1) During the expansion phase of the business cycle,

a) employment decreases.
b) income decreases.
c) unemployment increases.
d) production increases.

2) A recession can be defined as:
a) One year of negative economic growth.
b) A period of rising prices.
c) Six months of negative economic growth.
d) A drop in the economic growth rate from 5 percent to 3 percent.

3) A recession begins with a ________ in spending by firms on capital goods and a ________ in spending on
durable goods by households.
a) decrease; increase
b) increase; increase
c) increase; decrease
d) decrease; decrease

4) Which of the following goods would usually see the largest decline in demand during a recession?
a) Food
b) Clothing
c) Hair cuts
d) Cars

5) The aggregate demand and aggregate supply model helps explain
a) long run growth.
b) price fluctuations in an individual market.
c) short run fluctuations in real GDP and the price level.
d) output fluctuations in an individual market.

6) Because of the slope the aggregate demand we can say that
a) a decrease in the price level leads to a higher level of aggregate spending.
b) a decrease in the price level leads to a lower level of aggregate spending.
c) a decrease in the price level leads to a higher level of aggregate supply.
d) an increase in the price level leads to a higher level of aggregate spending.

7) Domestic household spending on goods and services is known as
a) planned investment spending.
b) consumption spending.
c) government purchases.
d) net exports.

8) Investment spending does NOT include
a) changes in inventories.
b) family purchases of new houses.
c) spending on new capital equipment.
d) spending on consumer durable goods.

9) Which of the following would NOT be considered a positive addition to household wealth?
a) 1000 shares in the Commonwealth Bank
b) The balance in your savings account
c) A credit card balance
d) The equity that homeowners have in their own homes

10) The interest-rate effect suggests that:
a) a decrease in the supply of money will increase interest rates, and reduce interest sensitive consumption and
investment spending.
b) an increase in the price level will increase the demand for money, reduce interest rates, and decrease
consumption and investment spending.
c) an increase in the price level will increase the demand for money, increase interest rates, and decrease
consumption and investment spending.
d) an increase in the price level will decrease the demand for money, reduce interest rates, and increase
consumption and investment spending.

11) A stock market crash which causes share prices to fall should cause
a) an increase in consumption spending.
b) an increase in wealth.
c) a decrease in consumption spending.
d) no change in consumption spending.

12) An increase in the real interest rate will
a) most likely lower the reward to savings.
b) cause consumers to spend more and save less.
c) most likely lower the cost of borrowing.
d) most likely lower consumer's purchases of durable goods.

13) The marginal propensity to consume is defined as
a) disposable income divided by consumption multiplied by 100.
b) the change in disposable income divided by the change in consumption.
c) the change in consumption divided by the change in disposable income.
d) consumption divided by disposable income multiplied by 100.

14) If disposable income increases by $100 million, and consumption increases by $90 million, then the marginal
propensity to consume is
a) 0.6
b) 0.9
c) 0.75
d) 0.8

15) If disposable income falls by $40 billion and consumption falls by $30 billion, then the slope of the consumption
function is
a) 0.3
b) 0.75
c) 0.4
d) 1.33

16) Given the following consumption schedule,
Consumption Disposable Income
$600 $1000
$900 $1500
$1200 $2000
The marginal propensity to consume is
a) 0.5
b) 0.6
c) 0.8
d) 0.75

17) If the marginal propensity to consume is 0.75, the marginal propensity to save is
a) 0.25
b) 0.5
c) 3.0
d) 1.0

18) Spending on the national defence force is categorised as government purchases. How do increases in spending
on defence affect the aggregate demand curve?
a) This will shift the aggregate demand curve to the right.
b) This will move the economy up along a stationary aggregate demand curve.
c) This will shift the aggregate demand curve to the left.
d) This will move the economy down along a stationary aggregate demand curve.

19) If firms are more optimistic that future profits will rise and remain strong for the next few years, then
a) investment spending will fall.
b) investment spending will rise, then fall.
c) investment spending will rise.
d) investment spending will remain unaffected.

20) Vietnamese net export spending rises when
a) the price level in Vietnam rises relative to the price level in other countries.
b) the inflation rate is higher in Vietnam relative to other countries.
c) the economic growth rate of Vietnamese GDP is slower than the growth rate of GDP in other countries.
d) the value of Vietnamese dong increases relative to other currencies.

21) The long-run aggregate supply curve is
a) vertical at the full employment level of output.
b) the same as the short-run aggregate supply curve at the macroeconomic level.
c) downward sloping when prices are falling and upward sloping when prices are rising.
d) upward sloping due to the effects of changes in the price level on production.

22) The level of real GDP in the long run is called
a) potential GDP.
b) frictional GDP.
c) low capacity GDP.
d) short run GDP.

23) If positive technological change occurs in the economy,
a) the economy will move up along the long run aggregate supply curve.
b) the long run aggregate supply curve will shift to the left.
c) the economy will move down along the long run aggregate supply curve.
d) the long run aggregate supply curve will shift to the right.

24) Which of the following will NOT shift the short-run aggregate supply curve?
a) A change in the wage rate
b) A reduction in the price of raw materials
c) Technological change
d) A change in the price level

25) Workers expect inflation to rise from 3% to 5% next year, this should
a) shift the short run aggregate supply curve to the left.
b) shift the short run aggregate supply curve to the right.
c) move the economy down along a stationary short run aggregate supply curve.
d) move the economy up along a stationary short run aggregate supply curve.

26) Long run macroeconomic equilibrium occurs when
a) aggregate demand equals short run aggregate supply and they intersect at a point on the long run supply
curve.
b) aggregate demand equals short run aggregate supply.
c) output is above potential GDP.
d) unemployment equals zero.


27) In the Figure above, which of the points are possible long run equilibriums?
a) A and B
b) A and C
c) A and D
d) B and D


28) Which of the points in the Figure above are possible short run equilibriums but not long run equilibriums? Assume
that Y1 represents potential GDP.
a) A and B
b) A and C
c) C and D
d) B and D

29) A decline in spending resulting from the wealth, interest rate, and foreign purchases effects would correspond to:
a) a movement along the aggregate demand curve.
b) a movement along the aggregate supply curve.
c) a leftward shift of aggregate demand.
d) a rightward shift of aggregate demand.

30) If the economy is operating along an upward sloping short run aggregate supply curve, an increase in aggregate
demand will:
a) cause unemployment and deflation.
b) cause employment to fall, but the price level to rise.
c) increase employment, output, and the price level.
d) increase employment and output, but not the price level.

31) If the economy is operating along the vertical range of the aggregate supply curve, an increase in aggregate
demand will:
a) cause unemployment and deflation.
b) increase employment, but reduce output and the price level.
c) increase employment and output, but not the price level.
d) increase the price level, but not employment and output.

32) Which of the following leads to a decrease real GDP?
a) An increase in the inflation rate in other countries, relative to the inflation in Australia
b) An increase in interest rates
c) Households have increasingly optimistic expectations about future income
d) An increase in government spending
33) If the economy is currently in equilibrium at a level of GDP that is below potential GDP, which of the following
would move the economy back to potential GDP?
a) An increase in the value of the dollar relative to other currencies
b) An increase in interest rates
c) A decrease in business confidence
d) An increase in wealth