Practice Questions: Macro Test 4

1. According the Keynesians, an increase in the money supply affects output more if …

a. Investment is sensitive to interest rates.

b. Money demand is sensitive to interest rates.

c. The unemployment rate is low.

d. Consumption is sensitive to the Phillips Curve.

e. Government spending is sensitive to public opinion.

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2. Which of the following would be caused by deficit spending when the economic equilibrium lies on the Long Run Aggregate Supply Curve?

a. An inflationary gap.

b. Increasing unemployment.

c. An increase in potential output.

d. A deflationary gap.

e. A decrease in interest rates.

3. Which of the following would be likely to increase economic growth?

I. An increase in productivity.

II. An increase in consumer spending.

III. An increase in interest rates.

a. I only e. II and III only

b. II only f. I and III only

c. III only g. I, II and III

d. I and II only h. none of the above

4. Which of the following would cause simultaneous increases in inflation and unemployment?

a. A decrease in government spending.

b. A decrease in the reserve requirement.

c. A decrease in the velocity of money.

d. A stagnation in labor productivity.

e. An increase in the overall level of productivity.

5. Which of the following represent the Monetarist viewpoint?

I. The rate of growth of the money supply should be about three to five percent per year.

II. Fiscal policy is more effective than monetary policy.

III. Monetary policy indirectly affects GDP through interest rates and investment.

a. I only e. II and III only

b. II only f. I and III only

c. III only g. I, II and III

d. I and II only h. none of the above

6. Which of the following would not be recommended by a supply-side economist?

a. Decreased corporate taxes.

b. Deregulation of business.

c. An emphasis on increased savings.

d. Lower marginal tax rates.

e. Increased government spending for welfare.

7. If we use fiscal policy to reduce high inflation rates, what will happen in the money market?

a. The demand for money will increase.

b. The demand for money will decrease.

c. The supply of money will increase.

d. The supply of money will decrease.

e. None of the above.

8. One morning, you pick up the newspaper and you are confronted by a headline that states, "Unemployment hits 9% and GDP drops for the

third straight quarter, thankfully, inflation is low!"

Given this information, what would be the most appropriate combination of monetary and fiscal policies?

a. The sale of securities on the open market and an income tax cut.

b. Lowering the discount rate and decreasing the reserve requirement.

c. Lowering the reserve requirement while increasing government transfer payments.

d. Encouraging loans through moral suasion while canceling many contracts for defense spending.

e. Cutting taxes and increasing spending.

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9. An economy that is in the middle of a recession will be at which of these points in the graph above?

a. A

b. B

c. C

d. D

e. E

10. If the economy is operating at top capacity and the money supply (M1) is increased, what is most likely to happen?

a. The unemployment rate will rise.

b. The output of goods and services will increase.

c. Average prices will rise.

d. The output of goods and services will decrease.

11. Given a sudden increase in Aggregate demand in the diagram above, we should reasonably expect…

I. A short run increase in price levels.

II. In the long run, real income will fall.

III. A short run increase in output.

a. I only e. I and III only

b. II only f. II and III only

c. III only g. I, II, and III

d. I and II only h. none of the above

12. If acute inflation was occurring in a full employment economy, appropriate and consistent government policies might involve which of the following

combinations?

a. A government surplus, the purchase of securities on the open market and a higher discount rate.

b. A government surplus, the sale of securities on the open market and a higher discount rate.

c. A government deficit, the sale of securities on the open market and a higher discount rate.

d. A government deficit, the purchase of securities on the open market and a lower discount rate.

13. The formula for the equation of money is MV=PQ. Which of the following would most likely cause P to increase?

a. An increase in the money supply.

b. An increase in the output of goods and services.

c. A decline in the speed at which money circulates.

d. A decline in the money supply.

14. On a Phillips Curve, high rates of inflation coincide with…

a. High interest rates.

b. Low interest rates.

c. High unemployment rates.

d. Low unemployment rates.

e. Low discount rates.

15. Which of the following is a Keynesian viewpoint?

a. Monetary policy is more important than fiscal policy.

b. Monetary policy and fiscal policy are equally important.

c. Fiscal policy is more important than monetary policy.

d. Monetary policy is more important than fiscal policy during recession, but the opposite holds true during inflation.

e. Stable velocity renders monetary policy ineffective.

16. Which of the following is a possible cause of stagflation (simultaneous high prices and high unemployment)?

a. Increase in labor productivity.

b. Increase in the price of raw materials.

c. The rapid growth and development of the computer industry.

d. A decline in labor union membership.

17. Which of the following best represents the monetarist approach to economic policy?

a. Establish a gold standard.

b. Establish a 100% reserve requirement.

c. Holding the money supply constant.

d. Allowing the money supply to increase at approximately the same rate as the potential for long-term real gross domestic product.

e. Reducing the growth of the money supply during inflation and accelerating it during a recession.

18. What is “crowding out”? And, why is it significant to monetarists?

19. What is “crowding in”?

20. What is the “Monetary Rule”?

21. In macroeconomics, what is the difference between the short run and the long run?

22. What information does the LRAS provide about an economy?

23. Illustrate and explain how an economy that experiences a sudden increase in AD will return to equilibrium on the LRAS.

24. Why did supply side economics develop and what are its basic ideas?

25. What can cause real economic growth?

26. How can real economic growth be illustrated? (draw a diagram)

27. How can policy makers encourage real economic growth?

28. Assume the economy is in a recession.

a) Explain each of the following…

i) Monetary and fiscal policies advocated by monetarists to eliminate the recession.

ii) Monetary and fiscal policies advocated by Keynesians to eliminate the recession.

b) Explain how monetarists and Keynesians differ in their conclusions about the affects of crowding out associated with the stabilization policies outlined in Part (a).