Questions:
1. An anticipated change is an economic occurrence that
a. catches most people by surprise.
b. is foreseen by most economic participants.
c. is anticipated by economists but unforeseen by other people.
d. is foreseen by policy makers but unforeseen by the public.
2. An unanticipated economic event is a change that
a. catches most people by surprise.
b. was foreseen by most economic participants.
c. is the result of a steady long-term trend in an economic variable.
d. was forecast by most economists.
3. Which of the following will most likely be an unanticipated economic change?
a. higher oil prices resulting from a revolution in an oil-exporting country such as Libya
b. this year's increase in the labor force
c. a constant increase in the general level of prices over a lengthy period of time
d. an increase in prime-age workers as a proportion of the labor force
4. A currency appreciation will be most likely to
a. reduce net exports and therefore increase aggregate demand.
b. raise net exports and therefore decrease aggregate demand.
c. reduce net exports and therefore decrease aggregate demand.
d. raise net exports and therefore increase aggregate demand.
5. Which of the following factors would increase aggregate demand in the goods and services market?
a. an decrease in stock prices
b. an increase in the real interest rate
c. a decrease in real incomes abroad
d. increased optimism on the part of consumers and businesses
6. Which of the following will most likely increase aggregate demand?
a. a decrease in stock market prices
b. a lower real interest rate
c. a decrease in the expected inflation rate
d. a decrease in real GDP
7. Which of the following would be most likely to cause a reduction in current aggregate demand in the United States?
a. increased fear of a recession
b. an increase in the expected rate of inflation
c. a sharp increase in the value of stocks owned by Americans
d. a rapid increase in the growth of income in Canada, Mexico, and Western Europe
8. Which of the following is the best example of a supply shock?
a. an increase in the availability of capital and machinery due to normal changes in business investment
b. a decrease in the productivity of the labor force due to a decline in the average educational level of workers
c. a decline in agricultural output due to a summer drought
d. an increase in output as a result of an expansion in employment
9. When the economy is operating at an output beyond its full-employment potential, the
a. actual level of unemployment will exceed the natural rate of unemployment.
b. actual level of unemployment will equal the natural rate of unemployment.
c. strong demand for resources will place upward pressure on resource prices.
d. aggregate demand will increase until full employment is restored.
10. When the economy is operating at an output rate less than full-employment capacity,
a. a strong demand for resources will cause resource prices to rise.
b. actual unemployment will be less than the natural rate of unemployment.
c. the rate of inflation will tend to rise.
d. weak demand for investment will place downward pressure on real interest rates.
11. When an economy is experiencing an economic boom and operating beyond its long-run capacity,
a. strong demand for investment funds will push interest rates upward.
b. weak demand for resources will push the prices of resources downward.
c. weak demand for investment funds will cause the real interest rate to decline.
d. the unemployment rate will be greater than its natural rate.
12. Which of the following statements is most consistent with the view that the economy has a self-corrective mechanism?
a. When the economy is in a recession, it will remain there until the government steps in to bring the economy out of the recession.
b. When the economy is in a recession, falling resource prices and declining interest rates will direct the economy back to full employment.
c. During economic booms, interest rates will fall, causing the economy to fall into a recession.
d. In a market economy, resource prices, such as wages, can only increase; they can never decrease.
13. If Europe and Japan experience rapid growth in their incomes, other things constant, this will cause a(n)
a. decrease in the exports from the United States.
b. increase in the exports from the United States.
c. decrease in the national income of the United States.
d. decrease in aggregate demand in the United States
14. An increase in the exchange rate value of the U.S. dollar (stronger U.S. dollar), relative to the Japanese yen, will cause U.S. imports from Japan to
a. increase and exports to Japan to decrease.
b. increase and exports to Japan to increase.
c. decrease and exports to Japan to decrease.
d. decrease and exports to Japan to increase.
15. An improvement in technology would shift which of the following curve(s)?
a. aggregate demand and short-run aggregate supply
b. only the short-run aggregate supply
c. only the aggregate demand
d. short-run and long-run aggregate supply
16. The expenditure multiplier indicates that
a. autonomous changes in investment, government, or consumption spending can trigger much larger changes in output.
b. an autonomous increase in saving will cause output to rise by a multiple of the additional saving.
c. a market economy will be more stable than classical economists thought.
d. the marginal propensity to consume is greater than one.
17. The marginal propensity to consume is defined as the
a. fraction of total income not spent on consumption.
b. proportion of any change in income that is spent on consumption.
c. fraction of total income spent on consumption.
d. fraction of a change in income that is saved.
18. If an economy is growing, but experiences no inflation, this means
a. aggregate demand increased, but aggregate supply did not.
b. aggregate supply increased, but aggregate demand did not.
c. aggregate demand and aggregate supply increased by the same amount.
d. aggregate demand and aggregate supply decreased by the same amount.
19. Over the last 60 years, the average annual growth of real GDP in the United States has been approximately
a. 1 percent.
b. 3 percent.
c. 5 percent.
d. 9 percent.
20. Federal budget deficits generally grow during recessions because
a. both tax revenues and transfer payments decrease.
b. both tax revenues and transfer payments increase.
c. tax revenues decrease while transfer payments increase.
d. tax revenues increase while transfer payments decrease.
21. Which of the following is an appropriate fiscal policy to address the inflation that occurs when the economy is above potential GDP?
a. Decrease taxes to protect consumers from the effects of inflation.
b. Increase taxes to reduce aggregate demand.
c. Increase government spending to provide some of the goods consumers can no longer afford at the higher prices.
d. Decrease government spending so that the demand for money will fall.
22. Why does a tax change affect aggregate demand?
a. A tax change alters saving by an equal amount.
b. A tax change alters imports and net exports.
c. A tax change alters government spending by an equal amount.
d. A tax change alters disposable income and consumption spending.
23. If Congress votes to increase government purchases and at the same time decrease personal income taxes, they
a. have decided to balance the federal budget.
b. have voted for the proper policy to counteract a recession.
c. have voted for the proper policy to counteract inflation and an economic boom.
d. are trying to achieve a federal budget surplus.
24. If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to
a. counteract the recession.
b. worsen and prolong the recession.
c. end the recession sooner.
d. increase the level of real GDP.
25. Rather than seeking to balance the budget, Keynesian economists argue that the government's tax and spending policies should be determined by the
a. demand for government-provided public goods.
b. level of aggregate demand required to achieve full employment of resources.
c. size and quality of the labor force.
d. need to expand or contract the supply of money.
26. If an economy were experiencing a high rate of unemployment as the result of weak aggregate demand, a Keynesian economist would be most likely to recommend
a. a reduction in taxes coupled with a reduction in government expenditures of equal size.
b. an increase in government expenditures coupled with an increase in taxes of equal size.
c. a reduction in taxes, and an increase in government expenditures.
d. maintenance of a balanced budget.
27. Prior to the Great Depression, most economists believed that a recessionary downturn would be reversed by
a. higher wages that would stimulate aggregate demand and reduce unemployment.
b. lower wages that would increase the quantity of labor demanded and reduce unemployment.
c. an expansionary monetary policy on the part of the Federal Reserve System.
d. an increase in government spending that would stimulate aggregate demand and employment.
28. Within the Keynesian model, when total spending is less than the full-employment level of output, firms will
a. continue to produce the current level of output.
b. cut production to reduce their inventory accumulation.
c. lower interest rates, which will stimulate aggregate demand and keep the economy at full employment.
d. cut production to build inventories.
29. According to new classical economists, the most appropriate policy during a recession would be for the government to
a. increase the minimum wage.
b. impose wage and price controls.
c. cut taxes and increase the budget deficit
d. do nothing
30. Which of the following best expresses the central idea of countercyclical fiscal policy?
a. Planned deficits are experienced during economic booms and planned surpluses during economic recessions.
b. The balanced-budget approach is the proper criterion for determining annual budget policy. c. Actual deficits should equal actual surpluses during a period of deflation.
d. Deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.
31. Unemployment compensation payments
a. rise during a recession and thereby help stimulate consumption.
b. rise during a recession and thereby retard consumption.
c. rise during economic expansion and thereby help stimulate consumption.
d. rise during economic expansion and thereby retard consumption.
32. The likely explanation for the persistence of the U.S. federal budget deficit is that
a. it is easier politically to increase government spending than to decrease taxes.
b. it is easier politically to decrease government spending than to decrease taxes.
c. it is easier politically to increase government spending than to increase taxes.
d. the economy naturally tends toward recessions.
33. Reductions in personal income tax rates, often advocated by supply-side economists to increase labor supply and effort, can be expected to also
a. decrease consumption spending.
b. increase consumption spending.
c. decrease investment spending.
d. increase export sales.
34. Kim Harper's annual income increased from $20,000 to $25,000. If Kim faces a 40 percent effective marginal tax rate, the $5,000 increase in income will expand her disposable income by
a. $2,000.
b. $3,000.
c. $3,600.
d. $5,000.
35. When an economy is operating well below its full-employment capacity and the marginal propensity to consume is 3/4, a $10 billion increase in autonomous investment will cause the equilibrium income to rise by
a. $5 billion.
b. $10 billion.
c. $20 billion.
d. $40 billion.
The following information is relevant to the next two questions.
Assume IBM decides, despite an ongoing recession, to build a new branch for computer analysis in Bozeman, Montana. The plant expects to spend $12 million to hire the necessary employees, all of whom move in from out of state to take the jobs.
36. If the marginal propensity to consume in Bozeman was 3/4, what would be the total change in income that would result from the operation of the plant for one year?
a. $12 million
b. $48 million
c. $9 million
d. $27 million
37. If Bozeman citizens decided to spend more than 3/4 of the additional income,
a. the MPC would decrease.
b. the expenditure multiplier would decrease.
c. the expansion in income would be larger.
d. aggregate expenditures would decline.
38. The primary determinant of consumer spending is
a. the interest rate.
b. disposable income.
c. expectations of inflation.
d. the stage of the business cycle.
39. What is meant by the expression, "There is too much money chasing too few goods"?
a. People spend too much time chasing after money.
b. An expansion in the supply of money relative to the availability of goods and services is causing an increase in the general level of prices.
c. The value of money will tend to decline when the supply of gold increases.
d. People would be better off if the monetary authorities increased the supply of money more rapidly.
40. The payments made to the beneficiaries of the Social Security program are financed by
a. Insurance premiums previously paid into the system by the beneficiaries.
b. Current receipts derived from the Social Security payroll tax.
c. Income derived from funds that were previously invested in stocks and bonds.
d. Governmental savings accounts based on the amount of funds the recipient previously paid into the system.
41. When the Social Security system begins running a deficit during the years following 2018, the bonds in the trust fund will be drawn down. The funds to redeem these bonds will have to come from
a. Higher taxes, spending reductions in other programs, or additional government borrowing.
b. The surplus funds deposited in governmental banking accounts.
c. Equity capital being liquidated.
d. The sale of private equities and securities that the government has been purchasing with the funds.
42. The current Social Security system works to the disadvantage of blacks primarily because the
a. Average annual earnings of blacks are generally lower than other groups.
b. Average life expectancy of blacks is generally less than other groups.
c. Social Security tax rates imposed on blacks are higher than those imposed on other groups.
d. Social Security benefit formula is disadvantageous to blacks.
43. As the baby boom generation, born during 1946 through 1960, reaches retirement age during the 2011 through 2030 period, the number of workers per Social Security beneficiary is expected to
a. Increase to five.
b. Remain constant at approximately seven.
c. Decline to approximately five.
d. Decline to approximately two.
44. If no changes are made to the current structure of Social Security, deficits will be incurred when the baby boomers begin to retire. Approximately what percentage increase in the payroll tax would be necessary to cover these deficits?
a. 10 percent
b. 30 percent
c. 50 percent
d. 100 percent
45. In 2011, workers pay Social Security payroll tax up to this annual income, and Social Security tax is no longer collected, once you surpass this income level.
a. $15,000
b. $32,000
c. $106,800
d. $200,000
46. During the last two decades, most of the surplus generated by the Social Security system was
a. Used to finance current government expenditures and were placed into the general fund.
b. Invested in government bonds that will make it possible for the federal government to pay future retirement benefits without an increase in federal taxes.
c. Used to pay down the national debt.
d. Invested in bonds offered by foreign governments and businesses that will provide a stream of future income for the finance of retirement benefits.
47. The Social Security program is primarily a
a. compulsory retirement income program set up on sound insurance principles.
b. forced-savings program where workers save during their working years and receive the principal and interest on these savings at retirement.
c. program designed to tax current workers in order to provide benefits for current retirees.
d. voluntary savings program run by the government.
48. When the Social Security surplus is used to cover the current operating expenses of the federal government, it will
a. make it easier for future taxpayers to provide promised Social Security benefits to baby boomers.
b. reduce the outstanding debt of the federal government.
c. make it possible for Congress and the president to spend more without raising current taxes or borrowing from the general public.
d. increase the credibility of the Social Security benefits promised to future retirees.
49. . The Social Security system is currently generating tax revenues that exceed the benefits paid to recipients. This surplus is
a. being invested in foreign bonds, which will provide Americans with a source of income when the baby boom generation retires.
b. separated from other government revenue so politicians will not spend the money during the current period.
c. being channeled into earmarked private savings accounts.
d. invested in government bonds, the redemption of which will require an increase in taxes (or additional Treasury borrowing).
50. The net value to the federal government of the bonds currently held in the Social Security Trust Fund is
a. approximately $1 trillion.
b. now approaching $2 trillion.
c. greater than $2.5 trillion.
d. zero, because the federal government is both the payee and recipient of the interest and principal represented by these bonds.