PRACTICE TEST-2

Name:

PRACTICE TEST-2

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

The French economist Jean-Baptiste Say transformed the equality of total output and total spending into a law that can be expressed as follows:

a.	Unemployment is not possible in the short run.
b.	Demand and supply are never equal.
c.	Supply creates its own demand.
d.	Demand creates its own supply.

According to the classical economists, which of the following would make prolonged unemployment impossible?

a.	Flexible prices, wages, and interest rates.
b.	Activist government policies.
c.	Stable investment demand.
d.	A steadily growing money supply.

The classical economists argued that the production of goods and services (supply) generates an equal amount of total income and, in turn, total spending. This theory is called:

a.	Keynes' General Theory.
b.	Say's Law.
c.	the "animal spirits" theory.
d.	the law of autonomous consumption.

Which of the following statements is true about Say's law?

a.	It states that supply creates its own demand.
b.	It states that demand creates its own supply.
c.	It states that total output will always exceed total spending.
d.	It states that consumption spending is the most volatile component of aggregate expenditures.
e.	It is a major proposition of the Keynesian model.

The school of thought that emphasizes the natural tendency for an economy to move toward equilibrium full employment without inflation is known as the:

a.	Keynesian school.
b.	supply-side school.
c.	noninterventionist school.
d.	rational expectations school.
e.	classical school.

Keynes once remarked that, in the long run, we're all dead. He was responding to the conventional wisdom of classical economics who argued that:

a.	the supply curve should remain vertical in the long run.
b.	World War I was fought to free Britain from economic ruin.
c.	depression was only a short-run, temporary departure from full-employment equilibrium.
d.	funeral plots need to be determined by the market.
e.	market-based realities cause the estate tax to be too high.

According to Keynes, what is the most important determinant of households' spending on goods and services?

a.	The price level.
b.	The interest rate.
c.	Autonomous consumption.
d.	Disposable income.

The consumption function shows the relationship between consumer expenditures and:

a.	the interest rate.
b.	the tax rate.
c.	savings.
d.	disposable income.

Consider the Keynesian consumption function. If disposable income is greater than the break-even level of disposable income, then households will be:

a.	investing.
b.	borrowing.
c.	dissaving.
d.	saving.

10.

A movement along the consumption function is caused by a change in:

a.	the price level.
b.	autonomous consumption.
c.	real disposable income.
d.	the stock of durable goods.

11.

The relationship between consumer expenditures and disposable income is the:

a.	savings function.
b.	the tax rate function.
c.	disposable income function.
d.	consumption function.

12.

Which of the following statements is true concerning the consumption function?

a.	It slopes upward.
b.	Its slope equals the MPC.
c.	It represents the direct (positive) relationship between consumption spending and the level of real disposable income.
d.	If the consumption function lies above the 45-degree line then saving is positive.
e.	All of the above.

13.

Economists refer to the simple relationship between consumption and disposable income as:

a.	autonomous consumption.
b.	the marginal propensity to consume.
c.	the absolute disposable income hypothesis.
d.	disposal income.
e.	the consumption function.

14.

The consumption function shows the relationship between consumption and:

a.	interest rates.
b.	saving.
c.	price level changes.
d.	disposable income.

15.

The relationship between consumption and disposable income is the:

a.	spending function.
b.	consumption function.
c.	autonomous consumption.
d.	household consumer spending
e.	household spending function.

16.

If the interest rate increases, then the:

a.	economy will move to a new point along the existing consumption function.
b.	consumption function will shift up.
c.	consumption function will shift down.
d.	investment demand curve will shift up.
e.	economy will move to a new point along the existing investment demand curve.

17.

Which one of the following changes is consistent with a change in an economy's consumption function from C = $500 billion + 0.80Y to C = $700 billion + 0.80Y?

a.	An increase in disposable income taxes.
b.	An increase in interest rates
c.	A decrease in permanent disposable income.
d.	An increase in wealth.
e.	An increase in savings.

18.

At the point where the disposable income line intersects the consumption function, saving:

a.	equals consumption.
b.	equals disposable income.
c.	is less than zero.
d.	is equal to zero.

19.

Autonomous consumption is consumption that:

a.	varies directly with disposable income.
b.	varies inversely with disposable income.
c.	is independent of the level of disposable income.
d.	is constant at first and then varies with disposable income.

20.

Autonomous consumption is equal to the level of consumption associated with:

a.	unstable disposable income.
b.	positive disposable income.
c.	zero disposable income.
d.	negative disposable income.

21.

Given the consumption function C = $100 billion + 0.75 ($300 billion), autonomous consumption is equal to:

a.	$100 billion.
b.	$225 billion.
c.	$300 billion.
d.	$325 billion.
e.	$400 billion.

22.

That part of disposal income not spent on consumption is defined as:

a.	transitory disposable income.
b.	permanent disposable income.
c.	disposal income.
d.	autonomous consumption.
e.	saving.

23.

If disposal income is $400 billion, autonomous consumption is $60 billion, and MPC is 0.8, what is the level of saving?

a.	$20 billion.
b.	$210 billion.
c.	$380 billion.
d.	$590 billion.
e.	$780 billion.

24.

If, for a given disposal income level, the disposable income line lies above the consumption curve, saving:

a.	equals consumption.
b.	equals disposable income.
c.	is less than zero.
d.	is equal to zero.
e.	is greater than zero.

25.

If, for a given disposal income level, the disposable income line lies below the consumption curve, saving:

a.	equals consumption.
b.	equals disposable income.
c.	is less than zero.
d.	is equal to zero.
e.	is greater than zero.

26.

The marginal propensity to consume (MPC) is computed as the change in:

a.	consumption divided by the change in savings.
b.	consumption divided by the change in disposable personal income.
c.	consumption divided by the change in GDP.
d.	None of the above.

27.

The marginal propensity to consume (MPC) is the slope of the:

a.	GDP curve.
b.	disposable income curve.
c.	consumption function.
d.	autonomous consumption curve.

28.

The slope of the consumption function is called the:

a.	autonomous consumption rate.
b.	marginal consumption rate.
c.	average propensity to consume.
d.	marginal propensity to consume.

29.

The change in consumption divided by a change in disposable income is defined as:

a.	the marginal propensity to consume.
b.	autonomous consumption.
c.	the consumption function.
d.	Keynes' absolute disposable income hypothesis.
e.	transitory consumption.

30.

The marginal propensity to consume is:

a.	the change in disposable income divided by the change in consumption.
b.	consumption spending divided by disposable income.
c.	disposable income divided by consumption spending.
d.	the change in consumption divided by the change in disposable income.
e.	the change in consumption divided by disposable income.

31.

The marginal propensity to consume measures the ratio of the:

a.	average amount of our disposable income that we spend.
b.	average amount of our savings that we spend.
c.	change in consumer spending to a change in money holdings.
d.	change in consumer spending to a change in interest rates.
e.	change in consumer spending to a change in disposable income.

32.

The marginal propensity to save (MPS) is computed as the change in:

a.	savings divided by the change in saving.
b.	savings divided by the change in disposable personal income.
c.	saving divided by the change in GDP.
d.	None of the above.

33.

If your disposable personal income increases from $30,000 to $40,000 and your savings increases from $2,000 to $4,000, your marginal propensity to save (MPS) is:

a.	0.2.
b.	0.4.
c.	0.5.
d.	0.8.
e.	1.0.

34.

The marginal propensity to save is:

a.	the change in saving induced by a change in consumption.
b.	(change in S) / (change in Y).
c.	1 - MPC / MPC.
d.	(change in Y - bY) / (change in Y).
e.	1 - MPC.

35.

If the marginal propensity to consume = 0.75, then:

a.	the marginal propensity to save = 0.75.
b.	the marginal propensity to save = 1.33.
c.	the marginal propensity to save = 0.20.
d.	the marginal propensity to save = 0.25.
e.	since the marginal propensity to save and the marginal propensity to consume are unrelated, we cannot determine the marginal propensity to save from the information given.

Exhibit 8-2 Consumption function

36.

As shown in Exhibit 8-2 autonomous consumption is:

a.	0.
b.	$2 trillion.
c.	$4 trillion.
d.	$6 trillion.
e.	$8 trillion.

Exhibit 8-3 Disposable income and consumption data

Disposable income	Consumption	Saving	Marginal propensity to consume (MPC)	Marginal propensity to save (MPS)
0	$100
100	175
200	250
300	325
400	400
500	475
600	550

Note: All amounts are in billions of dollars per year.

37.

As shown in Exhibit 8-3, if disposable income is $100 billion, saving is:

a.	$100 billion.
b.	$75 billion.
c.	-$75 billion.
d.	-$175 billion.

Exhibit 8-4 Consumption function

38.

As shown in Exhibit 8-4, autonomous consumption is:

a.	0.
b.	$1 trillion.
c.	$2 trillion.
d.	$3 trillion.
e.	$4 trillion.

39.

As shown in Exhibit 8-4, the marginal propensity to consume (MPC) is:

a.	0.25.
b.	0.50.
c.	0.75.
d.	0.90.

40.

An increase in the price level, other things remaining the same, may be expected to result in ____________ the consumption function.

a.	a downward shift of
b.	a movement along
c.	an upward shift in
d.	no effect on

41.

The investment demand curve shows the amount businesses spend for investment goods at different possible:

a.	price levels.
b.	levels of GDP.
c.	rate of interest.
d.	levels of taxation.

42.

Real investment spending is _____________ real personal consumption.

a.	equal to
b.	greater than
c.	stable compared to
d.	highly volatile compared to

43.

Which of the following would shift the investment demand curve downward?

a.	A decrease in business taxes.
b.	A tax credit for new investment.
c.	Firms move from unused capacity to full capacity.
d.	All of the above.

44.

A downward movement along the investment demand curve would be caused by a (an):

a.	increase in the expected rate of return on investment caused by an increase in business confidence.
b.	decrease in the expected rate of return on investment caused by a decrease in business confidence.
c.	increase in the rate of interest.
d.	decrease in the rate of interest.

45.

The demand curve for investment in the economy as a function of interest rates is:

a.	vertical.
b.	horizontal.
c.	upward sloping.
d.	downward sloping.
e.	elliptical.

46.

When one observes consumption and investment patterns over time, one finds that:

a.	like consumption, investment is fairly stable over time.
b.	like consumption, investment is fairly erratic over time.
c.	unlike consumption, which is fairly stable over time, investment is subject to erratic fluctuations.
d.	unlike consumption, which is subject to erratic fluctuations, investment is fairly stable over time.
e.	investment is rarely affected by technological and economic factors.

47.

If a major technological breakthrough occurs, then the:

a.	investment demand curve will shift downward.
b.	investment demand curve will shift upward.
c.	consumption function will shift downward.
d.	consumption function will shift upward.
e.	economy will move to a new point along the existing investment demand curve.

48.

Which one of the following will shift the investment demand curve downward?

a.	A technological breakthrough.
b.	Lower tax rates.
c.	Higher tax rates.
d.	Tighter lending laws.
e.	A lower rate of capacity utilization.

49.

The consumption function is drawn on a graph with disposable income on the horizontal axis without including investment. Assume investment is autonomous and is added to the consumption function. The effect is:

a.	an upward adjustment in the vertical intercept.
b.	no change in the adjustment in the vertical intercept.
c.	an increase in the slope of the consumption schedule.
d.	a decrease in the slope of the planned expenditure schedule.

50.

In the aggregate expenditures model, equilibrium occurs if:

a.	consumption equals investment.
b.	inventory equals investment.
c.	aggregate expenditures equal consumption.
d.	aggregate expenditures equal disposable income.

Exhibit 8-5 Aggregate expenditures function

51.

As shown in Exhibit 8-5, dissaving occurs:

a.	at $5 trillion.
b.	between 0 and $4 trillion.
c.	where disposable income is greater than $4 trillion.
d.	at $8 trillion.

52.

As shown in Exhibit 8-5, this economy is in macro equilibrium at:

a.	$2 trillion.
b.	$4 trillion.
c.	$6 trillion.
d.	$8 trillion.

Exhibit 8-8 Aggregate expenditures function

53.

In Exhibit 8-8, aggregate income will equal consumption plus investment and the economy will be in equilibrium when real disposable income is:

a.	$2.33 trillion.
b.	$3 trillion.
c.	$7 trillion.
d.	$10 trillion.

Exhibit 8-9 Consumption function

54.

In Exhibit 8-9, consumption and real disposal income are equal at:

a.	500.
b.	100.
c.	400.
d.	200.
e.	600.

55.

In Exhibit 8-9, the value of the marginal propensity to save is:

a.	.50.
b.	.25.
c.	.20.
d.	.80.
e.	.75.

Exhibit 8-10 Consumption function

56.

In Exhibit 8-10, the value of the marginal propensity to consume is:

a.	high for C' than for C.
b.	lower for C" than for C.
c.	lower for C' than for C'.
d.	lower for C" than for C'.
e.	the same for C, C', and C".

Exhibit 8-13 Consumption function

57.

In Exhibit 8-13, which of the following could cause the shift from C₁ to C₂?

a.	An increase in disposal income.
b.	A decrease in disposal income.
c.	Legislation tightening credit availability.
d.	Legislation lowering tax rates.
e.	Lower capacity utilization rates.

Exhibit 8-14 Disposable income and consumption data

Disposable income (Y)	Consumption (C)	MPC	MPS	Saving
$5,000	$4,750
$6,000	$5,500
$7,000

58.

In Exhibit 8-14, the MPC when Y increases from $5,000 to $6,000 is:

a.	0.20.
b.	0.80.
c.	0.25.
d.	0.75.
e.	$750.

59.

In Exhibit 8-14, when disposal income is $7,000, then saving will equal:

a.	$2,500.00.
b.	$1,750.00.
c.	$1,562.50.
d.	$1,250.00.
e.	$750.00.

60.

Using C to represent consumption, I to represent investment, G to represent government spending, S to represent saving, X to represent exports, and M to represent imports, aggregate expenditures can be represented by:

a.	C + I + G + (X + M).
b.	(C - S) + G + (X - M).
c.	C + I + G + (X - M).
d.	C + I + G + (X - M) - S.

61.

In the aggregate expenditures-output model, if aggregate expenditures (AE) are greater than GDP, then:

a.	inventory is depleted.
b.	inventory is accumulated.
c.	inventory is unchanged.
d.	employment decreases.

62.

Which one of the following are the components of aggregate expenditures?

a.	Household consumption, business investment, government spending for goods and services, and net exports.
b.	Household consumption, business investment, government transfer payments, and net exports.
c.	Household consumption, business investment, government spending for goods and services, and exports.
d.	Household consumption, business investment, government spending for goods and services, and saving.
e.	Household consumption, business inventories, government spending for goods and services, and net exports.

Exhibit 9-1 GDP and consumption data

GDP	Consumption	Aggregate Expenditures	Unplanned inventory
$0	$0.5
1	1.0
2	1.5
3	2.0
4	2.5
5	3.0
6	3.5
7	4.0
8	4.5

63.

As shown in Exhibit 9-1, if equilibrium GDP is $5 trillion, then the total of investment, government spending, and net exports is:

a.	$1 trillion.
b.	$2 trillion.
c.	$3 trillion.
d.	$4 trillion.
e.	$6 trillion.

64.

As shown in Exhibit 9-1, if investment is $0.5 trillion, government spending is $1 trillion, net exports are -$0.5 trillion, and GDP is $7 trillion, then:

a.	inventory depletion is -$1.0 trillion.
b.	inventory accumulation is $1.0 trillion.
c.	inventory depletion is -$2.0 trillion.
d.	inventory accumulation is $2.0 trillion.

Exhibit 9-2 Keynesian aggregate-expenditures model

65.

As shown in Exhibit 9-2, if GDP is $7 trillion, the economy experiences unplanned inventory:

a.	depletion of $1 trillion.
b.	depletion of $2 trillion.
c.	accumulation of $1 trillion.
d.	accumulation of $2 trillion.

66.

In the aggregate expenditures-output model, if an economy operates above equilibrium GDP, there will be:

a.	unplanned inventory accumulation.
b.	a decrease in GDP.
c.	a decrease in employment.
d.	none of the above.
e.	all of the above.

67.

If aggregate expenditures (AE) are less than aggregate output (real GDP), then firms will:

a.	have unplanned inventory accumulation.
b.	earn above-average profits.
c.	expand production and hire more workers.
d.	be raising their prices.

Exhibit 9-3 Keynesian aggregate-expenditures model

68.

As shown in Exhibit 9-3, equilibrium GDP is:

a.	$2 trillion.
b.	$6 trillion.
c.	$10 trillion.
d.	$12 trillion.
e.	$14 trillion.

69.

As shown in Exhibit 9-3, if GDP is $6 trillion, the economy experiences unplanned inventory:

a.	depletion of $2 trillion.
b.	depletion of $6 trillion.
c.	accumulation of $2 trillion.
d.	accumulation of $6 trillion.
e.	none of the above.

Exhibit 9-4 Keynesian aggregate expenditures-output model

70.

At a real GDP of $500 billion in Exhibit 9-4, the economy experiences unplanned inventory:

a.	depletion of $100 billion.
b.	depletion of $250 billion.
c.	accumulation of $100 billion.
d.	accumulation of $250 billion.

71.

The formula to compute the spending multiplier is:

a.	1/(MPC + MPS).
b.	1/(1 - MPC).
c.	1/(1 - MPS).
d.	1/(C + I).

72.

If the marginal propensity to consume (MPC) is 0.50, the value of the spending multiplier is:

a.	5.
b.	1.
c.	2.
d.	5.

73.

If the marginal propensity to save (MPS) is 0.25, the value of the spending multiplier is:

a.	1.
b.	2.
c.	4.
d.	9.

74.

A $1 million increase in investment spending will raise equilibrium output (real GDP) by:

a.	less than $1 million.
b.	exactly $1 million.
c.	between $0.5 and $1.5 million.
d.	more than $1 million.

75.

If the value of the marginal propensity to consume (MPC) is 0.90, the value of the spending multiplier is:

a.	10.
b.	1.1.
c.	90.
d.	100.

76.

If an economy spends 90 percent of any increase in real GDP, then an increase in investment of $1 billion would result ultimately in an increase in real GDP of:

a.	$0.
b.	$0.9 billion.
c.	$1.0 billion.
d.	$10 billion.

77.

Assume the marginal propensity to save is 0.10. Firms become optimistic and increase investment spending by $10 billion. Other things being equal, real GDP will:

a.	increase by $1 billion.
b.	not change.
c.	increase by $10 billion.
d.	increase by $100 billion.

78.

Suppose that John Flygare, the owner of a tennis shop in Evanston, Illinois, decides to purchase a new machine that restrings tennis rackets in half the time it formerly took. The new technology costs $1,000, and the MPC is 0.80. How much real GDP will be generated from John's $1,000 initial investment?

a.	$200
b.	$500
c.	$1,000
d.	$2,000
e.	$5,000

79.

Suppose real GDP is $800 billion when the MPC is 0.80, and people decide to increase their saving by $30 billion. Before this change, the economy was in equilibrium with people intending to save $100 billion and producers intending to invest $100 billion. The new equilibrium level of real GDP is:

a.	$600 billion.
b.	$650 billion.
c.	$680 billion.
d.	$730 billion.
e.	$800 billion.

80.

A $500 increase in investment will shift the aggregate expenditures curve up by:

a.	exactly $500 and will increase the equilibrium level of real GDP by exactly $500.
b.	exactly $500 and will increase the equilibrium level of real GDP by less than $500.
c.	exactly $500 and will increase the equilibrium level of real GDP by more than $500.
d.	more than $500 and will increase the equilibrium level of real GDP by more than $500.
e.	less than $500 and will increase the equilibrium level of real GDP by less than $500.

81.

If the MPC = .75, the spending multiplier is:

a.	4.
b.	5.
c.	1.33.
d.	1.20.
e.	.25.

82.

If the MPC = .80, and investment rises from $100 to $150, real GDP will increase by:

a.	$50.
b.	$125.
c.	$20.
d.	$250.
e.	$200.

83.

An increase in government expenditures by $100 (unmatched by an increase in taxes) would, if the MPC = 0.90, result in an increase in real GDP by:

a.	$1,000.
b.	$9,000.
c.	$900.
d.	$190.
e.	inadequate information is given.

84.

Assume that an economy's real GDP multiplier is 2 and that this economy is in equilibrium at $500 billion. If the government wants to move this economy to full-employment at $600 billion, while maintaining a balanced budget, it must choose which following options?

a.	Increase government spending and taxes by $100 billion
b.	Decrease government spending and taxes by $100 billion
c.	Increase government spending and taxes by $200 billion
d.	Decrease government spending and taxes by $200 billion

85.

Given full-employment output = $2,800, equilibrium output = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of national output?

a.	$300 decrease in taxes.
b.	$75 increase in government spending.
c.	$75 decrease in taxes.
d.	$300 increase in government spending.
e.	$75 decrease in government spending.

86.

Which of the following options could be used to eliminate a recessionary gap?

a.	Increase government spending.
b.	Decrease government spending.
c.	Decrease investment.
d.	Increase taxes.

87.

In the aggregate expenditures-output model, an increase in government spending causes a (an):

a.	upward shift in the aggregate expenditures curve.
b.	downward shift in the aggregate expenditures curve.
c.	shift in the 45-degree line.
d.	rightward movement along the aggregate expenditures curve.
e.	leftward movement along the aggregate expenditures curve.

88.

Use the aggregate expenditures-output model and assume the marginal propensity to consume (MPC) is 0.80. An increase in government spending of $1 billion would result in an increase in GDP of:

a.	$0.
b.	$0.8 billion.
c.	$1.0 billion.
d.	$5.0 billion.
e.	$8.0 billion.

89.

Use the aggregate expenditures-output model and assume an economy is in equilibrium at $5 trillion which is $250 billion below full-employment GDP. If the marginal propensity to consume (MPC) is 0.60, full-employment GDP can be reached if government spending:

a.	increases by $60 billion.
b.	increases by $100 billion.
c.	increases by $250 billion.
d.	is held constant.

90.

Use the aggregate expenditures-output model and assume an economy is in equilibrium at $6 trillion which is $500 billion below full-employment GDP. If the marginal propensity to consume (MPC) is 0.75, full-employment GDP can be reached if government spending:

a.	increases by $75 billion.
b.	increases by $125 billion.
c.	increases by $500 billion.
d.	is held constant.

91.

Assume the economy is in recession, the MPC is 0.80, and an increase of $200 billion in spending is needed in order to reach full employment. The target can be reached if government spending is increased by:

a.	$20 billion.
b.	$200 billion.
c.	$80 billion.
d.	$40 billion.

92.

Superhighways, public housing facilities, and defense projects are all ways that the President can

a.	close a recessionary gap
b.	close an inflationary gap
c.	combat inflation
d.	raise unemployment
e.	reverse the paradox of thrift

93.

In the aggregate expenditures-output model, a decrease in government spending causes a (an):

a.	upward shift in the aggregate expenditures curve.
b.	downward shift in the aggregate expenditures curve.
c.	shift in the 45-degree line.
d.	rightward movement along the aggregate expenditures curve.
e.	leftward movement along the aggregate expenditures curve.

94.

In the aggregate expenditures-output model, a tax increase causes a (an):

a.	upward shift in the aggregate expenditures curve.
b.	downward shift in the aggregate expenditures curve.
c.	shift in the 45-degree line.
d.	rightward movement along the aggregate expenditures curve.
e.	leftward movement along the aggregate expenditures curve.

95.

Use the aggregate expenditures-output model and assume the marginal propensity to consume (MPC) is 0.80. A decrease in government spending of $1 billion would result in a decrease in GDP of:

a.	$0.
b.	$0.8 billion.
c.	$1.0 billion.
d.	$5.0 billion.
e.	$8.0 billion.

96.

Use the aggregate expenditures-output model and assume the marginal propensity to consume (MPC) is 0.90. A decrease in government spending of $1 billion would result in a decrease in GDP of:

a.	$0.
b.	$0.9 billion.
c.	$1.0 billion.
d.	$9.0 billion.
e.	$10.0 billion.

97.

a.	decreases by $60 billion.
b.	decreases by $100 billion.
c.	decreases by $250 billion.
d.	is held constant.

98.

Assume that full-employment real GDP is Y = $1,200 billion, the current equilibrium real GDP is Y = $1,600 billion, and the MPC = 0.8. In order to bring the economy to a full-employment real GDP,

a.	a recessionary gap must be bridged by increasing aggregate expenditures by $80 billion.
b.	an inflationary gap must be bridged by cutting aggregate expenditures by $80 billion.
c.	nothing is needed to bring the economy into full employment equilibrium.
d.	a recessionary gap must be bridged by increasing aggregate expenditures by $400 billion.
e.	an inflationary gap must be bridged by cutting aggregate expenditures by $400 billion.

99.

An economy that is operating below its full-employment capacity is experiencing a(n):

a.	tax-induced recession.
b.	recessionary gap.
c.	fiscal drag.
d.	market correction.
e.	inflationary gap.

Exhibit 9-5 Keynesian aggregate-expenditures model where the MPC is 0.75

100.

To eliminate the GDP gap shown in Exhibit 9-5, the government should cut its spending by:

a.	$0.5 trillion.
b.	$1 trillion.
c.	$1.5 trillion.
d.	$2 trillion.

Exhibit 9-6 Keynesian aggregate-expenditure model when the MPC is 2/3

101.

In Exhibit 9-6, the spending multiplier for this economy is equal to:

a.	1 2/3.
b.	2 1/2.
c.	3.
d.	5.

102.

The economy shown in Exhibit 9-6 has a recessionary gap of:

a.	$1 trillion.
b.	$2 trillion.
c.	$3 trillion.
d.	$5 trillion.

Exhibit 9-7 Keynesian aggregate-expenditures model

103.

In Exhibit 9-7, if I = 0, C = Y at:

a.	$300.
b.	$500.
c.	$800.
d.	$100.
e.	$200.

104.

In Exhibit 9-7, the level of investment is:

a.	$50.
b.	$100.
c.	$150.
d.	$200.
e.	$0.

105.

In Exhibit 9-7, the value of the spending multiplier is:

a.	2.
b.	3.
c.	4.
d.	5.
e.	6.

Exhibit 9-8 Keynesian aggregate-expenditures model

106.

In Exhibit 9-8, the value of the spending multiplier is:

a.	3.
b.	4.
c.	5.
d.	2.
e.	6.

107.

Which of the following is not a component of the aggregate demand curve?

a.	Consumption (C).
b.	Investment (I).
c.	Government spending (G).
d.	Net exports (X-M).
e.	All of the above are components.

108.

The real balance effect is the impact on real GDP caused by the ________________ relationship between the price level and the real value of financial assets with fixed nominal value.

a.	direct
b.	inverse
c.	independent
d.	linear

109.

The aggregate demand curve shows how real GDP purchased varies with changes in:

a.	unemployment.
b.	output.
c.	the price level.
d.	the interest rate.

110.

Which of the following is not a component of the aggregate demand curve?

a.	Government spending (G).
b.	Investment (I).
c.	Consumption (C).
d.	Net exports (X-M).
e.	Saving.

111.

When the price level falls, the total quantities of goods and services demanded:

a.	decreases.
b.	stays the same.
c.	increases.
d.	increases and then decreases.
e.	decreases and then increases.

112.

The net exports effect is the ________________ relationship between net exports and the price level of an economy.

a.	inverse
b.	independent
c.	direct
d.	linear

113.

According to the net exports effect, as the price level falls relative to the rest of the world,

a.	foreigners buy fewer goods.
b.	foreigners buy more U.S. goods.
c.	the aggregate demand curve shifts to the left.
d.	the aggregate demand curve shifts to the right.
e.	the supply of U.S.-made goods increases.

114.

The interest rate effect predicts that higher prices:

a.	make it more expensive to borrow, leading to higher interest rates and less investment.
b.	make people worse off by reducing the value of their wealth, leading them to save more and spend less.
c.	decrease borrowing, leading to higher interest rates and less investment.
d.	decrease borrowing, leading to lower interest rates and more investment.
e.	increase borrowing, leading to higher interest rates and less investment.

115.

The negative slope of the aggregate demand curve is caused by:

a.	the real wealth effect, the interest rate effect, and the price level effect.
b.	the real wealth effect, the money supply effect, and the net exports effect.
c.	the interest rate effect, the net exports effect, and the real GDP effect.
d.	the real wealth effect, the interest rate effect, and the net exports effect.
e.	the real wealth effect, the interest rate effect, and the net export effect.

116.

Which of the following would shift the aggregate demand curve to the left?

a.	An increase in exports.
b.	An increase in investment.
c.	An increase in government spending.
d.	A decrease in government spending.

117.

Which of the following could not be expected to shift the aggregate demand curve?

a.	Net exports fall.
b.	Consumption spending decreases.
c.	An increase in government spending.
d.	A change in real GDP.

118.

In the classical range of the aggregate supply curve, greater spending for consumer and investment goods results in:

a.	stagflation.
b.	more unemployment.
c.	greater output.
d.	a higher price level.

119.

A cut in government spending, a decrease in income abroad, an increase in taxes, or an expectation that future consumer income will fall will all cause aggregate:

a.	demand to shift outward.
b.	demand to shift inward.
c.	supply to shift outward.
d.	supply to shift inward.
e.	supply and aggregate demand to both shift equally inward.

120.

The aggregate demand curve will shift outward when there is/are:

a.	a decrease in government spending.
b.	a decrease in incomes abroad.
c.	a tax increase.
d.	consumers deciding to buy more goods and services, even if prices remain unchanged.
e.	the expectation that future consumer income will fall.

121.

To illustrate the classical argument that "supply creates its own demand," the aggregate supply curve should be drawn:

a.	downward-sloping.
b.	upward-sloping.
c.	horizontal.
d.	vertical.

122.

The pre-Keynesian or classical economic theory viewed the long-run aggregate supply curve for the economy to be:

a.	horizontal at the full-employment level of real GDP.
b.	positively sloped at the full-employment level of real GDP.
c.	vertical at the full-employment level of real GDP.
d.	backward bending at the full-employment level of real GDP.

123.

According to classical theory, if the aggregate demand curve decreased and the economy experienced unemployment, then:

a.	the economy would remain in this condition indefinitely.
b.	the government must increase spending to restore full employment.
c.	prices and wages would fall quickly to restore full employment.
d.	the supply of money would increase until the economy returned to full employment.

124.

Which of the following characterizes the classical view of the economy?

a.	The economy is inherently unstable.
b.	Prices and wages are not flexible.
c.	The economy will "self-adjust" to full employment.
d.	None of the above.

125.

Which of the following is a range on the eclectic or general view of the aggregate supply curve?

a.	Keynesian range.
b.	Intermediate range.
c.	Classical range.
d.	All of the above.

126.

Gradual adjustment of prices and wages to an increase in the aggregate demand curve implies that the aggregate supply curve is:

a.	horizontal.
b.	vertical.
c.	upward sloping but not vertical.
d.	downward sloping.

127.

The aggregate supply curve relating the price level to real GDP has three distinguishing segments. Which one of the following indicates the segments?

a.	The horizontal segment reflects the increasing pressure on the price level as firms bid for resources. The upward-sloping segment reflects the availability of unused resources. The vertical segment reflects the full employment of all resources.
b.	The horizontal segment reflects the availability of unused resources. The upward-sloping segment reflects the full employment of all resources. The vertical segment reflects the increasing pressure on the price level as firms bid for resources.
c.	The horizontal segment reflects the full employment of all resources. The upward-sloping segment reflects the increasing pressure on the price level as firms bid for resources. The vertical segment reflects the availability of unused resources.
d.	The horizontal segment reflects the availability of unused resources. The downward-sloping segment reflects decreasing pressure on the price level as firms bid for resources. The vertical segment reflects the full employment of all resources.
e.	The horizontal segment reflects the availability of unused resources. The upward-sloping segment reflects increasing pressure on the price level as firms bid for resources. The vertical segment reflects the full employment of all resources.

128.

In the upward-sloping segment of the aggregate supply curve,

a.	increases in output are linked to decreases in the price level.
b.	increasing prices drag down resource costs.
c.	producers can hire more workers without having to raise the wage rate.
d.	the economy can increase aggregate supply without prices going up.
e.	firms are willing to pay higher wages to get more labor.

129.

In the vertical segment of the aggregate supply curve,

a.	different levels of GDP correspond with high unemployment.
b.	competition among producers for already-employed resources can succeed only in lowering the economy's price level.
c.	full employment is achieved.
d.	producers are able to hire more workers at lower wages.
e.	increases in GDP are due solely to production gains.

130.

In the upward-sloping segment of the aggregate supply curve,

a.	when GDP increases, the price level rises.
b.	when GDP increases, the price level does not change.
c.	when GDP decreases, the price level rises.
d.	when GDP increases, the price level falls.
e.	there is no relationship between changes in GDP and changes in the price level.

131.

The aggregate supply curve will be vertical when:

a.	output can be increased without an increase in the price level.
b.	the economy is operating at full-employment capacity.
c.	output and price level rise together.
d.	the aggregate demand curve is shifting to the left.
e.	aggregate demand is absent.

Exhibit 10-1 Aggregate supply curve

132.

In Exhibit 10-1, resources are fully employed, and competition among producers for resources will lead to a higher price level in:

a.	the segment labeled ab.
b.	the segment labeled bc.
c.	the segment labeled cd.
d.	both segment bc and segment cd.
e.	the entire curve.

133.

In Exhibit 10-1, higher price levels allow producers to earn higher profits, stimulating production and employment in:

a.	the segment labeled ab.
b.	the segment labeled bc.
c.	the segment labeled cd.
d.	both segment bc and segment cd.
e.	the entire curve.

134.

The full employment level of real GDP can be represented on an aggregate supply and demand diagram as a (an):

a.	vertical line.
b.	upward-sloping line.
c.	horizontal line.
d.	downward-sloping line.

135.

Along the classical or vertical range of the aggregate supply curve, an increase in the aggregate demand curve will increase:

a.	both the price level and real GDP.
b.	only real GDP.
c.	only the price level.
d.	real GDP and reduce the price level.

136.

An increase in oil prices will shift the aggregate:

a.	demand curve leftward.
b.	demand curve rightward.
c.	supply curve leftward.
d.	supply curve rightward.

137.

Lower taxes on businesses will shift the aggregate:

a.	demand curve rightward.
b.	demand curve leftward.
c.	supply curve rightward.
d.	supply curve leftward.

138.

A reduction in regulation will shift the aggregate:

a.	supply curve leftward.
b.	supply curve rightward.
c.	demand curve leftward.
d.	demand curve rightward.

139.

If a new method for obtaining oil from dry oil fields is found, then we will see:

a.	the AS curve shift to the left.
b.	a movement to the left along the AD curve.
c.	the AD curve shift to the left.
d.	the AD curve shift to the right.
e.	the AS curve shift to the right.

140.

An increase in aggregate supply will tend to cause the price level to:

a.	rise and GDP to rise
b.	rise and GDP to fall.
c.	rise and the unemployment rate to fall.
d.	fall and GDP to rise.
e.	fall and the unemployment rate to rise.

141.

The aggregate supply curve will shift to the right when the:

a.	amount of labor in the society decreases.
b.	capital stock of the society shrinks.
c.	amount of natural resources in the society gets smaller.
d.	amount of labor in the society increases.
e.	price level in the economy rises.

142.

Stagflation occurs when the economy experiences:

a.	low unemployment and low inflation.
b.	high unemployment and rapid inflation.
c.	low unemployment and rapid inflation.
d.	high unemployment and low inflation.

143.

When the economy is experiencing high inflation and high unemployment at the same time, then it is experiencing:

a.	stagnation.
b.	deflation.
c.	reflation.
d.	stagflation.
e.	innation.

144.

A decrease in aggregate supply can lead to:

a.	unemployment.
b.	demand-pull inflation.
c.	prosperity.
d.	cost-push inflation.
e.	a recession.

145.

When OPEC caused the price of oil to rise in the early 1970s, the:

a.	aggregate supply curve shifted to the right.
b.	aggregate supply curve shifted to the left.
c.	the aggregate demand curve shifted to the right.
d.	aggregate demand curve shifted to the left.
e.	price level in the economy fell.

146.

Demand-pull inflation is caused by:

a.	an increase in aggregate demand.
b.	an decrease in aggregate demand.
c.	an increase in aggregate supply.
d.	an decrease in aggregate supply.

147.

Demand-pull inflation is associated with a(n):

a.	decrease in the aggregate supply curve.
b.	increase in the aggregate supply curve.
c.	increase in the aggregate demand curve.
d.	decrease in the aggregate demand curve.
e.	decline in the availability of a productive resource

Exhibit 10-3 Aggregate supply and demand curves

148.

A shift in the aggregate supply curve in Exhibit 10-3 from AS₁ to AS₂ would be caused by a (an):

a.	advance in technology.
b.	increase in input prices.
c.	decrease in input prices.
d.	decrease in real output.

149.

The shift from AS₁ to AS₂ in Exhibit 10-3 could be caused by a (an):

a.	sudden increase in the price of oil.
b.	increase in input prices for most firms.
c.	increase in workers' wages.
d.	all of the above.

Exhibit 10-4 Aggregate supply and demand curves

150.

In Exhibit 10-4, point E₂ represents:

a.	real GDP above full-employment GDP.
b.	real GDP that equals full-employment GDP.
c.	a depression.
d.	real GDP below full-employment GDP.

Exhibit 10-6 Aggregate supply curve

151.

In Exhibit 10-6, where the GDP = $1,200 billion,

a.	everyone willing to work at the current wage is employed.
b.	the economy has reached full employment.
c.	GDP can increase to $1,100 billion without triggering an increase in the price level.
d.	no further increases in the price level can generate more real GDP.
e.	further increases in the price level must generate lower levels of employment.

152.

In Exhibit 10-6, when the economy moves from a GDP of $1,000 billion to a GDP of $1,100 billion,

a.	higher wages will lower the cost of producing goods.
b.	real GDP and employment both increase, but only under conditions of constant prices.
c.	real GDP increases and employment decreases, but only under conditions of price level increases.
d.	real GDP and employment both increase, but only under conditions of price level increases.
e.	the economy has reached full employment.

153.

In Exhibit 10-6, the aggregate supply curve becomes vertical at GDP = $1,200 because:

a.	there are no more workers available at any wage rate to increase real GDP.
b.	the price level remains constant.
c.	the only workers available would demand higher wage rates.
d.	the economy is experiencing low employment and low production.
e.	the Treasury is no longer allowed to explain away the deficit with creative accounting

Exhibit 10-8 Aggregate demand and supply

154.

In Exhibit 10-8, if aggregate demand shifts from AD₁ to AD_2,

a.	real GDP will increase from $3.0 to $7.0, and the price level will remain the same.
b.	real GDP will increase from $3.0 to $4.0, and the price level will remain the same.
c.	real GDP and the price level will both remain the same.
d.	real GDP will increase from $3.0 to $4.0, and the price level will increase from 100 to 140.

155.

In Exhibit 10-8, if aggregate demand shifts from AD₅ to AD₄, real GDP will:

a.	not change, and the price level will fall from 170 to 100.
b.	not change, and the price level will fall from 140 to 100.
c.	fall from $8.0 to $6.0, and the price level will not change.
d.	fall from $8.0 to $6.0, and the price level will fall from 140 to 120.
e.	not change, and the price level will fall from 170 to 140.

156.

In Exhibit 10-8, if aggregate demand shifts from AD₂ to AD₁, real GDP will:

a.	fall from $4.0 to $3.0, and the price level will fall from 120 to 100.
b.	fall from $4.0 to $3.0, and the price level will not change.
c.	fall from $7.0 to $4.0, and the price level will not change.
d.	not change, and the price level will not change.
e.	fall from $4.0 to $3.0, and the price level will fall from 170 to 100.

157.

If the marginal propensity to consume (MPC) is 0.80, and if policy makers wish to increase real GDP $200 billion, then by how much would they have to change taxes?

a.	-$240 million.
b.	-$200 million.
c.	-$180 million.
d.	-$50 million.

158.

Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC) is 0.75, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of $1,000 billion aggregate demand can restore full employment, the government should:

a.	increase spending by $250 billion.
b.	decrease spending by $750 billion.
c.	increase spending by $1,000 billion.
d.	increase spending by $750 billion.

159.

Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC) is 0.90, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of $1,000 billion aggregate demand can restore full employment, the government should:

a.	increase spending by $100 billion.
b.	decrease spending by $790 billion.
c.	increase spending by $1,000 billion.
d.	increase spending by $250 billion.

160.

Assume that we want to drive our economy out of recession by generating a $400 billion change in real GDP. The MPC is 0.8. Which of the following policy prescriptions would generate the targeted $400 billion change in income?

a.	$120 billion increase in government spending and $50 billion increase in tax revenue.
b.	$140 billion increase in government spending and $70 billion increase in tax revenue.
c.	$160 billion increase in government spending and $120 billion increase in tax revenue.
d.	$220 billion increase in government spending and $100 billion increase in tax revenue.
e.	$400 billion increase in government spending and $300 billion increase in tax revenue.

Exhibit 11-1 Aggregate demand and supply model

161.

Suppose the economy in Exhibit 11-1 is in equilibrium at point E₁ and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to full employment at point E₂ by:

a.	decreasing government tax revenue by $100 billion.
b.	decreasing government tax revenue by $750 billion.
c.	increasing government tax revenue by $100 billion.
d.	increasing government tax revenue by approximately $33 billion.
e.	decreasing government tax revenue by approximately $33 billion.

Exhibit 11-2 Aggregate demand and supply model

162.

Suppose the economy in Exhibit 11-2 is in equilibrium at point E₁ and the marginal propensity to consume (MPC) is 0.80. Following Keynesian economics, to restore full employment, the government should increase its spending by:

a.	$200 billion.
b.	$250 billion.
c.	$500 billion.
d.	$1 trillion.

163.

Beginning at equilibrium E₁ in Exhibit 11-2, when the government increases spending or cuts taxes the economy will experience:

a.	an inflationary recession.
b.	stagflation.
c.	cost-push inflation.
d.	demand-pull inflation.

164.

If no fiscal policy changes are made, suppose the current aggregate demand curve will increase horizontally (shift rightward) by $1,000 billion and cause inflation. If the marginal propensity to consume is 0.90, federal policymakers could follow Keynesian economics and restrain inflation by decreasing:

a.	government spending by $100 billion.
b.	taxes by $100 billion.
c.	taxes by $1,000 billion.
d.	government spending by $1,000 billion.

165.

If no fiscal policy changes are made, suppose the current aggregate demand curve will increase horizontally by $1,000 billion and cause inflation. If the marginal propensity to consume is 0.75, federal policymakers could follow Keynesian economics and restrain inflation by decreasing:

a.	government spending by $250 billion.
b.	taxes by $100 billion.
c.	taxes by $1,000 billion.
d.	government spending by $1,000 billion.

166.

If no fiscal policy changes are implemented, suppose the aggregate demand curve will exceed the current aggregate demand curve by $900 billion at any level of prices. Assuming the marginal propensity to consume is 0.90, this increase in aggregate demand could be prevented by:

a.	increasing government spending by $500 billion.
b.	increasing government spending by $140 billion.
c.	decreasing taxes by $40 billion.
d.	increasing taxes by $100 billion.

167.

Suppose inflation is a threat because the current aggregate demand curve will increase by $600 billion at any price level. If the marginal propensity to consume is 0.75, federal policymakers can follow Keynesian economics and restrain inflation by:

a.	decreasing tax revenues by $600 billion.
b.	decreasing transfer payments by $200 billion.
c.	increasing tax revenues by $200 billion.
d.	increasing government purchases by $150 billion.

168.

If the economy is experiencing unemployment, then the most appropriate government policy would be to:

a.	shift the aggregate demand curve by using a tax increase coupled with spending cuts.
b.	shift the aggregate demand curve by using a tax increase coupled with more spending.
c.	shift the aggregate demand curve by using a tax cut coupled with spending cuts.
d.	shift the aggregate demand curve by using a tax cut coupled with more spending.
e.	shift the aggregate supply curve by using a tax cut coupled with spending cuts.

Exhibit 11-5 Aggregate demand and supply model

169.

In Exhibit 11-5, if the aggregate demand curve is at AD₁ , the government should:

a.	raise taxes to move to AD₂.
b.	cut taxes to move to AD₂.
c.	cut taxes to move to AD₃.
d.	cut spending to move to AD₂.
e.	not change its behavior.

Exhibit 11-6 Aggregate demand and supply model

170.

Suppose the economy in Exhibit 11-6 is in equilibrium at point E₁ and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, to lower the price level from 170 to 150 the government should raise taxes by:

a.	$20 billion.
b.	$100 billion.
c.	$133 billion.
d.	$400 billion.

171.

Assume the marginal propensity to consume (MPC) is 0.75 and the government cuts taxes by $250 billion. The aggregate demand curve will shift to the:

a.	right by $1,000 billion.
b.	right by $750 billion.
c.	left by $1,000 billion.
d.	left by $750 billion.

172.

The result of the balanced-budget multiplier is that aggregate demand changes by the amount of the change in:

a.	government spending.
b.	tax revenue.
c.	government spending plus tax revenue.
d.	government spending minus tax revenue.

173.

Which of the following is an automatic stabilizer that moves the federal budget toward deficit during an economic contraction and toward surplus during an economic expansion?

a.	Personal income tax revenues.
b.	Corporate income tax revenues.
c.	Unemployment benefits.
d.	All of the above.

174.

A decrease in real GDP would affect the U.S. economy by:

a.	cutting tax revenues and raising government expenditures.
b.	cutting government expenditures and raising tax revenues.
c.	raising both tax revenues and government expenditures.
d.	cutting both government expenditures and tax revenues.

175.

In the U.S. economy, the effect on federal tax revenues and spending of an increase in the unemployment rate is to:

a.	cut tax revenues and raise expenditures.
b.	cut expenditures and raise tax revenues.
c.	raise both tax revenues and expenditures.
d.	cut both expenditures and tax revenues.

176.

When the economy enters a recession, automatic stabilizers create:

a.	higher taxes.
b.	more discretionary spending.
c.	budget deficits.
d.	budget surpluses.

177.

Structures in the economy that tend to add to aggregate demand when the economy is in recession and subtract from aggregate demand when the economy is inflationary are known as:

a.	tax transfers.
b.	inventory investment.
c.	accelerators.
d.	depreciation.
e.	automatic stabilizers.

178.

Unemployment insurance payments act as automatic stabilizers by:

a.	allowing for more consumer spending during prosperity.
b.	spreading workers' income more evenly out over the business cycle.
c.	making the unemployment rate worse during a recession.
d.	allowing for less consumer spending during a recession.
e.	changing the Phillips curve to a Laffer curve.

179.

Unemployment compensation payments:

a.	fall during periods of prosperity and thus reduce federal budget deficits.
b.	fall during periods of prosperity and thus increase federal budget deficits.
c.	fall during recessions and thus increase the problem of unemployment.
d.	rise during periods of prosperity and thus increase federal budget deficits.
e.	rise during recessions and thus increase the problem of unemployment.

180.

Income tax payments:

a.	fall during periods of prosperity, thus reduce inflationary pressures.
b.	fall during periods of prosperity, thus increase inflationary pressures.
c.	rise during periods of prosperity, thus reduce inflationary pressures.
d.	fall during recessions, thus increase the problem of unemployment.
e.	rise during recessions, thus increase the problem of unemployment.

181.

When the economy enters a prosperity phase, personal income tax collections:

a.	fall, and so disposable income and spending fall more slowly than real GDP.
b.	fall, and so disposable income and spending does not rise as rapidly as real GDP.
c.	rise, and so disposable income and spending does not rise as rapidly as real GDP.
d.	rise, and so disposable income and spending fall more slowly than real GDP.
e.	fall, and so disposable income and spending fall at the same rate as real GDP.

182.

Structures in the economy which automatically create employment during recessions and automatically cut inflation when the rate of inflation is unacceptably high are known as:

a.	discretionary stabilizers.
b.	countercyclical stabilizers.
c.	procyclical stabilizers.
d.	automatic stabilizers.
e.	seasonal stabilizers.

183.

"Tax cuts, by providing incentives to work, save, and invest, will raise employment and lower the price level." This argument is made by the:

a.	Keynesian economists.
b.	supply-side economists.
c.	classical economists.
d.	monetarists.

184.

Which of the following policies is a supply-side policy?

a.	Reduction in taxes.
b.	Reduction in regulation.
c.	Reduction in resource prices.
d.	Subsidies to produce technological advances.
e.	All of the above.

185.

Those who favor government policies to stimulate the economy by creating incentives for individuals and businesses to increase their productive efforts are supporting:

a.	supply-side economics.
b.	Keynesian economics.
c.	monetarist economics.
d.	Marxian economics.

186.

Supply-side economists:

a.	saw influence beyond in both the Bush and Clinton administrations.
b.	disagreed with economist Arthur Laffer's views on taxes.
c.	were influential in President Reagan's decision to change the tax structure.
d.	believe that government regulations do not reduce productivity and undermine industrial efficiency.

187.

During the Reagan administration, the Laffer curve was used to ague that:

a.	the supply-side effects of tax cuts are relatively small.
b.	discretionary tax cuts are unwise because they create stagflation.
c.	lower income tax rates could increase tax revenues.
d.	a "flat tax" would simplify the tax code and stimulate economic growth.

188.

The curve that reflects the view that when tax rates are too high, lowering them not only creates greater incentive for suppliers to increase production, but ends up generating higher tax revenues, is known as the:

a.	Phillips curve.
b.	Laffer curve.
c.	Engel curve.
d.	Rational expectations curve.
e.	consumption curve.

189.

Which economist(s) argued that high tax rates produce less tax revenues and limit the expansion of real GDP and employment?

a.	Robert Lucas and Thomas Sargent.
b.	A. W. Phillips.
c.	Robert Barro.
d.	Paul Samuelson.
e.	Arthur Laffer.

190.

The Laffer curve shows the relationship between tax:

a.	revenue and tax rates.
b.	revenue and take-home pay.
c.	revenue and government spending.
d.	rates and take-home pay.
e.	rates and government spending.

191.

According to the Laffer Curve, when the tax rate is 100 percent, tax revenue will be:

a.	0.
b.	at the maximum value.
c.	the same as they would be at a 50 percent tax rate.
d.	greater than they would be at a 50 percent tax rate.
e.	the same as they would be at a 20 percent tax rate.

192.

If Congress fails to pass a budget before the fiscal year starts, then federal agencies may continue to operate only if Congress has passed a:

a.	balanced budget amendment.
b.	deficit reduction plan.
c.	tax increase.
d.	continuing resolution.

193.

Which of the following groups analyzes federal budgets proposals?

a.	The Council of Economic Advisors.
b.	The Office of Management and Budget.
c.	The Congressional Budget Office.
d.	The House and Senate Budget Committees.

194.

When the U. S. federal government runs a budget deficit, it borrows money by selling:

a.	Treasury bills, notes, and bonds.
b.	publicly owned land.
c.	its gold reserves.
d.	financial assets located in foreign banks.

195.

To finance a federal budget deficit, the U.S. Treasury borrows by selling:

a.	Treasury bills.
b.	Treasury notes.
c.	Treasury bonds.
d.	All of the above.

196.

The national debt is best described as the:

a.	amount by which this year's federal spending exceeds its taxes.
b.	value of all U. S. Treasury bonds owned by foreigners.
c.	sum of all federal budget deficits, past and present.
d.	percentage of GDP needed to finance a country's investment.

197.

With regard to the national debt, to whom does the federal owe money?

a.	Taxpayers.
b.	Federal government workers.
c.	The Treasurer of the United States.
d.	Investors who buy U.S. Treasury bills, bonds, and notes.

198.

The sum of past federal budget deficits increases the:

a.	GDP debt.
b.	trade debt plus GDP.
c.	national debt.
d.	Congressional debt.

199.

Which of the following is false?

a.	The national debt's size decreased steadily after World War II until 1980 and then increased sharply each year.
b.	The national debt increases in size whenever the federal government has a surplus budget.
c.	The size of the national debt currently is about the same size as it was during World War II.
d.	All of the above are false.
e.	All of the above are true.

200.

Which of the following statements is true?

a.	The national debt is the current year's amount by which the government is spending more than it collects as taxes.
b.	Deficits are financed by the government issuing for sale more government securities.
c.	The debt ceiling refers to the amount of debt at which the government is officially declared as being bankrupt.
d.	Internal national debt is the portion of the national debt owed to foreigners.

201.

Between 1945 and 1980, the national debt as a percent of GDP:

a.	decreased slightly.
b.	decreased substantially.
c.	remained about the same.
d.	increased slightly.
e.	increased substantially.

202.

Between 1945 and 1980, the national debt as a percent of GDP:

a.	increased substantially.
b.	decreased substantially.
c.	remained about the same.
d.	increased slightly.
e.	decreased slightly.

203.

Which of the following countries has the largest national debt as a percentage of GDP?

a.	France.
b.	Japan.
c.	United States.
d.	Canada.
e.	Italy.

204.

In recent years, net interest on the national debt paid by the federal government as a percentage of GDP is equal to approximately:

a.	1 percent.
b.	3 percent.
c.	6 percent.
d.	25 percent.
e.	50 percent.

205.