and investment is $4 billion. If the economy is in equilibrium then saving is:
A) $1 billion.
B) $4 billion.
C) $5 billion.
D) $9 billion.
61. A tax increase has a smaller impact on the economy than does a decrease in government spending of the same magnitude because:
A) Congress drags its feet in passing tax increases.
B) consumers pay for part of the tax increase by reducing their saving.
C) tax changes have more of a direct impact on income than does an equivalent change in government spending.
D) fiscal policy is weaker than monetary policy.
62. If the MPC = 0.8 and the government reduces taxes by $5 billion, equilibrium income will:
A) fall by $25 billion.
B) rise by $25 billion.
C) rise by $20 billion.
D) fall by $20 billion.
63. If the MPC = 0.6 and the MPS = 0.4 and government spending increases by $2 billion at the same time taxes are increased by $2 billion, equilibrium income will:
A) rise by $2 billion.
B) not change.
C) fall by $2 billion.
D) rise by $5 billion.
64. If a government always balances its budget, then:
A) the economy can never slide into a recession.
B) raising taxes has no net effect on total spending.
C) economic growth would be spurred by showing businesses that budgets can be balanced.
D) the effect of an increase in government spending on aggregate expenditures is weakened.
65. If the government spends $1 billion to create a wetlands preserve, taxes increase $1 billion to pay for it, and the MPC is .75, what is the impact on the economy?
A) GDP remains unchanged.
B) GDP increases $1 billion.
C) GDP increases $4 billion.
D) GDP decreases $1 billion.
66. Assume that the economy is currently at equilibrium at $10 trillion, with an MPC = 0.75. If exports rise by $0.5 trillion and imports increase by $0.7 trillion, equilibrium income will:
A) not change.
B) fall by $0.2 trillion.
C) rise by $2 trillion.
D) fall by $0.8 trillion.
67. Assume that the economy is currently at equilibrium at $12 trillion, with an MPC = 0.80. If exports rise by $0.2 trillion and imports decrease by $0.2 trillion, equilibrium income will:
A) not change.
B) rise by $2 trillion.
C) rise by $0.2 trillion.
D) fall by $0.2 trillion.
68. Assume that the economy is currently at equilibrium at $12 trillion, with an MPC = 0.75. If exports rise by $0.1 trillion and imports increase by $0.1 trillion, equilibrium income will:
A) not change.
B) rise by $0.1 trillion.
C) fall by $0.1 trillion.
D) rise by $0.4 trillion.
69. Exports are ______ of spending into the economy and imports are ______ of spending into the economy.
A) injections; withdrawals
B) withdrawals; injections
C) injections; also injections
D) withdrawals; also withdrawals
70. The amount of increase in aggregate spending needed to bring an economy to full employment is called the:
A) goal-oriented spending.
B) inflationary gap.
C) gap closure spending.
D) recessionary gap.
71. The full employment level of income is $50 trillion. Current income is $40 and the MPC is .8. What is the size of the recessionary gap?
A) $1 billion
B) $2 billion
C) $10 billion
D) $20 billion
72. Assume that the multiplier is .9. Full employment is considered to be at a GDP level of $500 billion. The current GDP is $400 billion. What should the government do to achieve full employment?
A) increase spending by $25 billion
B) increase spending by $10 billion
C) reduce spending by $25 billion
D) reduce spending by $100 billion
73. The GDP gap divided by the multiplier yields the:
A) optimal level of government spending.
B) inflationary or recessionary gap.
C) equilibrium level of injections and withdrawals.
D) full-employment level of income.
74. If equilibrium income falls short of full employment, the economy:
A) is experiencing an inflationary gap.
B) would eliminate the gap with a tax increase.
C) could close the gap if businesses increased their investment.
D) would benefit from a reduction in government spending on homeland security.
75. Assume that the multiplier is .8. Full employment is considered to be at a GDP level of $500 billion. The current GDP is $400 billion. The government is committed to a balanced budget. What should the government do to achieve full employment?
A) increase taxes by $100 billion and increase government spending by $100 billion
B) increase taxes by $20 billion and increase government spending by $100 billion
C) increase taxes by $25 billion and increase government spending by $100 billion
D) increase government spending by $100 billion and reduce taxes by $100 billion
76. Assume that the MPC is .8. Full employment is considered to be at a GDP level of $500 billion. The current GDP is $400 billion. Which of the following events would drive the economy to full employment?
A) increased government spending of $10 billion dollars
B) increased investment of $20 billion dollars
C) increased consumption of $10 billion dollars
D) decreased taxes of $10 billion dollars
77. If full employment income is $10 trillion, equilibrium income is $10.5 trillion, and the MPC = 0.8:
A) the inflationary gap is $0.5 trillion.
B) a decrease in spending of $0.5 trillion will move the economy to full employment.
C) the recessionary gap is $0.1 trillion.
D) a reduction in investment or government spending of $0.1 trillion will move the economy to full employment.
78. The following figure shows an economy where the actual income is $3 billion and the full-employment level of income is $5 billion.
The inflationary gap is:
A) $1 billion.
B) $2 billion.
C) $3 billion.
D) $5 billion.
79. Assume that the multiplier is .75. Full employment is considered to be at a GDP level of $500 billion. The current GDP is $600 billion. What should the government do to achieve full employment?
A) increase spending by $25 billion
B) increase spending by $10 billion
C) reduce spending by $25 billion
D) reduce spending by $100 billion
80. Because the private and foreign sectors of the economy were suffering from the Great Depression of the 1930s, Keynes suggested an increase in:
A) investment spending.
B) government spending.
C) consumption spending.
D) import spending.
AP Economics Ch. 19 Multiple Choice 75 Sample Questions
1. Keynes believed that in a depression:
A) businesses would not invest even though the interest rates are low.
B) there was no slack capacity in industry.
C) government spending would be useless because of excess slack capacity in industry.
D) productivity was the primary determinant of GDP.
2. Keynes believed that ______ would not change if spending increased in times of slack capacity.
A) prices
B) consumption
C) investment
D) employment
3. According to Keynes, what determines the level of employment and income?
A) aggregate expenditures
B) aggregate savings
C) government spending
D) aggregate supply
4. Who created the beginnings of macroeconomics?
A) Adam Smith
B) Karl Marx
C) John Maynard Keynes
D) Milton Friedman
5. Under Keynesian analysis of aggregate expenditures during the Great Depression, which of the following elements is held constant?
A) government spending
B) investment spending
C) amount of labor hired
D) aggregate price level
6. The aggregate demand curve displays:
A) real GDP demanded at different price levels.
B) nominal GDP versus real GDP.
C) GDP demanded at different investment levels.
D) the business cycle.
7. The difference between the Keynesian model and the AD-AS model is that the:
A) Keynesian model assumes that prices are constant.
B) AD-AS model assumes that prices are constant.
C) Keynesian model assumes the presence of full employment.
D) AD-AS model assumes that equilibrium always occurs at less than full employment.
8. The curve that shows how much GDP is demanded at different price levels is called:
A) the aggregate expenditures schedule.
B) the consumption line.
C) aggregate demand.
D) aggregate supply.
9. When the inflation rate rises, people:
A) feel less wealthy and consume less.
B) anticipate more price increases, and increase consumption.
C) consume the same amount on a national level.
D) work harder.
10. Which factor does NOT explain why the aggregate demand curve is downward-sloping?
A) the wealth effect
B) the export effect
C) the interest rate effect
D) the substitution effect
11. At higher price levels, people:
A) sell more exports.
B) buy more imported goods.
C) buy the same amount of foreign goods.
D) try to buy American.
12. If the U.S. aggregate price level falls:
A) the purchasing power of wealth declines.
B) net exports rise.
C) interest rates go up.
D) the aggregate demand curve shifts to the right.
13. If the U.S. aggregate price level rises:
A) U.S. imports rise.
B) the aggregate demand curve shifts to the left.
C) the aggregate demand curve shifts to the right.
D) business investment increases.
14. The aggregate demand curve is negatively sloped for what reason?
A) the productivity effect
B) the interest rate effects
C) the substitution effect
D) the impact of progressive taxes
15. Which of the following factors is NOT a component of aggregate demand?
A) consumption
B) investment
C) income
D) net exports
16. The shift in aggregate demand depicted in the following figure may be due to a(n):
A) increase in consumer confidence.
B) decrease in interest rates.
C) increase in income taxes.
D) increase in exports.
17. Consumer spending is NOT affected by which of the following factors?
A) wealth
B) consumer confidence
C) taxes
D) inventories
18. Which of the following factors will cause the aggregate demand curve to shift to the right?
A) reduction in the aggregate price level
B) reduction in personal income taxes
C) increase in interest rates
D) drop in foreign income
19. Which of the following events will shift the aggregate demand curve to the right?
A) increase in exchange rate
B) increased taxes
C) decreased taxes
D) decrease in military spending
20. High family debt:
A) reduces the tendency to consume.
B) encourages the tendency to consume.
C) is illegal.
D) is a prime predictor of impending inflation.
21. Which of the following events will NOT cause the aggregate demand curve to shift?
A) Businesses are optimistic about the economy, investing heavily in new equipment.
B) Consumers experience a drop in their wealth caused by a drop in the stock market.
C) A rise in the aggregate price level causes a drop in exports.
D) Governments increase spending on national security in the wake of terrorist attacks.
22. If the English pound sterling appreciates against the U.S. dollar, then England buys ______ U.S. goods, causing the U.S. aggregate demand curve to shift to the ______.
A) more; right
B) more; left
C) fewer; left
D) fewer; right
23. Which of the following factors will cause the aggregate demand curve to shift to the left?
A) rise in consumer confidence
B) fall in excess capacity at businesses
C) increase in foreign income
D) appreciation of the dollar
24. If the English pound sterling depreciates against the U.S. dollar, then England buys ______ U.S. goods, causing the U.S. aggregate demand curve to shift to the ______.
A) more; right
B) more; left
C) fewer; left
D) fewer; right
25. Which of the following factors causes a shift in the aggregate demand curve to the left?
A) increase in consumption
B) increase in wealth
C) decrease in exports
D) decrease in government spending
26. Government spending on Social Security:
A) has no impact on aggregate demand.
B) increases aggregate demand.
C) decreases aggregate demand.
D) hurts investment.
27. Which of the following events will shift the aggregate demand curve to the left?
A) new government program to eliminate poverty
B) fall in the interest rate
C) increased exports
D) decrease in military spending
28. An increase in aggregate demand can be caused by:
A) the depreciation of the dollar.
B) a cut in government spending.
C) an increase in interest rates.
D) a rise in consumer debt.
29. The aggregate supply curve is:
A) horizontal along all points.
B) downward sloping.
C) vertical along all points.
D) horizontal, upward sloping, and vertical in different sections.
30. A horizontal supply curve:
A) would occur in times of rapid growth.
B) is the shape of the long-run aggregate supply curve.
C) would occur during time of excess capacity.
D) can never occur.
31. If an economy is on the horizontal portion of the aggregate supply curve, then it is:
A) in a severe recession.
B) overheating.
C) at full employment.
D) experiencing inflation.
32. The short-run supply curve slopes up because:
A) profits increase at higher price levels.
B) productivity increases at higher price levels.
C) wages increase at higher output in the short run.
D) resource costs increase at higher price levels.
33. The short-run aggregate supply curve:
A) is downward sloping.
B) shows many input costs quickly changing to keep the economy at full employment.
C) exhibits a positive relationship between the aggregate price level and aggregate output.
D) shows input costs remaining constant as firms have a lot of excess capacity.
34. One reason the aggregate supply curve is upward sloping in the intermediate range is that:
A) people are willing to pay more for the extra output.
B) the level of employment rises.
C) costs of production rises as output rises.
D) the progressive income tax increases business costs.
35. The long-run supply curve is:
A) vertical.
B) horizontal.
C) elastic.
D) inelastic.
36. The long-run aggregate supply curve:
A) is horizontal.
B) shows prices, wages and interest rates to be inflexible.
C) shows the economy reaching an equilibrium at the natural rate of unemployment.
D) can never shift.
37. Which of the following is a characteristic of an economy in long-run equilibrium?
A) The supply curve is vertical.
B) Inflation is accelerating.
C) The demand curve is vertical.
D) There is some cyclical unemployment.
38. The more time a free market economy has to adjust to price changes, the:
A) greater is the rate of inflation.
B) closer GDP gets to the natural rate of output.
C) closer the economy gets to the horizontal portion of the aggregate demand curve.
D) more volatility is seen in the business cycle
39. Which of the following factors is NOT a determinant of aggregate supply?
A) income
B) taxes on business
C) input prices
D) regulation
40. Which of the following statements is correct?
A) An improvement in technology shifts the long-run aggregate supply curve to the right.
B) A decrease in inflationary expectations shifts the short-run aggregate supply curve to the left.
C) As business expectations become more negative, the short-run aggregate supply curve shifts to the right.
D) Lower subsidies to business firms shift the short-run aggregate supply curve to the right.
41. A decrease in regulation would cause aggregate:
A) supply to shift to the left.
B) demand to shift to the right.
C) demand to shift to the left.
D) supply to shift to the right.
42. Which of the following statements regarding the short-run aggregate supply curve is true?
A) The short-run aggregate supply curve shifts to the left when tax rates on businesses are lowered.
B) The short-run aggregate supply curve shifts to the right when the costs of capital rise.
C) The short-run aggregate supply curve shifts to the left when business expectations become more positive.
D) The short-run aggregate supply curve shifts to the right with a reduction in burdensome regulations.
43. If monopolization or market increases, what happens to the AD-AS model?
A) AS shifts left.
B) AS shifts right
C) AD shifts left.
D) AD shifts right.
44. What happens if business expectations improve?
A) AS shifts left.
B) AS shifts right.
C) AD shifts left.
D) AD shifts right.
45. Macroeconomic equilibrium:
A) produces an equilibrium aggregate price level in the short run.
B) occurs at less than full employment in the long run.
C) eliminates inflation in the long run.
D) is impossible to attain in the short run.
46. Short-run macroeconomic equilibrium is achieved where the:
A) quantity of aggregate supply exceeds the quantity of aggregate demand.
B) quantity of aggregate demand exceeds the quantity of aggregate supply.
C) short-run aggregate supply and aggregate demand curves intersect.
D) inflation rates are low.
47. Output definitely increases if aggregate demand ______ and aggregate supply ______.
A) increases; increases
B) rises; falls
C) falls; rises
D) decreases; decreases.
48. The actual price level is determined by:
A) government policy.
B) the intersection of aggregate supply and demand.
C) microeconomic equilibrium.
D) monopolists.
49. In which phase of the business cycle is the spending multiplier the largest?
A) expansion
B) recession
C) recovery
D) peak
50. A weakness of the Keynesian spending multiplier concept (1/1 – MPC) is that it:
A) is impossible to estimate MPC.
B) assumes prices don't change.
C) consistently underestimates the true value of the multiplier.
D) ignores the effect of saving on the economy.
51. The spending multiplier:
A) equals 1/MPC.
B) becomes smaller as excess capacity in the macroeconomy shrinks.
C) is small in a depression economy.
D) is very large once the economy reaches full employment.
52. If the aggregate supply curve is not linear, then the multiplier:
A) is constant.
B) varies with the slope of the AS curve.
C) is zero.
D) is infinite.
53. The closer the economy comes to full employment, the:
A) larger is the increase in aggregate output for a given change in aggregate demand.
B) smaller is the increase in the aggregate price level for a given change in aggregate demand.
C) more excess capacity an economy has.
D) smaller is the multiplier effect.
54. In the long-run model, the value of the spending multiplier is:
A) indeterminate.
B) one.
C) zero.
D) infinity.
55. Supposing that spending in an economy rose by a large amount and the rate of inflation accelerated shortly thereafter, we could conclude that:
A) the economy is in a recession.
B) wage and price controls are needed.
C) the economy is not in equilibrium.
D) the value of the spending multiplier is probably small.
56. The Great Depression demonstrated that:
A) there can be no macroeconomic equilibrium.
B) macroeconomic equilibrium can occur at substantially less than full employment.
C) inflation is a worse problem than unemployment.
D) government intervention in the economy results in economic depressions.
57. What alleviated the crisis of the Great Depression?
A) increase in investment
B) increase in consumption
C) decrease in the interest rate
D) spending on World War II.
58. The drop in aggregate demand that occurred during the Great Depression caused a drop in real GDP:
A) and deflation.
B) but an increase in the price level.
C) but no change in the price level.
D) but a modest rise in inflation.
59. Demand-pull inflation is caused by:
A) increases in wages pulling up prices.
B) increases in aggregate demand.
C) decreases in aggregate supply.
D) consumers demanding better quality, which increases costs.
60. Consumer overspending in the economy causes:
A) cost-push inflation.
B) aggregate supply to increase.
C) demand-pull inflation.
D) aggregate supply to decrease.
61. Generally, demand-pull inflation occurs:
A) during depressions.
B) during wars.
C) during recessions.
D) during periods of balanced government budgets.
62. Which of the following occurrences is NOT a solution to demand-pull inflation?
A) increased taxes on income
B) reduced government spending
C) higher taxes on savings
D) higher taxes on exports
63. To combat a demand-pull inflation, policymakers should:
A) give more subsidies to businesses and consumers.
B) raise corporate income taxes.
C) increase government spending.
D) print more money.
64. What would cause inflation to rise and employment to increase?
A) a shift to the left of the AD curve.
B) a shift to the right of the AD curve
C) a shift to the left of the AS curve
D) a shift to the right of the AS curve.
65. What would cause inflation to decrease and employment to increase?
A) a shift to the left of the AD curve
B) a shift to the right of the AD curve
C) a shift to the left of the AS curve
D) a shift to the right of the AS curve
66. What would cause inflation to rise and employment to decrease?
A) a shift to the left of the AD curve
B) a shift to the right of the AD curve
C) a shift to the left of the AS curve
D) a shift to the right of the AS curve
67. Which of the following statements regarding demand-pull inflation is true?
A) Demand-pull inflation usually occurs over a short-run time period.
B) Demand-pull inflation in the United States in the 1960s was in part due to the U.S. involvement in Vietnam.
C) Demand-pull inflation in Japan during 1985–1995 was in part due to Japan's huge trade deficits.
D) Demand-pull inflation is often caused by rising interest rates.
68. What would cause inflation to decrease and employment to decrease?
A) a shift to the left of the AD curve
B) a shift to the right of the AD curve
C) a shift to the left of the AS curve
D) a shift to the right of the AS curve
69. Cost-push inflation occurs because of a shift to the:
A) right of the AS curve.
B) left of the AS curve.
C) right of the AD curve.
D) left of the AD curve.
70. Oil shocks (increases) create:
A) demand-pull inflation.
B) cost-push inflation.
C) a shift to the right of the AS curve.
D) a shift to the right of the AD curve.
71. Cost-push inflation:
A) occurs when the government increases excess demand during wars.
B) occurs when a supply shock hits the economy.
C) is another name for demand-pull inflation.
D) occurred during the Great Depression.
72. Cost-push inflation:
A) can be cured with government spending policies that encourage consumption, investment, or net exports.
B) can be cured by reducing aggregate demand, with no effect on employment.
C) can be cured by shifting the aggregate demand curve to the right.
D) is impossible to cure.
73. In cost-push inflation, aggregate output _________ and the aggregate price level _________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
74. Which of the following statements concerning cost-push inflation is correct?
A) Cost-push inflation occurs when total spending expands so much that equilibrium output exceeds full-employment output.
B) Cost-push inflation occurs when a supply shock shifts the short-run aggregate supply curve to the right.
C) Cost-push inflation occurs when rising resource costs reduce aggregate supply.
D) Cost-push inflation occurs when subsidies to businesses are increased.
75. As a result of the 1973 oil shock, the:
A) oil companies increased their profits, pushing the aggregate supply curve to the right.
B) economy moved to the full-employment output level.
C) short-run aggregate supply curve shifted to the left.
D) aggregate demand curve shifted to the left.
AP Economics Ch. 20 Multiple Choice 77 Sample Questions
1. The federal budget is approximately:
A) $3 billion.
B) $300 billion.
C) $3 trillion.
D) $13 trillion.
2. Which measure is NOT a tool of fiscal policy?
A) changing the level of transfer payments
B) changing the money supply
C) changing government spending on goods and services
D) changing the level of taxes
3. Government spending, transfer payments, and taxes, with the goal of managing the macroeconomy, are called:
A) fiscal policy.
B) monetary policy.
C) industrial policy.
D) regulatory policy.
4. Which two categories constitute 80% of all revenues for the federal government?
A) tariffs and income taxes
B) corporate income tax and individual income tax
C) individual income tax and Social Security tax
D) corporate income tax and Social Security tax
5. Together, Social Security, national defense, and Medicare account for what proportion of all government spending?
A) one-fourth
B) one-third
C) one-half
D) two-thirds
6. An example of fiscal policy is:
A) changing the interest rate.
B) changing the money supply.
C) changing the tax rate.
D) changing the physical fitness of the citizens.
7. Which of the following categories is NOT an example of discretionary spending?
A) national defense
B) environment
C) education
D) interest on the national debt
8. Which of the following categories is an example of discretionary spending?
A) Social Security
B) Medicaid
C) food stamps
D) hurricane relief funds
9. Which of the following statements regarding discretionary and mandatory spending is correct?
A) Discretionary spending is authorized by permanent laws.
B) Mandatory spending may act as a stabilizing force in the macroeconomy.
C) Discretionary spending has steadily grown as a percentage of the federal budget since the 1960s.
D) Mandatory spending programs include national defense, income security, and education.
10. Individual income taxes constitute what part of total federal government revenues?
A) 10%–15%
B) 30%–35%
C) 45%–50%
D) 90%–100%
11. The largest source of federal government revenues is:
A) corporate income taxes.
B) Social Security taxes.
C) individual income taxes.
D) excise and estate taxes.
12. Which tax source accounts for 35%–40% of government revenues?
A) corporate income tax
B) Social Security tax
C) estate tax
D) individual income tax
13. Mandatory spending:
A) has increased as a percentage of the federal budget since 1965.
B) has decreased as a percentage of the federal budget since 1965.
C) does not include Social Security.
D) is approximately 50% of the total federal budget at the current time.
14. Which of the following categories is an example of mandatory spending?
A) body armor for military troops
B) National Aeronautics and Space Administration
C) National Institute for Mental Health
D) interest on the national debt
15. Which measure is NOT a channel through which the government can influence aggregate demand?
A) direct spending on goods and services
B) transfer payments to households and firms
C) taxes on households and firms
D) regulation on businesses
16. Using demand-side fiscal policy to stimulate aggregate demand when the economy is near full employment will primarily result in:
A) unemployment.
B) underemployment.
C) inflation.
D) a large economic expansion.
17. Which of the following measures is NOT an example of discretionary fiscal policy?
A) The unemployment compensation program pays out more money as unemployment rates rise.
B) Tax rates are cut in the hope of expanding the economy.
C) Tax increases are enacted to reduce the government deficit.
D) Government spending is increased to reduce the problems caused by the recession.
18. If the marginal propensity to consume is 0.8, what is the effect on equilibrium output of a $5 billion increase in government spending?
A) Equilibrium output is reduced by $4 billion.
B) Equilibrium output is increased by $25 billion.
C) Equilibrium output is increased by $5 billion.
D) Equilibrium output is increased by $20 billion.
19. If peace is achieved and military spending is reduced by $100 billion, what is the impact on the GDP? Assume that the MPC is .75 and the unemployment level is 10%.
A) GDP increases by $100 billion.
B) GDP decreases by $100 billion.
C) GDP increases by $400 billion.
D) GDP decreases by $400 billion.
20. If a war breaks out and military spending increases by $100 billion, what is the impact on the GDP if the economy is at full employment? Assume that the MPC is .75 and the unemployment level is at full employment.
A) GDP increases by $100 billion.
B) GDP increases by $400 billion.
C) GDP decreases by $400 billion.
D) There is no impact on real GDP.
21. If the economy is at full employment, increases in government spending:
A) have a multiplier effect on equilibrium output.
B) have no effect on the aggregate price level.
C) are fully absorbed by price increases.
D) reduce aggregate output.
22. If the marginal propensity to consume is .8, how much initial spending would a $1 billion tax cut introduce into the economy?
A) no spending
B) $0.2 billion
C) $0.8 billion
D) $8 billion
23. If the marginal propensity to consume is 0.8, what is the effect on equilibrium output of a $5 billion increase in taxes?
A) Equilibrium output is reduced by $4 billion.
B) Equilibrium output is increased by $25 billion.
C) Equilibrium output is reduced by $25 billion.
D) Equilibrium output is reduced by $20 billion.
24. Without government spending, which of the following equations is true?
A) Y = C + S
B) S – I = 1
C) I – S = 1
D) I + S = 1
25. Transfer payments are:
A) monies paid directly to individuals by the government.
B) not part of the government budget.
C) a vital part of discretionary fiscal policy.
D) payments made to government officials who transfer them back to private companies.
26. Fiscal policy that puts money in the hands of households and businesses to spend their way out of a recession is called:
A) circular flow policy.
B) injection policy.
C) expansionary policy.
D) contractionary policy.
27. Which of the following measures is an example of an expansionary fiscal policy?
A) decreasing government spending
B) reducing welfare payments
C) increasing unemployment compensation
D) raising taxes
28. The economy is experiencing 10% unemployment. What should the federal government do?
A) increase taxes
B) decrease taxes
C) increase the interest rate
D) decrease the money supply
29. If the government uses an expansionary fiscal policy in an attempt to reduce unemployment and fill in an output gap:
A) output will rise but at the expense of a higher price level.
B) it will have no effect, as fiscal policy does not work during times of unemployment.
C) output will fall but so too will the price level.
D) output will rise but the price level will fall.
30. The solution to simultaneous presence of deflation and unemployment is to shift the:
A) AD curve to the right.
B) AD curve to the left.
C) AS curve to the right.
D) AS curve to the left.
31. If the economy expands beyond the level of full employment, what is the outcome?
A) inflation
B) lower interest rates
C) unemployment
D) depression
32. Increasing taxes to fight inflation is an example of:
A) conservative policy.
B) contractionary policy.
C) expansionary policy.
D) demand-braking policy.
33. If an expansionary policy pushes output beyond the full employment level of GDP, then:
A) the economy will experience deflation.
B) the natural rate of unemployment will fall.
C) costs of production will drop.
D) the aggregate supply will eventually shift to the left.
34. When an economy is at full employment, an expansionary fiscal policy:
A) has the same multiplier effect as if the economy were in a depression.
B) does not affect the aggregate price level.
C) yields no temporary increase in output.
D) produces no long-run improvement in real output.
35. The economy is experiencing 10% inflation. What should the federal government do?
A) increase taxes
B) decrease taxes
C) decrease the interest rate
D) increase the money supply
36. Contractionary fiscal policy is typically used to:
A) fight inflation stemming from an overheated economy.
B) fight recession due to deficient demand.
C) restore the balance of payments.
D) balance the federal budget.
37. The tradeoff to higher employment is:
A) higher taxes.
B) higher inflation.
C) lower inflation.
D) lower interest rates.
38. Politicians do NOT like to use contractionary fiscal policy to reduce inflation for which of the following reasons?
A) Contractionary policies can increase unemployment.
B) The politicians might lose in the next election if this policy is used.
C) An economy benefits from an inflation spiral.
D) Politicians look to the Federal Reserve to reduce inflation.
39. The problem with supply-side fiscal policies is that they:
A) don't work.
B) take longer to work than demand-side fiscal policies.
C) only increase inflation.
D) only decrease inflation.
40. If a technological increase shifts the AS curve out, what happens to price and output?
A) Prices drop and output increases.
B) Prices increase and output decreases.
C) Prices remain stable and output decreases.
D) Nothing happens.
41. The solution to the simultaneous presence of both inflation and unemployment is to shift the:
A) AD curve to the right.
B) AD curve to the left.
C) AS curve to the right.
D) AS curve to the left.
42. Which of the following statements about fiscal policy and aggregate supply is correct?
A) The focus of fiscal policy and aggregate supply is on long-run economic growth.
B) Fiscal policies that influence aggregate supply don't always require tradeoffs between price levels and output.
C) Fiscal policies that influence aggregate supply take less time to work than do demand-side fiscal policies.
D) Fiscal policies that influence aggregate supply increase inflationary pressures as output expands.
43. Which statement is NOT an advantage of supply-side fiscal policy?
A) Supply-side fiscal policy removes the tradeoff between GDP growth and inflation.
B) Supply-side fiscal policy fights inflation.
C) Supply-side fiscal policy supports increases in productivity.
D) Supply-side fiscal policy takes longer to implement than does demand-side policy.
44. Which measure is an example of a supply-side fiscal policy?
A) reducing income taxes
B) giving tax breaks to firms that undertake research and development
C) increasing the money supply
D) increasing government spending on Medicare
45. Which of the following measures is NOT suggested by modern growth theory as a way for governments to encourage economic growth?
A) adding to a nation's infrastructure
B) encouraging higher levels of human capital
C) providing grants for research and development
D) stimulating growth in the money supply
46. The figure that follows shows the Laffer curve for an economy where the tax rate is currently 80%.
Supply-side economists would argue that the government should:
A) reduce the tax rate to 40%.
B) reduce the tax rate to 20%.
C) keep the tax rate at 80%.
D) not change the tax rate.
47. A supply-side economist is advocating reducing income tax rates.
She is probably assuming that the economy is at point ______ in the figure.
A) a
B) b
C) c
D) d
48. The Laffer curve demonstrates that:
A) beyond some point, lowering tax rates would increase tax revenues.
B) if tax rates are 100%, tax revenues will be huge.
C) policymakers can always increase tax revenues by raising tax rates.
D) policymakers will always reduce tax revenues by raising tax rates.
49. Laffer pointed out that:
A) increasing taxes could sometimes increase revenues.
B) taxes were no laughing matter.
C) increasing taxes always leads to decreasing revenue.
D) decreasing taxes always leads to increasing revenue.
50. Which of the following statements would Laffer agree with?
A) Men married to successful women in the 1960s found it hard to justify working because the marginal tax rate was so high.
B) Increasing tax rates always makes people work harder.
C) Decreasing tax rates always gives people more money, which they spend on less work and increased leisure.
D) Taxes have no impact on working decisions.
51. Which of the following statements is a criticism of the Laffer curve?
A) If the Laffer curve were steeper, then the effects of lowering tax rates would be less.
B) Not knowing the economy's position on the Laffer curve means the effects of lowering tax rates are uncertain.
C) High marginal tax rates have disincentive effects on work effort.
D) The shape of the Laffer curve is known with certainty.
52. The reduction of the high marginal income tax rates in the mid-1980s primarily affected the labor supply of:
A) single men.
B) married men.
C) single women.
D) married women.
53. Which of the following fiscal policies will increase aggregate supply?
A) increasing tax rates on consumers
B) increasing tax rates on businesses
C) reducing the depreciation period for business equipment from five years to three years
D) creating more regulations for businesses to follow
54. Which of the following policies do supply-side economists believe is the best for increasing the standard of living?
A) redistributing income from the wealthy to the poor
B) raising taxes to support government public works projects
C) increasing investment in capital that boosts worker productivity
D) increasing the supply of labor in an economy
55. Which of the following groups must agree in order to implement fiscal policy?
A) Senate, House, and executive branch
B) legislative branch, executive branch, and judicial branch
C) legislative branch, executive branch, and Federal Reserve
D) Senate, House, and Federal Reserve
56. Automatic stabilizers are:
A) aspects of the tax code that stabilize tax revenue over the course of a business cycle.
B) laws passed by Congress that stabilize interest rates.
C) policies intended to stabilize the price level.
D) components of the federal budget that counter the effects of the business cycle without explicit intervention by the President or Congress.
57. An automatic stabilizer:
A) injects money into the economy during booms.
B) extracts money from the economy during recessions.
C) would be exemplified by a program such as unemployment compensation.
D) would be exemplified by a program such as the Corps of Engineers dam-building program.
58. Automatic stabilizers include all the following EXCEPT:
A) unemployment compensation benefits.
B) welfare payments.
C) national defense spending.
D) tax revenues.
59. The main purpose of automatic stabilizers is to:
A) eliminate fluctuations in the business cycle.
B) help the economy reach full employment.
C) keep the price level stable.
D) reduce the swings in the business cycle.
60. Fiscal policy may not be effective in smoothing out the business cycle because of:
A) crowding out.
B) timing lags.
C) problems with the multiplier.
D) the British heritage of Keynes.
61. Which of the following illustrates the data lag?
A) The economy was thought to increase at .1% in July, but the numbers are revised in August to reflect an actual 2% decrease.
B) Policy makers decide to wait and see what happens in the next quarter.
C) The government reacts to the 2% decrease in the economy, and private investment is crowded out of the investment market.
D) The government decides not to react to the 2% decrease in the economy because it is worried about the possibility of inflation.
62. The recognition lag is:
A) the time it takes for policymakers to realize that a problem exists in the economy.
B) the time policymakers must wait for economic data to be collected, processed, and reported.
C) the time required to turn fiscal policy into law.
D) rarely less than 18 to 24 months.
63. Which of the following is NOT a fiscal policy timing lag?
A) data lag
B) crowding-out lag
C) recognition lag
D) implementation lag
64. Which of the following statements regarding the implementation lag is correct?
A) The implementation lag is usually less than 12 months.
B) The implementation lag is the length of time it takes policymakers to recognize that a problem exists in the economy.
C) The implementation lag is the length of time it takes for a fiscal policy change to impact the economy.
D) The implementation lag is the shortest of the three fiscal policy lags.
65. Legislators debate for 6 months on which spending programs to utilize to manipulate the business cycle. This is an example of the:
A) data lag.
B) recognition lag.
C) implementation lag.
D) crowding-out lag.
66. Fiscal policy timing lags prevent effective action to combat a business cycle problem by at least:
A) 1 month.
B) 6 months.
C) 18 to 24 months.
D) 10 years.
67. As a result of the crowding-out effect, interest rates ______ and private sector borrowing ______.
A) increase; increases
B) decrease; increases
C) decrease; decreases
D) increase; decreases
68. The crowding-out effect is small when the economy:
A) is at full employment.
B) has a great deal of excess capacity.
C) is above full employment.
D) has an inflationary gap.
69. According to the crowding-out effect, if government spending increases by $50 billion with no increase in taxes, then typically consumption and investment spending ______ than $50 billion.
A) rise by more
B) fall by more
C) fall by less
D) rise by less
70. The crowding-out effect:
A) essentially replaces some private investment with government spending.
B) increases the value of the spending multiplier.
C) is a bigger problem during recessions.
D) improves the efficacy of discretionary fiscal policy.
71. Crowding out:
A) refers to government spending crowding out imports.
B) aids expansionary fiscal policy.
C) completely cancels out expansionary fiscal policy.
D) leads to higher interest rates in the market.
72. The government sells $550 billion worth of bonds to increase spending to counteract a recession. The effect is to drive down the price of the bonds and increase the interest rate. This effect is called the:
A) implementation lag.
B) transmission lag.
C) crowding-out effect.
D) automatic stabilizer.
73. People who prefer to see the federal government take a smaller role in the economy tend to favor:
A) supply-side fiscal expansionary policy.
B) demand-side fiscal expansionary policy.
C) Keynesian expansionary policy.
D) active monetary policy.
74. Supply-side economists tend to argue for:
A) more taxes.
B) a smaller federal government.
C) more income redistribution.
D) high marginal tax rates.
75. Since 1950, government spending as a percentage of GDP has been consistently within what range?
A) 15%–25%
B) 5%–10%
C) 25%–35%
D) 40%–50%
76. Which of the following groups favors a larger and more active government?
A) the political left
B) libertarians
C) the political right
D) political conservatives
77. Federal government spending as a percentage of GDP has:
A) decreased from the 1950s to the present.
B) usually exceeded tax receipts as a percentage of GDP since 1950.
C) averaged 35% to 40% since 1990.
D) typically been less than tax receipts as a percentage of GDP since 1950.
Ch. 26
Ideas for Capturing Your Classroom Audience
Chapter Checkpoints
The Balance of Payments
Question: Ronald McKinnon, writing in the April 20, 2006 issue of The Wall Street
Journal, notes, China's saving is even higher than its own extraordinary high
domestic investment of 40% of GDP. . . . The result is that China (like many other
countries in Asia) naturally runs an overall current account surplus. . . .Why would this be true? (Hint: look back at the discussion on the relationship between federal and trade deficits in the chapter on Deficits and the Public Debt.)
The point is to check that students can: apply the extended “leakages and injections” approach to the analysis of the cited article.
Exchange Rates
Question: If China were to revalue its currency by 10% so in effect the yuan appreciated by 10%, would this have an impact on the U.S. current account?
The point is to check that students can: integrate the understanding of the effect of changes in currency values on imports and exports and therefore on the current account.
Monetary and Fiscal Policy in an Open Economy
Question: The United States seems to rely more on monetary policy to maintain stable prices, low interest rates, low unemployment, and healthy economic growth.
Does the fact that the United States has really embraced global trade (imports and
exports combined are over 25% of gross domestic product) and we have a flexible
(floating) exchange rate help explain why monetary policy seems more important
than fiscal policy?
The point is to check that students can: understand how the exchange rate system
(fixed or flexible) impacts the effectiveness of monetary and fiscal policy.
Examples Used in the End-of-Chapter Questions
Question 2 refers to remittances. For a map illustrating the amounts of remittances to various countries see the Web site of the Multilateral Investment Fund from the Inter-American Development Bank. The site is located on the Web at: http://www.iadb.org/mif/remesas_map.cfm?language=English&parid=5&item1d=2.
Question 4 asks “how are most exchange rates determined?” and the answer is by
supply and demand in free markets. China has been viewed as an exception, but in
2005 the Chinese government took an important step toward allowing its currency
to float. For more information see the story by Peter S. Goodman in The
Washington Post titled, “China Ends Fixed-Rate Currency: Administration Hails
Policy Shift” (July 22, 2005, page A01, available on the Web at: http://www .washingtonpost.com/wp-dyn/content/article/2005/07/21/AR2005072100351.html.
Question 11 refers to the devaluation of Zimbabwe’s currency in mid-2006. But they
“only” (in simple terms) removed three 0’s. Turkey, in January 2005, took six 0’s off in the “redenomination” of their currency. Learn more about Turkey (and how things have worked out) on this site from the BBC: http://news.bbc.co.uk/1/hi/business/1833730.stm.
For Further Analysis
Using the AS/AD Model to Explore the Impacts of Changes in the Value of the
Dollar
The example provided in the student handout can be used as an in-class small group
exercise or as an individual in-class exercise. It is designed to complement and
extend the text’s material exchange rates and their effect on the U.S. economy using the AS/AD model. The exercise begins with the analysis described by Figure 4 in the chapter and then has students consider the opposite case (of dollar appreciation).
The exercise concludes asking students to evaluate the differing effects and
address the question of “what’s better” for the U.S. economy: a strong dollar or a
weak dollar?
The format of the exercise asks students to demonstrate their understanding by
analyzing a reverse situation to that described in the text. It also provides a chance to introduce students to the debates about economics and to get them to think about whether appreciation or depreciation is better for an economy and whether it benefits or hurts certain portions of society.
If you wish to elaborate on the analysis you can ask students to consider financial effects such as capital flows and the interest rate; this material is covered in the chapter. You may wish to supplement the assignment with current articles about the value of the dollar and views as to whether the U.S. government should “manage” the dollar more than it does at present. Other points that could be addressed include how long the long run really is and whether the short-run effects may swamp the long run. Stone’s section in microeconomics about the different definitions of time in economics is very useful.
Web-Based Exercise
This example can be used as a small group exercise or as an individual exercise. The exercise provides an opportunity for students to apply the material in the chapter about purchasing power parity and the Big Mac Index to get a feel for forecasting exchange rates. The exercise asks students to look at the Big Mac Index data from some previous period(s) and see if the currencies noted as “overvalued” subsequently depreciated and if those noted as “undervalued” subsequently appreciated.
You can change how extensive this assignment is by adding more past periods of
time or supplementing the Big Mac data with articles about various currencies
explaining the factors affecting them.
Students may also be intrigued by The Economist’s “lattenomics” that uses
Starbucks coffee instead of burgers. A video clip and explanation are among the
resources on the site at http://www.economist.com/markets/Bigmac/Index.cfm.
PPP and the Big Mac
As described in the text, the Big Mac Index published by The Economist has always
been meant to be a humorous and intuitive way to explain purchasing power parity.
However, as simple as it is, the Big Mac Index has been pretty good at predicting the future course of some currencies. Visit the Web site for the Big Mac Index at
http://www.economist.com/markets/Bigmac/Index.cfm and answer the following:
Collect data to answer the following:
1) Pick three currencies that were listed as overvalued at the time and three
that were listed as undervalued. Have those currencies subsequently moved
in the indicated directions?
2) Describe the limitations of the Big Mac Index.
Tips from a Colleague
The most challenging part of this chapter is the material on the current and capital accounts. Students are likely to understand that if we import more than we export we have a trade deficit, but the logic of why this results in a capital account surplus is likely to elude them. You might consider a simple intuitive illustration of swapping goods. Offer to trade an inexpensive stick pen for a student’s hat or other item which has an obviously higher value. Explain that such a direct swap of goods would be similar to imports and exports. When the student suggests that the goods being traded are not equal in value, offer different amounts of money (hypothetically) to make up the difference. Explain that the willingness of someone to take U.S. money to make up the difference is analogous to the increased holdings of U.S. assets by foreigners that make up the capital account.
Email HW to gmsmith@shanahan.org
2. The Balance of Payments
Question: Ronald McKinnon, writing in the April 20, 2006 issue of The Wall Street
Journal, notes, China's saving is even higher than its own extraordinary high
domestic investment of 40% of GDP. . . . The result is that China (like many other
countries in Asia) naturally runs an overall current account surplus. . . .Why would this be true? (Hint: look back at the discussion on the relationship between federal and trade deficits in the chapter on Deficits and the Public Debt.)
The point is to check that students can: apply the extended “leakages and injections” approach to the analysis of the cited article.
3. As review for HW, typical questions that you may encounter on the actual AP Economics Macro Test are included daily:
Review Questions (Princeton):
a) a vertical Phillips curve
b) supply shocks
c) structural shocks
d) demand-pull inflation
e) deflation
34. On a banks' balance sheet, which of the following is considered a liability?
a) Required reserves
b) Excess reserves
c) Loans
d) Deposits
e) Reserve ratio
35. The primary functions of an economics system are to answer the questions
a) what, how, and for whom to produce
b) when, where, and why to produce
c) how to maximize profits and minimize time spent making things
d) how fast, how much, and how often to produce
e) where does the money go and how can those in society get some
