Question 1

Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?

Accepted Answer

Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.

Question 2

In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS,

Accepted Answer

A) inflation occurs.

Question 3

Which of the following is an appropriate policy for the Fed to pursue if it wants to increase the money supply?

Accepted Answer

Buy US treasury bills

Question 4

To decrease the money supply, the Federal Reserve could

Accepted Answer

Raise required reserve ratio

Question 5

An increase in the interest rate

Accepted Answer

increases the opportunity cost of holding money.

Question 6

The quantity theory of money predicts that, in the long run, inflation results from the

Accepted Answer

money supply growing at a faster rate than real GDP.

Question 7

An increase in the price level causes

Accepted Answer

the money demand curve to shift to the right.

Question 8

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

Accepted Answer

decrease.

Question 9

For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the

Accepted Answer

federal funds rate.

Question 10

If the Fed raises the interest rate, this will ________ inflation and ________ real GDP in the short run.

Accepted Answer

reduce; lower

Question 11

When the Federal Reserve increases the money supply, at the previous equilibrium interest rate households and firms will now have

Accepted Answer

more money than they want to hold.

Question 12

The Fed can increase the federal funds rate by

Accepted Answer

selling Treasury bills, which decreases bank reserves.

Question 13

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________.

Accepted Answer

higher, higher

Question 14

Government transfer payments include which of the following?

Accepted Answer

Social Security and Medicare programs

Question 15

Fiscal policy is determined by

Accepted Answer

Congress and the president.

Question 16

Expansionary fiscal policy involves

Accepted Answer

increasing government purchases or decreasing taxes

Question 17

If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

Accepted Answer

taxes

Question 18

The multiplier effect refers to the series of

Accepted Answer

induced increases in consumption spending that result from an initial increase in autonomous expenditures.

Question 19

A change in consumption spending caused by income changes is ________ change in spending, and a change in government spending that occurs to improve roads and bridges is ________ change in spending

Accepted Answer

) an induced; an autonomous

Question 20

The government purchases multiplier equals the change in ________ divided by the change in ________.

Accepted Answer

equilibrium real GDP; government purchases

Question 21

If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.)

Accepted Answer

) a $300 billion decrease in GDP

Question 22

Suppose that the economy is experiencing an expansion and the change in real GDP needed to bring the economy back into long-run equilibrium is $200 billion. To move the economy back to potential GDP, Congress should

Accepted Answer

lower government purchases by an amount less than $200 billion.

Question 23

In the long run, most economists agree that a permanent increase in government spending leads to ________ crowding out of private spending

Accepted Answer

complete

Question 24

Which of the following best describes supply-side economics?

Accepted Answer

Tax rates, particularly marginal tax rates, affect the incentive to work, save, and invest and, therefore, aggregate supply.

Question 25

A decrease in which of the following would decrease the tax wedge?

Accepted Answer

marginal tax rate

Question 26

Tax reduction and simplification should ________ long-run aggregate supply and ________ aggregate demand.

Accepted Answer

increase; increase

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