Name: __________________________ Date: _____________ 1. Which of the following will decrease the aggregate quantity of output supplied?

A) a decrease in wages ) a decrease in the la!or force ") a decrease in net e#ports D) a decrease in the price le$el %se the following to answer questions &'(: Figure 8-5

Panel (a) shows an economy's aggregate production function, Panel (b) shows the labor market and Panel (c) shows the economy's long-run aggregate supply cur e! &. "efer to Figure 8-5! An upward shift of the aggregate production function would lead to A) a decrease in the real wage and to a decrease in real )D*. ) an increase in the real wage and to a decrease in real )D*. ") a decrease in the real wage and to an increase in real )D*. D) an increase in the real wage and to an increase in real )D*. (. "efer to Figure 8-5! +he real wage is the ratio of A) the price le$el to the nominal wage. ) the nominal wage to the quantity of la!or employed. ") the nominal wage to the price le$el. D) real )D* to the nominal wage.

*age 1

%se the following to answer question ,: Figure 8-4

,. "efer to Figure 8-#! Which of the following could cause the production function to shift upward? A) an increase in the quantity of la!or employed ) an increase in the economy-s a$erage price le$el ") an increase in the a$aila!ility of natural resources D) an increase in the real wage rate .. /$er the past century0 the a$erage household income in the %nited 1tates A) has increased in nominal terms !ut has decreased in real terms. ) has increased in nominal terms !ut has remained constant in real terms. ") has increased in real terms. D) has increased only marginally !oth in real and nominal terms. 2. 3f the rate of growth of output is 145 and the rate of growth of per capita real )D* is 250 what is the rate of growth of population? A) & ) , ") 2 D) 6 7. 8#pansionary fiscal policy includes increasing ta#es and increasing go$ernment purchases.
*age &

A)

) ") D)

lowering interest rates0 decreasing ta#es and increasing transfer payments. decreasing ta#es and increasing go$ernment e#penditures. lowering the interest rates0 decreasing ta#es and decreasing go$ernment spending.

%se the following to answer question 6: Figure $%-%

6. "efer to Figure $%-%! 1uppose real )D* is equal to Yr. 3f policyma9ers want to close the output gap with demand management policies0 what should they do? A) lower corporate profit ta# rates to encourage in$estments ) increase in$estment ta# credits to !usinesses ") decrease go$ernment spending on transfer payments and on final goods and ser$ices D) lower interest rates :. An e#pansionary fiscal policy is li9ely to _____ a go$ernment !udget surplus ;or increase a !udget deficit) and ______ !orrowing !y the +reasury which will _____ !onds. A) decrease< increase< sell more ) increase< decrease< !uy more ") increase< increase< sell more D) decrease< decrease< !uy more

14. An e#pansionary fiscal policy 3. 33. includes ta# cuts. 33 increases a go$ernment !udget deficit or reduces a go$ernm 3. A) 30 330 and 333
*age (

) ") D)

3 and 33 only 3 and 333 only 33 and 333 only

11. )o$ernment ta# and e#penditure policies affect real )D* are called A) automatic fiscal policy. ) discretionary fiscal policy. ") fiscal policy. D) supply'side policy. 1&. 1uppose fiscal authorities raise state income ta# rates. As a result0 disposa!le income falls0 there!y ____0 and causing __________ A) decreasing consumption spending< the aggregate demand cur$e to shift to the left. ) decreasing consumption spending< a mo$ement along a gi$en aggregate demand cur$e. ") increasing sa$ing< the aggregate demand cur$e to shift to the left. D) increasing sa$ing< a mo$ement along a gi$en aggregate demand cur$e. 1(. What is the relationship !etween a$erage household income and standard of li$ing? A) +here is no relationship. 3ncreasing a$erage income says nothing a!out income distri!ution. ) =ising income ena!les households to acquire more of the goods and ser$ices that impro$e their material standard of li$ing. ") =ising income tends to increase the crime rate and $iolence0 there!y lowering a country-s standard of li$ing. D) +here is no relationship. 1tandard of li$ing depends on producti$ity not household income. 1,. An economy ad>ust on its own to close an inflationary gap !ecause there is A) pressure on nominal wages to fall and this shifts the 1=A1 cur$e rightward. ) pressure on nominal wages to rise and this shifts the 1=A1 cur$e rightward. ") pressure on nominal wages to fall and this shifts the 1=A1 cur$e leftward. D) pressure on nominal wages to rise and this shifts the 1=A1 cur$e leftward. 1.. +he interest rate effect suggests that the negati$e slope of the aggregate demand cur$e results in part !ecause changes in the price le$el affect A) domestic purchases of foreign goods. ) the demand for money !y households and firms. ") the real purchasing power of household wealth. D) the le$el of income.

*age ,

%se the following to answer question 12: Figure &-&

12. "efer to Figure &-&! 1uppose the economy is initially at K. Which of the following statements !est e#plains how the economy responds to restore long'run macroeconomic equili!rium? A) /$er time0 the aggregate demand cur$e will shift to the right until long'run equili!rium is restored at J and the gap is closed. ) =ising unemployment puts pressure on nominal wages to fall. +he 1=A1 cur$e shifts right to SRAS1 closing the gap at H. ") 3n response to rising prices0 firms will increase production mo$ing along SRAS2 until long' run equili!rium is restored at J and the gap is closed. D) =ising unemployment puts pressure on nominal wages to fall. ?irms employ more wor9ers mo$ing along SRAS2 until long'run equili!rium is restored at J and the gap is closed. 17. %sing the aggregate demand@aggregate supply model0 predict what happens in the short run when the consumer confidence inde# falls as consumers !ecome pessimistic a!out their economic prospects. A) +he aggregate supply cur$e shifts right< the aggregate demand cur$e is not affected< price le$el decreases< real )D* increases. ) +he aggregate supply cur$e shifts left< the aggregate demand cur$e is not affected< price le$el increases< real )D* decreases. ") +he aggregate demand cur$e shifts right< the aggregate supply cur$e is not affected< price le$el and real )D* increase. D) +he aggregate demand cur$e shifts left< the aggregate supply cur$e is not affected< price le$el and real )D* decrease.

*age .

%se the following to answer question 16: Figure 7-1

16. "efer to Figure &-$! A mo$ement from point A to point B A) is a change in aggregate demand resulting from a lower price le$el. ) is change in aggregate quantity demanded resulting from a lower price le$el. ") could !e due to an increase in in$estment demand. D) occurs !ecause aggregate output supplied has increased. %se the following to answer question 1:: (ggregate )uantity *emanded (+ trillion) 7.6 7.2 7., 7.& 7 2.6 2.2 2., 2.& 2 ..6 Table 7-1 (ggregate )uantity ,upplied (+ trillion) ,.6 ..& ..2 2.4 2., 2.6 7.4 7.& 7., 7.2 7.6

Price 'e el 1.4 1.& 1., 1.2 1.6 &.4 &.& &., &.2 &.6 (.4

-able &-$ shows the aggregate demand and short-run aggregate supply cur es for an economy! -he potential le el of output is +&!. trillion! 1:. "efer to -able &-$! 3f policyma9ers choose to close the gap !y using sta!iliAation policy0 they should use A) contractionary fiscal or monetary policies. ) e#pansionary fiscal or monetary policies.

*age 2

") D)

a com!ination of contractionary fiscal and e#pansionary monetary policies. a com!ination of e#pansionary fiscal and contractionary monetary policies.

&4. +he stic9y price e#planation of the short'run aggregate supply cur$e says that when the a$erage price le$el rises0 A) some firms will immediately pass the higher prices to consumers. ) !ecause of ad>ustment costs associated with changing prices0 some firms will not raise their prices immediately which may temporarily !oost their sales. ") firms will raise their output prices !y more than the increase in the a$erage price le$el to ma9e up for the shortfall in sales. D) consumers are unwilling to pay higher prices resulting in a decrease in aggregate demand. %se the following to answer question &1: Figure &-&

&1. "efer to Figure &-&! 1uppose the economy is initially in short'run equili!rium at K. Which of the following sta!iliAation policies could !e used to close the gap? A) decrease go$ernment welfare spending ) decrease personal income ta#es ") decrease go$ernment spending on defense D) increase payroll ta#es

*age 7