SampleQuestionsforChapters12&13

InflationUnemployment&BusinessCycles
FiscalPolicy

MULTIPLECHOICE.Choosetheonealternativethatbestcompletesthestatementoranswersthequestion.

1) Inflationcanbestartedby 1)
A) adecreaseinaggregatesupplyoradecreaseinaggregatedemand.
B) anincreaseinaggregatesupplyoradecreaseinaggregatedemand.
C) adecreaseinaggregatesupplyoranincreaseinaggregatedemand.
D) anincreaseinaggregatesupplyoranincreaseinaggregatedemand.

2) Whichoftheabovefiguresbestshowsthestartofademand-pullinflation? 2)
A) FigureA B) FigureB C) FigureC D) FigureD

3) Whichofthefollowingcouldstartademand-pullinflation? 3)
A) anincreaseingovernmentexpenditure
B) adecreaseinthequantityofmoney
C) anincreaseinimports
D) anincreaseinthemoneypricesofrawmaterials

4) WhichofthefollowingisNOTapotentialstartofademand-pullinflation? 4)
A) anincreaseinexports B) anincreaseinthequantityofmoney
C) anincreaseingovernmentexpenditure D) anincreaseintaxes

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5) Intheabovefigure,supposethattheeconomyisatpointA whenthequantityofmoneyincreases. 5)
Intheshortrun,theeconomywillmovetopoint________.
A) A,thatis,thepricelevelandlevelofrealGDPwillnotchange.
B) B
C) C
D) D

6) Asthemoneywageraterises, 6)
A) theshort-runaggregatesupplycurveshiftsrightward.
B) theshort-runaggregatesupplycurveshiftsleftward.
C) thelong-runaggregatesupplycurveshiftsrightward.
D) boththelong-runaggregatesupplycurveandtheshort-runaggregatesupplycurveshift
leftward.

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 7) Intheabovefigure,theeconomyinitiallyisatpointA andthenanincreaseinthequantityof 7)
moneymovestheeconomytopointD.AtpointD,therealwageratehas
A) risen.
B) risenbythesamepercentageasthepricelevel.
C) remainedconstant.
D) fallen.

8) Intheabovefigure,theeconomyinitiallyisatpointA andthenanincreaseinthequantityof 8)
moneymovestheeconomytopointD.Themoneywageratewill
A) risebecausealaborshortagenowexists. B) fallbecausealaborshortagenowexists.
C) fallbecausealaborsurplusnowexists. D) risebecausealaborsurplusnowexists.

9) AssumingthatGDPcurrentlyequalspotentialGDP,acost-pushinflationcouldresultfromwhich 9)
ofthefollowing?
A) anincreaseinthelaborforce
B) anincreaseinthenationscapitalstock
C) alargecropfailurethatbooststhepricesofrawfoodmaterials
D) adecreaseintaxrates

10) AnincreaseinthemoneywagerateshiftstheSAS curve________andanincreaseinthemoney 10)

pricesofrawmaterialsshiftstheSAScurve________.
A) leftward;leftward B) leftward;rightward
C) rightward;rightward D) rightward;leftward

11) Aone-timeincreaseinthepriceofoilfollowedbyaone-timeincreaseinaggregatedemand 11)

produce
A) continuingdemand-pullinflation. B) continuingcost-pushinflation.
C) aone-timeincreaseinthepricelevel. D) aone-timedecreaseinthepricelevel.

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12) Intheabovefigure,whichpathrepresentsacost-pushinflation? 12)
A) pointAtoCtoDtoFtoG B) pointA toB toD toF toG
C) pointAtoCtoDtoEtoG D) pointA toB toD toE toG

13) Intheabovefigure,theeconomyisinitiallyatpointA.Ifworkersandfirmscorrectlyanticipatethe 13)

increaseinaggregatedemandandtheresultinginflationrate,theeconomywillmovetopoint
A) A,thatis,thepricelevelandlevelofrealGDPwillnotchange.
B) B.
C) C.
D) D.

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14) Phillipscurvesshowtherelationshipbetweenthe 14)
A) nominalinterestrateandtherealinterestrate.
B) realinterestrateandtheunemploymentrate.
C) unemploymentrateandtheinflationrate.
D) expectedrateofinflationandthenominalinterestrate.

15) Movingalongashort-runPhillipscurve, 15)

A) theexpectedinflationrateisconstant. B) thepricelevelisconstant.
C) theinflationrateisconstant. D) unemploymentisconstant.

16) Movementsupwardalongtheshort-runPhillipscurveresultfrom 16)

A) expectedincreasesintheinflationrate.
B) unexpecteddecreasesintheinflationrate.
C) unexpectedincreasesintheinflationrate.
D) expecteddecreasesintheinflationrate.

17) Intheabovefigure,supposetheeconomyisatpointA.Anunexpectedincreaseintheinflationrate 17)

to6percentwillresultinamovementtopoint
A) A,thatis,thereisnomovement. B) B.
C) C. D) D.

18) Thelong-runPhillipscurveis 18)

A) theverticalsumoftheshort-runPhillipscurves.
B) verticalatthenaturalunemploymentrate.
C) thehorizontalsumoftheshort-runPhillipscurves.
D) verticalatpotentialGDP.

19) Ifthenaturalunemploymentrateincreases,thentheshort -runPhillipscurveshifts________and 19)

thelong-runPhillipscurveshifts________.
A) leftward;rightward B) leftward;leftward
C) rightward;rightward D) rightward;leftward

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20) Intheabovefigure,supposethattheeconomycurrentlyisatpoint A.Iftheinflationraterisesand 20)
thisriseisNOTexpectedbythepublic,theeconomymovestoapointsuchaspoint
A) B. B) D. C) C. D) E.

21) Keynesusedthetermanimalspiritstorepresent 21)

A) theeaseofforecasting.
B) investmentbasedonhardfactsaboutthefuture.
C) changesinpeoplesconsumptionexpenditures.
D) fluctuationsinbusinessconfidence.

22) Realbusinesscycletheorysaysthatthefactorleadingtothebusinesscycleischangesin 22)

A) onlyaggregatedemand. B) productivity.
C) thegrowthrateofthequantityofmoney. D) animalspirits.

23) Accordingtotherealbusinesscycletheory,anincreaseinthepriceofaresource,suchasoil,that 23)

decreasesthedemandforloanablefundswill________employmentand________realGDP.
A) increase;increase B) decrease;increase
C) decrease;decrease D) increase;decrease

24) Iftherealinterestrateis4percentandworkersexpectrealwagestobe2percentyearhighernext 24)

year,accordingtorealbusinesscycletheory,workerswillwork
A) lessthisyearandlessnextyear. B) lessthisyearandmorenextyear.
C) morethisyearandmorenextyear. D) morethisyearandlessnextyear.

25) Thelargestsourceofgovernmentrevenuesis________. 25)

A) personalincometaxes B) socialsecuritytaxes
C) corporateincometaxes D) indirecttaxes

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26) Rankthefollowingfederalgovernmentoutlaysfromthelargesttothesmallest. 26)
I. debtinterest
II. transferpayments
III. expenditureongoodsandservices
A) II,III,I B) III,II,I C) III,I,II D) I,II,III

27) FederalgovernmentoutlaysasapercentageofGDPareapproximately 27)

A) 66percent. B) 10percent. C) 50percent. D) 25percent.

28) Agovernmentincursabudgetdeficitwhen 28)

A) exportsarelessthanimports.
B) exportsaregreaterthanimports.
C) taxesarelessthangovernmentoutlays.
D) taxesaregreaterthangovernmentoutlays.

Government Government
taxrevenues expenditures
Year
(billionsof (billionsof
dollars) dollars)
1 240 240
2 250 245
3 260 255
4 300 320
5 325 340

29) Thegovernmentbeginsyear1with$25billionofdebt.Basedontheinformationintheabove 29)

table,whatistheamountofdebtfollowingyear1?
A) $240billion
B) $0
C) $25billion
D) Notenoughinformationisprovidedtoanswerthequestion.

30) Lookingatthesupply-sideeffectsonaggregatesupplyshowsthatataxhikeonlaborincome 30)

A) decreasespotentialGDP.
B) weakenstheincentivetowork.
C) increasespotentialGDPbecausepeopleworkmoretopaythehighertaxes.
D) BothanswersAandBarecorrect.

31) Thesupplysideeffectsofachangeintaxesonlaborincomemeansthat________intaxesonlabor 31)

incomeshiftthe________.
A) anincrease;laborsupplycurveleftward
B) adecrease;labordemandcurverightward
C) anincrease;laborsupplycurverightward
D) adecrease;labordemandcurveleftward

32) Thedifferencebetweenthebefore-taxandafter-taxratesisreferredtoasthe 32)

A) taxationpenalty. B) taxplug.
C) taxwedge. D) deadweightgain.

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33) TheLaffercurveistherelationshipbetween 33)
A) taxratesandpotentialGDP.
B) taxrevenueandpotentialGDP.
C) taxratesandtaxrevenue.
D) governmentpurchasesandpotentialGDP.

34) AccordingtotheLaffercurve,raisingthetaxrate 34)

A) doesnotchangetheamountoftaxrevenue.
B) alwaysincreasestheamountoftaxrevenue.
C) alwaysdecreasestheamountoftaxrevenue.
D) mightincrease,decrease,ornotchangetheamountoftaxrevenue.

35) Anincreaseinthetaxoninterestincome________thesupplyofloanablefundsand________the 35)

equilibriuminvestment.
A) decreases;decreases B) decreases;increases
C) increases;increases D) increases;decreases

36) Taxesandgovernmentexpendituresthat,withoutneedforadditionalgovernmentaction,change 36)

inresponsetochangesinthelevelofeconomicactivityareexamplesof
A) discretionaryfiscalvariables. B) built-inmonetarystabilizers.
C) cyclicallybalancedbudgets. D) automaticfiscalpolicy.

37) ThetaxrebatespassedbyCongressin2008tohelpmovetheeconomymorerapidlytoward 37)

potentialGDPareanexampleof
A) lump-sumtaxes. B) contractionaryfiscalpolicy.
C) automaticfiscalpolicy. D) discretionaryfiscalpolicy.

38) Governmenttransferpayments________duringexpansionsand________duringrecessions. 38)

A) decrease;decrease B) increase;decrease
C) increase;increase D) decrease;increase

39) Duringanexpansion,taxrevenues________andgovernmenttransferpayments________. 39)

A) decrease;decrease B) decrease;increase
C) increase;decrease D) increase;increase

40) Thestructuraldeficitisthedeficit 40)

A) thatwouldoccuratfullemployment. B) duringanexpansion.
C) causedbythebusinesscycle. D) duringarecession.

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41) Usingtheabovefigure,iffullemploymentoccursat$15trillionandtheeconomyisactually 41)
producing$15trillion,thenthereisa
A) structuraldeficit. B) cyclicaldeficit.
C) cyclicalsurplus. D) structuralsurplus.

42) Intheabovefigure,ifactualGDP=$15trillion,thereisabudget________equalto________. 42)

A) surplus;$0.2trillion B) surplus;$1.3trillion
C) deficit;$1.1trillion D) deficit;$0.2trillion

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43) Whichofthefollowingarealimitationoffiscalpolicy? 43)
I. Thereisalagbetweenrecognizingthatfiscalpolicymightbeneededandwhenitactually
takeseffect.
II. Economicforecastsmightbeincorrect.
III. Monetarypolicymightcounterfiscalpolicy.
A) IandII B) I,IIandIII C) Ionly D) IandIII

44) Intheabovefigure, 44)

A) anysurplusesarecyclicalsurpluses. B) thestructuraldeficitequalszero.
C) anydeficitsarecyclicaldeficits. D) Alloftheaboveanswersarecorrect.

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45) Usingtheabovefigure,iffullemploymentoccursat$13trillion,buttheeconomyisactually 45)
producing$15trillion,thenthereisa
A) structuraldeficit. B) cyclicaldeficit.
C) cyclicalsurplus. D) structuralsurplus.

46) Intheabovefigure,supposetheeconomyisatpointA.Anexpectedincreaseintheinflationrateto 46)

6percentwillresultinamovementtopoint
A) A,thatis,thereisnomovement. B) B.
C) C. D) D.

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47) Intheabovefigure,supposethattheeconomyisatpointA whenforeigncountriesbeginan 47)
expansionandbuymoreU.S.-madegoods.Intheshortrun,thischangecreatesamovementto
point________andaneventualincreasein________.
A) D;thenaturalunemploymentrate B) B;thenaturalunemploymentrate
C) D;moneywagerates D) B;moneywagerates

48) AninitialincreaseinaggregatedemandthatisNOT followedbyanincreaseinthequantityof 48)

moneyresultsinalong-runequilibriumwith
A) ahigherpricelevelbutthesamerealGDP.
B) thesamepricelevelandalowerlevelofrealGDP.
C) ahigherpricelevelandanincreasedlevelofrealGDP.
D) Noneoftheaboveanswersarecorrect.

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Answer Key
Testname: SAMPLE QUESTION FOR CH 12 & 13

1) C
2) A
3) A
4) D
5) B
6) B
7) D
8) A
9) C
10) A
11) C
12) D
13) C
14) C
15) A
16) C
17) B
18) B
19) C
20) A
21) D
22) B
23) C
24) D
25) A
26) A
27) D
28) C
29) C
30) D
31) A
32) C
33) C
34) D
35) A
36) D
37) D
38) D
39) C
40) A
41) D
42) A
43) A
44) D
45) C
46) C
47) D
48) A

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