final_prep

D) the expected inflation rate is rising.

316) The short-run Phillips curve shows

316) _____

A)an inverse relationship between the unemployment rate and the inflation rate.

B)an inverse relationship between interest rates and the price level.

C)a direct relationship between the quantity of money and interest rates.

D)a direct relationship between the price level and real GDP.

317)	In the short run, unexpected inflation typically leads to	317)	_____
	A) a lower unemployment rate.
	B) a higher unemployment rate.
	C) decreases in aggregate demand.
	D) workers thinking the real wage rate has fallen.
318)	Suppose that last year the economy of Suffera was experiencing an expected inflation rate of 8	318)	_____
	percent and unemployment rate of 12 percent. An unanticipated increase in the inflation rate

would

A) increase the inflation rate and decrease the unemployment rate. B) increase the unemployment rate.

C) increase the inflation rate but have no effect on the unemployment rate. D) None of the above answers is correct.

319)	In the above figure, suppose the economy is at point A. An unexpected increase in the inflation		319)	_____
	rate to 6 percent will result in a movement to point
	A) A, that is, there is no movement.	B) B.
	C) C.	D) D.
320)	In the above figure, suppose the economy is at point A. An expected increase in the inflation rate		320)	_____
	to 6 percent will result in a movement to point
	A) A, that is, there is no movement.	B) B.
	C) C.	D) D.
321)	Which of the following statements about the long-run Phillips curve is correct?		321)	_____
	A) The long-run Phillips curve shifts leftward if the natural unemployment rate decreases.

B)The long-run Phillips curve shifts rightward and upward if the expected inflation rate increases.

C)The long-run Phillips curve is horizontal.

D)None of the above statements is correct.

322) In the above figure, which of the following curves represents the long-run Phillips curve?				322) _____
A) 4	B) 3	C) 2	D) 1

323) Which of the diagrams in the above figure best illustrates a long-run Phillips curve?		323) _____
A) Figure A	B) Figure B
C) both Figure A and Figure B	D) neither Figure A nor Figure B

324)	In the above figure, the economy is at point A. The inflation rate unexpectedly falls by two		324)	_____
	percentage points. As a result, the economy moves to point
	A) A, that is, there is no movement.	B) B.
	C) C.	D) D.
325)	The short-run Phillips curve shows the relationship between		325)	_____

A)the price level and real GDP in the short run.

B)inflation and unemployment when expected inflation equals the actual inflation.

C)the price level and unemployment in the short run.

D)inflation and unemployment when expected inflation does not change.

326)	A decrease in the expected inflation rate leads to ________ in the long-run Phillips curve and		326)	_____
	________ in the short-run Phillips curve.
	A) no shift; no shift	B) a leftward shift; an upward shift
	C) an upward shift; no shift	D) no shift; a downward shift
327)	The difference between the government debt and the budget deficit is		327)	_____

A)not significant because both move in the same direction.

B)the government debt shows the annual discrepancy between government spending and tax revenue and the budget deficit shows the accumulated balance of past government debts.

C)the budget deficit shows the annual discrepancy between government spending and tax revenue and the government debt shows the accumulated balance of past government debts.

D)none.

328)	An increase in the government ________ reduces the government's ________.		328)	_____
	A) budget surplus; debt	B) debt; budget deficit
	C) budget deficit; debt	D) None of the above answers is correct.
329)	If tax revenue equal $1.5 billion and government outlays equal $1.6 billion, then the		329)	_____

A)government debt declines by $0.1 billion.

B)government budget has a deficit of $0.1 billion.

C)government budget has a surplus of $0.1 billion.

D)government debt is equal to $0.1 billion.

		Govern	Govern
		ment
			ment
		tax
			expend
		revenu
	Year		itures
		es
			(billion
		(billion
			s of
		s of
			dollars)
		dollars)
	1	240	240
	2	250	245
	3	260	255
	4	300	320
	5	325	340

330)	What is the amount of the surplus or deficit incurred in year 1 by the government shown in the		330)	_____
	above table?
	A) $25 billion surplus	B) $240 billion surplus
	C) $0	D) $25 billion deficit
331)	What is the amount of the surplus or deficit incurred in year 2 by the government shown in the		331)	_____
	above table?
	A) $5 billion surplus	B) $0
	C) $250 billion surplus	D) $5 billion deficit
332)	The difference between the before-tax and after-tax rates is referred to as the		332)	_____
	A) deadweight gain.	B) tax wedge.
	C) taxation penalty.	D) tax plug.
333)	The supply side effects of a change in taxes on labor income means that ________ in taxes on		333)	_____
	labor income shift the ________.

A)a decrease; labor demand curve leftward

B)a decrease; labor demand curve rightward

C)an increase; labor supply curve leftward

D)an increase; labor supply curve rightward

334)	An increase in taxes on labor income shifts the labor supply curve ________ and the ________.		334)	_____
	A) leftward; after-tax wage rate falls
	B) leftward; after-tax wage rate rises
	C) rightward; before-tax wage rate rises
	D) The question errs because taxes affect only aggregate demand.
335)	The supply side effects of a cut in tax rates include ________ in the supply of labor and ________		335)	_____
	in the supply of loanable funds.
	A) a decrease; an increase	B) a decrease; a decrease
	C) an increase; an increase	D) an increase; a decrease
336)	When interest income is taxed and the inflation rate rises, the tax revenue collected by the		336)	_____
	government
	A) increases.	B) doesn't change.
	C) could either increase or decrease.	D) decreases.

337)	Suppose the tax rate on interest income is 25 percent, the real interest rate is 4 percent, and the				337)	_____
	inflation rate is 4 percent. In this case, the real after-tax interest rate is
	A) 2.0 percent.	B) 4.0 percent.	C) 3.5 percent.	D) .5 percent.
338)	The Laffer curve is the relationship between				338)	_____

A)tax rates and tax revenue.

B)government purchases and potential GDP.

C)tax rates and potential GDP.

D)tax revenue and potential GDP.

339) According to the Laffer curve, raising the tax rate

339) _____

A)does not change the amount of tax revenue.

B)always increases the amount of tax revenue.

C)always decreases the amount of tax revenue.

D)might increase, decrease, or not change the amount of tax revenue.

340)	The Laffer curve shows that increasing ________ increases ________ when ________ low.		340)	_____
	A) potential GDP; tax revenue; tax revenue is
	B) tax rates; tax revenue; tax rates are
	C) tax revenue; potential GDP; tax revenue is
	D) None of the above answers is correct.
341)	An increase in the tax on interest income ________ the supply of saving and ________ the		341)	_____
	equilibrium investment.
	A) decreases; decreases	B) increases; increases
	C) increases; decreases	D) decreases; increases
342)	A discretionary fiscal policy is a fiscal policy that		342)	_____

A)requires action by the Congress.

B)is triggered by the state of the economy.

C)involves a change in government defense spending.

D)involves a change in corporate tax rates.

343) An example of a discretionary fiscal policy is when

343) _____

A)Congress passes a law that raises personal marginal tax rates.

B)unemployment compensation payments rise with unemployment rates.

C)food stamp payments rise when the economy is in a recession.

D)tax receipts fall as incomes fall.

344)	An increase in the tax rates as a result of a new tax law passed by Congress is an example of		344)	_____
	________.
	A) discretionary fiscal policy	B) increasing the government deficit
	C) increasing the government debt	D) needs-tested taxing change.
345)	The autonomous tax multiplier is		345)	_____

A)negative.

B)smaller than the government expenditure multiplier.

C)equal to the government expenditure multiplier.

D)larger than the government expenditure multiplier.

346) Suppose the government increases autonomous taxes. This change decreases	346) _____
A) government expenditure, which decreases aggregate expenditure.

B)disposable income, which decreases consumption expenditure and aggregate expenditure.

C)disposable income, which decreases aggregate supply.

D)consumption expenditure and spending on imports. The effect on aggregate expenditure depends on whether domestic spending or spending on imports decreases the most.

347)	The aggregate demand curve is shifted rightward by		347)	_____
	A) an increase in the federal budget	B) an increase in tax rates.
	surplus.
	C) a decrease in government expenditure.	D) an increase in government expenditure.
348)	Assuming there are no supply-side effects, an increase in government expenditures ________ the		348)	_____
	AD curve and ________ the SAS curve.
	A) shifts rightward; does not shift	B) shifts leftward; shifts leftward
	C) shifts rightward; shifts rightward	D) does not shift; does not shift
349)	A decrease in government expenditure shifts the AD curve ________ and a decrease in taxes		349)	_____
	shifts the AD curve ________.
	A) rightward; leftward	B) rightward; rightward
	C) leftward; leftward	D) leftward; rightward
350)	The government could increase aggregate demand by $1 trillion by		350)	_____

A)increasing its taxes by less than $1 trillion.

B)increasing its expenditures on goods and services by less than $1 trillion.

C)increasing its expenditures on goods and services by more than $1 trillion.

D)increasing its expenditures on goods and services by exactly $1 trillion.

351) Using the AD-AS model, an increase in government expenditure

351) _____

A)has a full multiplier effect on real GDP, leaving the price level unchanged in the long run.

B)has no impact on real GDP.

C)increases both real GDP and the price level.

D)has no impact on real GDP, but will increase potential GDP.

352) The government increases its expenditures. The steeper the SAS curve, the ________ will be the		352) _____
increase in the price level and the ________ will be the increase in real GDP.
A) smaller; smaller	B) larger; larger
C) larger; smaller	D) smaller; larger

353) In the above figure, if the economy initially is at point A and government expenditure increases, 353) _____

in the short run the economy will move to point A) C.

B) A, that is, the equilibrium will NOT change. C) B.

D) None of the above answers is correct.

354) The figure above illustrates the aggregate demand, short-run aggregate supply, and long-run		354) _____
aggregate supply in Lotus Land. The economy is currently at point D and the government
increases its expenditure on goods and services. The economy will move to ________. The price
level will ________, and the change in real GDP will be ________ the increase in aggregate
demand.
A) point B; remain constant; the same as	B) point D; rise; less than
C) point C; rise; less than	D) point A; fall; less than

355)	The figure above illustrates the aggregate demand, short-run aggregate supply, and long-run		355)	_____
	aggregate supply in Lotus Land. The economy is currently at point D and the government
	decreases its taxes. The economy will move to ________. The price level will ________, and the
	change in real GDP will be ________ the increase in aggregate demand.
	A) point B; remain constant; the same as	B) point A; fall; less than
	C) point C; rise; less than	D) point D; rise; less than
356)	An advantage of automatic stabilizers over discretionary fiscal policy is that		356)	_____

A)automatic stabilizers can be easily fine-tuned to move the economy to full employment.

B)automatic stabilizers require only a simple majority of Congress to pass whereas discretionary fiscal policy requires a two-thirds majority to pass.

C)only the President is involved in implementing automatic stabilizers instead of both the President and Congress.

D)automatic stabilizers are not subject to all the same time lags that discretionary fiscal policy is.

357) The use of fiscal policy is limited because

357) _____

A)the economy is almost always at full employment.

B)the President may have different goals than Congress.

C)there is never a long enough time lag.

D)time lags associated with fiscal policy may cause the policy to take effect too late to solve the problem it was supposed to address.

358) The use of discretionary fiscal policy to end a recession is limited because

358) _____

A)in the real world, taxes are not induced.

B)potential GDP changes too rapidly.

C)the real-world multiplier is too small to have an impact on real GDP.

D)the legislative process is slow.

359)	The size of the government expenditure multiplier is ________ by induced taxes and ________ by		359)	_____
	needs-tested spending.
	A) increased; increased	B) decreased; increased
	C) decreased; decreased	D) increased; decreased
360)	Which one of the following statements about the budget deficit or surplus over the business		360)	_____
	cycle is correct?

A)When GDP decreases, the budget deficit tends to decrease.

B)When the economy is in an expansion, the budget deficit tends to increase.

C)Automatic fluctuations in the budget deficit act as automatic stabilizers.

D)When the economy is in recession the budget surplus tends to increase.

361) In general, the relationship between the business cycle and the government budget deficit is

361) _____

A)for the deficit to fall when the economy is growing.

B)non-existent because the deficit depends on the policy of the current administration toward taxation.

C)only now being studied by macroeconomics.

D)not stable because the relationship depends on consumer confidence.

362) The principal goal of monetary policy is to

362) _____

A)lower taxes

B)keep the budget deficit small and/or the budget surplus large.

C)maintain low inflation

	D) reverse the productivity growth slowdown
363) Which of the following are policy instruments available to the Fed as it tries to achieve its		363) _____
macroeconomic goals?
I.	government expenditures on goods and services and taxes

II.the government budget deficit or surplus

III.changes in the federal funds rate

	A) II and III	B) III only	C) I and II	D) II only
364)	Monetary policy affects real GDP by				364)	_____
	A) creating budget surpluses.		B) changing aggregate supply.
	C) changing aggregate demand.		D) creating budget deficits.
365)	Monetary policy produces ripple effects, some of which happen quickly and some that can take				365)	_____
	years to produce change. Which of the following takes the longest to change?
	A) exchange rate		B) inflation rate
	C) monetary base		D) federal funds rate

366)	The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland		366)	_____
	undertakes an open market purchase of government securities that changes the quantity of
	reserves by $100 billion, then the federal funds rate will ________.
	A) remain at 6 percent a year	B) fall to 4 percent a year
	C) rise to 8 percent a year	D) None of the above answers is correct.
367)	The Fed lowers the federal funds rate. A mechanism through which aggregate demand increases		367)	_____
	is that the lower federal funds rate

A)increases other short-term interest rates, which decreases investment, thereby decreasing aggregate demand.

B)raises the exchange rate so that net exports decrease, which increases investment, thereby

increasing aggregate demand.

C) decreases other short-term interest rates, which increases investment, thereby increasing aggregate demand.

D) decreases other short-term interest rate, which decreases investment, thereby increasing

aggregate demand.

368)	In the above figure, if the economy is initially at point a, the short-run effect of a cut in the		368)	_____
	federal funds rate is given by movement from point
	A) a to point d, decreasing output and increasing the unemployment rate.
	B) a to point c, keeping output and the unemployment rate constant.
	C) a to point b, increasing output and decreasing the unemployment rate.
	D) a to point b, increasing output and the unemployment rate.
369)	In the above figure, if the economy is initially at point c, the short-run effect of a hike in the		369)	_____
	federal funds rate is given by movement from point
	A) c to point a, keeping output and the unemployment rate constant.
	B) c to point d, increasing output and decreasing the unemployment rate.
	C) c to point b, increasing output and decreasing the unemployment rate.
	D) c to point d, decreasing output and increasing the unemployment rate.
370)	If the Fed wished to eliminate an inflationary gap, which of the following would be an		370)	_____
	appropriate policy?
	A) buy government securities	B) decease the government budget deficit
	C) raise the federal funds rate	D) lower the federal funds rate
371)	According to the AS/AD model, in the short run an increase in the federal funds rate will		371)	_____

A)decrease equilibrium real GDP but leave the equilibrium price level unchanged.

B)increase the equilibrium price level and decrease equilibrium real GDP.

C)decrease the equilibrium price level but leave equilibrium real GDP unchanged.

D)decrease the equilibrium price level and decrease equilibrium real GDP.