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Chapter 8: The Business Cycle


Multiple Choice Questions

1. The study of aggregate economic activity for the economy as a whole is: A) Opportunity cost. B) Scarcity. C) Macroeconomics. D) Microeconomics.

Answer: C Type: Definition Page: 151

2. Macroeconomics is the study of: A) Aggregate economic behavior of the economy as a whole. B) Individual segments of the economy. C) How individual households make decisions. D) How individual businesses make decisions.

Answer: A Type: Definition Page: 151

3. Alternating periods of economic growth and contraction in real GDP define: A) Capitalism. B) The business cycle. C) Macro equilibrium. D) Say's Law.

Answer: B Type: Definition Page: 151

4. The business cycle is defined as: A) Changing wages and prices. B) An effort to reach full employment. C) The growth of real GDP. D) Alternating periods of economic growth and contraction.

Answer: D Type: Definition Page: 151

STABLE OR UNSTABLE?

5. According to Classical theory: A) Keynes had "neglected to take account of the drag on prosperity which can be exercised by an

insufficiency of effective demand." B) Macro equilibrium might start out badly and get worse in the absence of government intervention. C) Flexible wages and prices allow a laissez-faire economy to adjust to shifts in aggregate demand. D) Business cycles are not relevant and do not occur.

Answer: C Type: Basic Understanding Page: 151

6. A cornerstone of the Classical view was: A) The law of demand adjusted the economy to shifts in aggregate demand. B) A laissez-faire economy. C) Flexible wages and prices. D) All of the above.


Answer: D Type: Basic Understanding Page: 151

7. Which theory of the economy led to the assertion that markets "self-adjust" to deviations from their long-term growth trend? A) Classical theory. B) Monetarist theory. C) Keynesian theory. D) Supply-side theory.

Answer: A Type: Basic Understanding Page: 152

8. Which of the following theories assumes that markets self-adjust? A) Classical economic theory. C) Supply-side economic theory. B) Keynesian theory. D) The eclectic viewpoint.


9. If wages and prices are flexible, then a recession is best eliminated when prices: A) And wages both rise. C) Rise and wages drop. B) And wages both fall. D) Drop and wages rise.

Answer: B Type: Complex Understanding Page: 152

10. Say's Law states that: A) Supply creates its own demand. B) Shifts of either supply or demand can achieve a given market equilibrium. C) Wages and prices are inflexible, which prevents the achievement of a market equilibrium. D) Increased prices lead to increased supply.


11. The statement "Supply creates its own demand" is known as: A) Keynes' Law. B) Say's Law. C) Okun's Law. D) A supply-side belief.


12. Unlike the Classical economists, Keynes asserted that: A) The private economy was inherently unstable. C) Prices and wages were flexible. B) Laissez faire would lead to macro equilibrium. D) Markets would naturally self-adjust.


13. Which of the following describes how Keynes viewed the macro economy? A) Typically self-adjusting. C) Inherently unstable. B) Supply creates its own demand. D) Inherently stable.



14. According to Keynes, which of the following can be used to stimulate the economy? A) Raising interest rates through reductions in the money supply. B) Increasing government purchases. C) Increasing government taxation. D) Reducing inefficient employment of resources.

Answer: B Type: Basic Understanding Page: 153

HISTORICAL CYCLES

15. Which of the following is true about business cycles in the United States? A) They are remarkably similar in length but vary greatly in intensity. B) They vary greatly in length, frequency, and intensity. C) They are similar in frequency and intensity, but not in length. D) They are similar in length, frequency, and intensity.


16. The peak of a business cycle is typically accompanied by: A) The highest unemployment rate over the cycle. B) The highest rate of increase in the price level over the cycle. C) The lowest output of goods and services over the cycle. D) All of the above.


17. Which of the following is characteristic of a downturn in the business cycle? A) Lower unemployment rates. B) Lower real output. C) Higher prices. D) Higher interest rates.


18. Constant prices are used to correct distortions in nominal GDP because of: A) Inflation. B) Unemployment. C) Business cycles. D) All of the above.


19. Changes in real GDP provide a way to measure: A) Inflation. B) Unemployment. C) Business cycles. D) All of the above.


20. A decline in total output for two or more consecutive quarters is known as: A) Inflation. B) A recession. C) A growth recession. D) All of the above.



21. A recession can be represented by a point: A) Outside the production-possibilities curve. B) Inside the production-possibilities curve. C) On the production-possibilities curve. D) At either end of the production-possibilities curve.


22. A decline in real GDP characterizes a: A) Recession. B) Depression. C) Downswing in the business cycle. D) All of the above.


23. An extremely deep and long recession is called a: A) Growth recession. C) Normal period of contraction. B) Depression. D) Temporary deviation from full employment.


24. In which of the following situations is the percentage change in real GDP positive? A) Depression. B) Growth recession. C) Recession. D) All of the above.


25. A growth recession is said to occur when the economy grows at a: A) Rate less than that of population. B) Rate less than the long-term average. C) Slower rate in the current year than the preceding year. D) Negative rate.


26. Which of the following would be a "growth recession"? A) Real GDP contracts for two consecutive quarters. B) Real GDP grows for a period at a rate less than 3 percent. C) The unemployment rate stays constant at the long-run rate of 6 percent. D) Prices rise steadily but at a rate less than the long-run trend of 4 percent.


27. The Great Depression: A) Followed a period of apparent prosperity. B) Led to an unemployment rate that reached 25 percent. C) Caused President Roosevelt to declare a "bank holiday" in 1933. D) Did all of the above.



28. The Great Depression in the United States: A) Provided the basis for the Neoclassical economic theory. B) Ended with a higher real GDP per capita than when it began. C) Caused negative growth in real GDP and a high level of unemployment. D) Was ended by World War I.


29. The Great Depression in the United States: A) Provided the basis for the Neoclassical economic theory. B) Caused real GDP to fall by nearly 30 percent between 1919 and 1929. C) Ended with a higher real GDP per capita than when it began. D) Was ended by massive government spending during World War II.


30. During the period 1992 to 2000, for the United States: A) Economic expansion set a record for longevity. C) Millions of new jobs were created. B) The unemployment rate fell to 3.9 percent. D) All of the above.


A MODEL OF THE MACRO ECONOMY

31. Macro outcomes include: A) Output. B) Growth. C) Jobs. D) All of the above.


32. Which of the following are considered macro outcomes? A) The levels of employment and unemployment. B) The year-to-tear expansion in production capacity. C) The average price of goods and services. D) All of the above.


33. Which of the following is generally considered a desirable outcome of government intervention? A) More jobs. B) More profitable prices. C) Higher unemployment rates. D) Greater deficits.


34. Which of the following can be used to measure macroeconomic performance? A) The total value of goods and services produced. C) The international value of the dollar. B) The average price level of goods and services. D) All of the above.



35. The determinants of macro performance include: A) Internal market forces. B) Policy levers. C) External shocks. D) All of the above.


36. External shocks include: A) Wars, natural disasters, trade disruptions. B) Tax policy, government spending, availability of money, and regulation. C) Population growth, spending behavior, invention, and innovation. D) Internal market forces, policy levers.


37. External shocks include: A) Tax policy. C) Trade disruptions. B) Changes in the availability of money. D) All of the above.


38. Internal market forces include: A) Wars, natural disasters, trade disruptions. B) Tax policy, government spending, availability of money. C) Population growth, spending behavior, invention. D) External shocks, policy levers.


39. Policy levers include: A) Tax policy, government spending, availability of money. B) Wars, natural disasters, trade disruptions. C) Population growth, spending behavior, invention. D) External shocks, internal market forces.


40. Policy levers include: A) Spending behavior. B) Trade disruptions. C) Availability of money. D) All of the above.



41. In the absence of external shocks or government policy an economy would: A) Still experience business cycle fluctuations because of internal market forces. B) Not experience business cycle fluctuations. C) Not be able to expand production and output. D) Still experience business cycle fluctuations because of factors such as wars and tax policy.

Answer: A Type: Complex Understanding Page: 158

AGGREGATE DEMAND AND SUPPLY

42. Determinants of macro performance work on macro outcomes through: A) Aggregate supply and demand. C) External shocks and internal market forces. B) International balances. D) All of the above.


43. Aggregate demand: A) Is the total quantity of a good demanded at alternative prices. B) Is the total quantity of output demanded at alternative price levels. C) Refers to the demand in a particular market. D) Refers to the level of demand where equilibrium occurs.


44. Which of the following is illustrated by the aggregate demand curve? A) How real personal income varies with the inflation rate. B) How total quantity of output demanded varies with the average price level. C) How real output varies with the inflation rate. D) How real personal income varies with the price level.


45. Which of the following explains the downward slope of the aggregate demand curve? A) The real-balances effect. C) The interest-rate effect. B) The foreign-trade effect. D) All of the above.


46. The aggregate demand curve is downward-sloping because, other things being equal: A) People buy fewer goods and services at lower average incomes. B) People buy more goods and services at lower average prices. C) A higher average price level will induce producers to offer more output than otherwise. D) People buy more goods and services at higher average prices.



47. If average prices in the U.S. economy fall, then, ceteris paribus: A) The real-balances effect will lead to a higher quantity of output demanded. B) The foreign-trade effect will lead to a lower quantity of output demanded. C) The interest-rate effect will lead to a lower quantity of output demanded. D) The cost effect will lead to a higher quantity of output demanded.


48. If average prices in the U.S. economy fall, then, ceteris paribus: A) The real-balances effect will lead to a lower quantity of output demanded. B) The foreign-trade effect will lead to a higher quantity of output demanded. C) The interest-rate effect will lead to a lower quantity of output demanded. D) The profit effect will lead to a higher quantity of output demanded.


49. If average prices in the U.S. economy fall, then, ceteris paribus: A) The real-balances effect will lead to a lower quantity of output demanded. B) The foreign-trade effect will lead to a lower quantity of output demanded. C) The interest-rate effect will lead to a higher quantity of output demanded. D) All of the above.


50. The foreign-trade effect states that: A) The quantity of domestic goods demanded rises when the domestic price level rises. B) The quantity of domestic goods demanded rises when the prices of imported goods fall. C) Foreign consumers have less incentive to buy American-made products when U.S. prices fall. D) Relatively lower prices for imports give Americans an incentive to buy foreign-made products.


51. Which of the following effects suggests that lower average prices stimulate more borrowing? A) The cost effect. B) The interest-rate effect. C) The real-balances effect. D) The profit effect.


52. Which of the following refers to the total quantity of output producers are willing and able to supply at alternative price levels? A) Quantity supplied. B) Market supply. C) Aggregate supply. D) A supply-side alternative.

Answer: C Type: Definition Page: 161

53. Which of the following is associated with the aggregate supply curve? A) Factors of production. B) The cost effect. C) The profit effect. D) All of the above.



54. The profit effect implies: A) That some costs do not rise with average prices. C) A negative-sloping aggregate supply curve. B) A curved aggregate supply curve. D) All of the above.


55. The shape of the aggregate supply curve can be explained by the: A) Foreign-trade effect. B) Interest rate effect. C) Real-balances effect. D) Profit effect.


56. Which of the following suggests that lower average prices make it more difficult to cover interest payments and other costs of doing business, causing firms to reduce production? A) The cost effect. B) The interest-rate effect. C) The profit effect. D) The real-balances effect.

Answer: C Type: Complex Understanding Page: 161

57. As output rises, the profit effect results from: A) Lower opportunity costs. B) Tight supplies of factors of production. C) The law of demand. D) Constant costs which do not rise when prices rise.


58. A positively sloped aggregate supply curve reflects: A) The idea that greater production lowers profit margins, which raises quantity demanded. B) That costs rise simultaneously with rising prices. C) Rising costs of increased capacity utilization. D) All of the above.


59. The cost effect implies: A) That higher average prices are reflected in higher costs. B) A linear aggregate supply curve. C) That lower average prices result in greater quantity supplied. D) All of the above.


60. The aggregate supply curve is upward-sloping because of the: A) The real-balances effect. C) The interest-rate effect. B) The foreign-trade effect. D) The cost effect.



61. As output rises, the cost effect results from: A) Lower opportunity costs. B) Tight supplies of factors of production. C) The law of demand. D) Constant costs which fail to fall when prices fall.


62. Macro equilibrium always occurs when: A) Aggregate supply is greater than aggregate demand. B) The labor force is fully employed. C) Aggregate demand equals aggregate supply at the average price level of the economy. D) The level of output is expanding.


63. The unique situation in which the behavior of buyers and sellers is compatible is referred to as: A) Full-employment GDP. C) Micro equilibrium. B) Macro equilibrium. D) Labor market equilibrium.


64. Macro equilibrium: A) Occurs at the full-employment output level. B) Occurs at the optimal price level. C) May be distributed by shifts in aggregate demand or aggregate supply. D) Can result in the shortage of goods if consumer demand is too great.


65. If aggregate demand decreases and aggregate supply decreases, the level of real output will: A) Decrease and the price level will decrease. B) Decrease and the price level will increase. C) Either increase or decrease, but the price level will stay the same. D) Decrease, but the price level may either increase, decrease, or stay the same.

Answer: D Type: Complex Understanding Page: 162

66. Which of the following might be a problem at macro equilibrium? A) The equilibrium is inconsistent with macroeconomic goals. B) A surplus of goods. C) A shortage of goods. D) All of the above.



67. Beginning at a full employment equilibrium, a decrease in aggregate demand will tend to cause a: A) Lower price level and a higher employment level. B) Lower price level and a lower employment level. C) Higher price level and a higher employment level. D) Higher price level and a lower employment level.


68. Which of the following results if the aggregate quantity supplied exceeds the aggregate quantity demanded? A) Aggregate demand shifts to the right. C) A surplus causes the price level to rise. B) Aggregate supply shifts to the left. D) A surplus causes the price level to fall.


69. Which of the following would result if the price level were below the equilibrium level? A) Aggregate demand would increase. B) Aggregate supply would decrease. C) Consumers would bid prices up by competing for goods currently in shortage. D) Shortages would force sellers to lower prices in order to increase aggregate quantity demanded.


70. Alternating periods of economic growth and contraction are: A) The result of government intervention according to Keynes. B) The result of recurrent shifts of aggregate demand and aggregate supply. C) Indicative of an unstable economy and require government intervention according to classical

economists. D) Not typical of the U.S. economy.


71. Ceteris paribus, the price level will decrease if the aggregate: A) Supply curve shifts to the left. B) Demand curve shifts to the left. C) Demand curve shifts to the right. D) Supply and demand curves both shift to the right.


72. When the aggregate demand curve shifts to the left, output will remain constant if the aggregate: A) Supply curve is vertical. C) Demand curve is vertical. B) Supply curve is horizontal. D) Demand curve is downward sloping.



73. If full employment is greater than the macro equilibrium, which of the following best describes the impact of a rightward shift of the aggregate supply curve, ceteris paribus? A) A higher price level and a higher level of output. B) A higher price level and a lower level of output. C) A recession or depression. D) A lower price level and a higher level of output.


74. If macro equilibrium is at a level below full employment, which of the following best describes the impact of a rightward shift of the aggregate demand curve, ceteris paribus? A) A higher price level and a higher level of output. B) A higher price level and a lower level of output. C) A recession or depression. D) A lower price level and a higher level of output.


75. A rightward shift in the aggregate supply curve should result in: A) Inflation and a higher unemployment rate. C) Deflation and a higher unemployment rate. B) Inflation and a lower unemployment rate. D) Deflation and a lower unemployment rate.


76. Which combination of shifts of aggregate demand and supply would definitely cause an increase in real GDP? A) Demand shifts to the left and supply shifts to the right. B) Demand shifts to the left and supply shifts to the left. C) Demand shifts to the right and supply shifts to the right. D) Demand shifts to the right and supply shifts to the left.


77. Which of the following is most likely to cause the aggregate demand curve to shift to the left? A) A decrease in taxes. C) A decrease in government spending. B) A decrease in savings. D) All of the above.


78. A leftward shift of the aggregate supply curve could be caused by: A) An increase in consumer saving. C) An increase in imports. B) A decrease in the money supply. D) An increase in production costs.



79. Which of the following is a situation in which economic theory failed to explain a change in the economy? A) Classical economics failed to explain a prolonged depression. B) New Classical economics failed to explain the effects of "priming the pump." C) Keynes failed to explain the impact of fiscal policy on the economy. D) Supply-side economics failed to explain a prolonged inflation.


80. Controversies between Keynesian, monetarist, supply-side, and eclectic theories focus on the: A) Shape and sensitivity of aggregate demand and aggregate supply curves. B) Existence or nonexistence of the aggregate supply curve. C) Importance of international balances to the economy. D) Usefulness of using aggregate demand and supply to analyze adjustment of the macro equilibrium.


COMPETING THEORIES OF SHORT-RUN INSTABILITY

81. Which of the following is true if equilibrium exceeds full employment? A) The economy is inside the production-possibilities curve. B) The economy is experiencing low inflation. C) Growth rates are unacceptably low. D) The economy is working beyond normal capacity.


82. Which of the following economic perspectives focuses on the need for government to shift aggregate demand to correct problems of unemployment and inflation? A) Supply-side. B) Keynesian. C) Classical. D) New Classical.


83. According to Keynesian theory, the correct fiscal policy to stimulate the economy would be to: A) Raise taxes to increase aggregate demand. B) Increase the money supply to increase aggregate supply. C) Increase government expenditures to increase aggregate demand. D) Lower taxes to increase aggregate supply.


84. According to Keynes, unemployment resulted from: A) Increased business investment which reduced consumer spending. B) Flexible wages and price. C) Insufficient spending on the part of consumers, business, and government. D) Increased government spending which reduced consumer spending.



85. Keynesian levers would include: A) Deregulation. B) Fiscal policy. C) Monetary policy. D) Aggregate supply.


86. A tax cut can best be characterized as: A) Monetary policy only. C) Supply-side policy only. B) Fiscal policy only. D) Both fiscal and supply-side policy.


87. From the supply-side perspective, the economy may fail to reach full employment because of: A) A lack of incentives for production. C) Excessive government taxes and regulation. B) Rising costs. D) All of the above.


88. Individual employment and training programs are levers most likely to be advocated by: A) Classical economists. B) Neoclassical economists. C) Keynesians. D) Supply-side economists.


89. Which of the following is the best example of supply-side policy? A) The government response to the Great Depression. B) Inflation during the 1970s. C) The Reagan tax cuts in 1982. D) Government policy before 1930.


LONG-RUN SELF-ADJUSTMENT

90. In the long run, the aggregate supply curve: A) Is upward sloping. C) Tends to be horizontal. B) Is the same as it is in the short run. D) Tends to be vertical.

Answer: D Type: Analytical Page: 169

91. A vertical aggregate supply curve: A) Implies that supply-side policies will have no effect on the macro equilibrium. B) Implies that aggregate demand shifts have no impact on output. C) Is likely in the short run. D) Reflects the inflexibility of prices and wages.



92. The long-run AS curve is vertical because: A) Of the profit effect of rising price levels. B) Of the inverse relationship between inflation and unemployment. C) Over a long period of time, rising costs will catch up with higher price levels thus providing no

incentive to increase output. D) The real balances effect does not apply in the long run.


93. For the aggregate supply curve, the profit effect: A) Provides an incentive for producers to decrease output when prices rise. B) Dominates in the long run and causes the curve to be upward sloping. C) Along with the cost effect cause the curve to be upward sloping in the long run. D) Is temporary and in the long run the cost effect dominates.


94. When the AS curve is vertical, increases in AD will: A) Increase the average price level but have no impact on unemployment. B) Increase the average price level and decrease unemployment. C) Increase both the average price level and but have no impact on unemployment. D) Have no impact on either the average price level or unemployment.


95. If the price level decreases and real output does not change, we can conclude that aggregate: A) Demand increased in the portion of the aggregate supply curve that is practically horizontal. B) Demand decreased in the portion of the aggregate supply curve that is vertical. C) Demand decreased in the portion of the aggregate supply curve that is upward sloping. D) Supply increased in the portion of the aggregate demand curve that is downward sloping.


96. When the AS curve is vertical, fiscal policy will be: A) Ineffective against both inflation and unemployment. B) Effective against inflation but not unemployment. C) Effective against unemployment but not inflation. D) Effective against both inflation and unemployment.


97. The belief that an increase in aggregate demand results in an increase in the price level but no change in output is attributed to: A) Monetarists. B) Keynesians. C) Supply-side economists. D) All of the above.



98. The only policy lever that is effective against unemployment when the AS curve is vertical is: A) Fiscal policy. B) Monetary policy. C) Supply-side policy. D) No policy lever is effective.


THE ECONOMY TOMORROW

99. A laissez faire policy approach during a recession would advocate: A) Non-interference by the government. B) Increasing AS by funding programs which improve worker skills. C) Increasing AD by increasing government spending. D) Increasing both AD and AS.


100. New Classical economists believe: A) The market self-adjusts so that government policy is ineffective even in the short run. B) Increased government spending is needed to stimulate the economy. C) Government policy has its chief effect through the demand side. D) In a horizontal supply curve.


101. The use of tax incentives and deregulation to stimulate the ability and willingness to produce goods and services is most closely associated with: A) Fiscal policy. B) A laissez faire approach. C) Supply-side policy. D) Monetary policy.


102. International trade and money flows can increase aggregate supply and aggregate demand if: A) Trade barriers are increased. C) Tariffs are increased. B) Trade barriers are reduced. D) Quotas are increased.


103. The eclectic approach to macroeconomic policy relies on: A) Demand-side policy. C) Supply-side policy. B) A laissez faire approach. D) Any or all of the above approaches.



Use the following to answer questions 104-107:

Figure 8.1

R E A L O U T P U T

PRIC

ELE

VEL

• •

•

P 2A B

CP 1

Q 1 Q 2

A D 1

A D 2

104. Using Figure 8.1, an increase in real output resulting from the real-balances effect would be depicted as a movement from point: A) A to point C. B) A to point B. C) B to point C. D) C to point A.


105. Using Figure 8.1, an increase in real output resulting from the interest-rate effect would be depicted as a movement from point: A) A to point B. B) A to point C. C) B to point C. D) C to point A.


106. In Figure 8.1, an increase in government spending, ceteris paribus, is best represented as a movement from point: A) A to point B. B) C to point A. C) B to point C. D) A to point C.


107. In Figure 8.1, a decrease in business inventories, ceteris paribus, is best represented as a movement from point: A) A to point B. B) C to point A. C) C to point B. D) B to point A.




Figure 8.2

R E A L O U T P U T

PRIC

ELE

VEL

• •

•

P 2A

B

CP 1

Q 1 Q 2

A S 1

A S 2

108. Using Figure 8.2, a decrease in real output resulting from the profit and cost effects would be depicted as a movement from point: A) A to point C. B) A to point B. C) B to point C. D) C to point B.


109. In Figure 8.2, an improvement in technology is best represented as a movement from point: A) A to point B. B) C to point A. C) C to point B. D) B to point A.


110. In Figure 8.2, an increase in the cost of an input in the production process is best represented as a movement from point: A) A to point B. B) C to point A. C) C to point B. D) B to point A.




Figure 8.3Aggregate supply and demand

111. Assume the economy is initially in equilibrium on AD1 and AS1. Which curve would have shifted and in what direction would it have shifted, if a new equilibrium were to occur at an output level of $300 billion and a price level of P3 in Figure 8.3? A) Aggregate supply would have shifted to the left. B) Aggregate supply would have shifted to the right. C) Aggregate demand would have shifted to the left. D) Aggregate demand would have shifted to the right.


112. Assume the economy is initially in equilibrium on AD2 and AS2. Which curve would have shifted, and in what direction would it have shifted, if a new equilibrium were to occur at an output level of $300 billion and a price level of P3 in Figure 8.3? A) Aggregate supply would have shifted to the left. B) Aggregate supply would have shifted to the right. C) Aggregate demand would have shifted to the left. D) Aggregate demand would have shifted to the right.

Answer: A Type: Analytical Page: 162

113. Macro equilibrium is established at which level of real output, given AD1 and AS2 in Figure 8.3? A) $200 billion. B) $100 billion. C) $300 billion. D) $400 billion.

Answer: C Type: Analytical Page: 162


114. Macro equilibrium is established at which price level, given AD1 and AS1 in Figure 8.3? A) P1 . B) P2 . C) P3 . D) P4 .

Answer: B Type: Analytical Page: 162

115. Given AD2 and AS1, the equilibrium price level in Figure 8.3 is: A) P1 . B) P2 . C) P3 . D) P4 .


116. Given AD1 and AS1, if the average price level in Figure 8.3 were at P3 : A) A surplus would exist initially. B) The aggregate quantity demanded would exceed the aggregate quantity supplied. C) The average price level would rise. D) The equilibrium price level would be P3.


117. Given AD1 and AS1 in Figure 8.3, the Classical approach to achieving full employment at an output of $300 billion would be to: A) Increase taxes and increase government spending so as to shift AD1 to AD2. B) Increase the growth of the money supply so as to shift AD1 to AD2. C) Do nothing and wait for "natural" market forces to achieve full employment. D) Use all available supply-side options.


118. Given AD1 and AS1 in Figure 8.3, the Keynesian approach to achieving a higher level of output would be to: A) Use various demand-side options, such as price controls. B) Increase the growth of the money supply so as to shift AS1 to AS2. C) Do nothing. D) Employ an expansionary fiscal policy—tax cuts and/or more government spending—so as to shift AD1

to AD2.


119. A supply-side policy approach in Figure 8.3, given AD1 and AS1, to achieve both lower prices and more output would be to: A) Increase the growth of the money supply. B) Reduce marginal tax rates and government regulation in an effort to move AS1 to AS2. C) Wait until natural market forces establish full employment. D) Increase aggregate spending.




Figure 8.4Aggregate supply and demand

120. At what price level does equilibrium occur in Figure 8.4? A) P1. B) P2. C) P3. D) P4.


121. At what level of output does equilibrium occur in Figure 8.4? A) Q2. B) Q3. C) Q4. D) Q5.


122. At which of the following price levels would a shortage occur in Figure 8.4? A) P1. B) P2. C) P3. D) P4.


123. At which of the following price levels would a surplus occur in Figure 8.4? A) P1only. B) P2only. C) P1 and P2. D) P3.




Figure 8.5

R E A L O U T P U T

PRIC

ELE

VEL

P 3

P 2

P 1

Q 1 Q 2 Q 3

A D 1

A D 2

A S 2

A S 1

124. Using Figure 8.5, if the equilibrium real output is Q2 then: A) Aggregate demand must be AD1. B) Aggregate demand could be either AD1 or AD2 depending on the level of aggregate supply. C) The equilibrium price level is P2. D) Aggregate supply must be AS1 and the equilibrium price level must be P1.


125. In Figure 8.5, if equilibrium real output is Q1 and full employment real output is Q2, an appropriate fiscal policy lever would be to: A) Increase AD by increasing income taxes. B) Increase AD by increasing government spending. C) Increase AS by reducing government regulations. D) Reduce AS by tightening air pollution standards in order to improve air quality.


126. In Figure 8.5, if equilibrium real output is Q1 and full employment real output is Q2, an appropriate monetarist policy lever would be to: A) Increase AD by decreasing income taxes. B) Increase AS by increasing the money supply. C) Increase AD by reducing interest rates. D) Increase AD by reducing government regulations.



127. In Figure 8.5, if this economy's inflation goal is a price level of P2 but the equilibrium price level is P3, an appropriate fiscal policy lever would be to: A) Decrease AD by decreasing income taxes. B) Decrease AS by decreasing the money supply. C) Decrease AD by reducing transfer payments. D) Increase AS by reducing government regulations.


128. In Figure 8.5, if this economy's inflation goal is a price level of P2 but the equilibrium price level is P3, an appropriate monetary policy lever would be to: A) Decrease AS by decreasing the money supply. C) Decrease AD by increasing income taxes. B) Decrease AD by increasing interest rates. D) Increase AS by increasing the money supply.


129. Using Figure 8.5, if the equilibrium price level is P1, then: A) Aggregate demand is AD2, and the equilibrium output level is Q2. B) Aggregate demand is AD2, and the equilibrium output level is Q1. C) Aggregate demand is AD1, and the equilibrium output level is Q3. D) Aggregate demand is AD1, and the equilibrium output level is Q2.



Choose the letter below that best represents the type of shift that would occur in each situation in the United States.

Figure 8.6Shifts of aggregate supply and demand

A g g reg a te S u p p ly( le f tw ard )

A g g reg a te S u p p ly(rig h tw a rd )

A g g reg a te D em an d(le f tw ard )

A g g reg a te D em an d(rig h tw a rd )

Pri c

e L

e ve l

Pric

e L

e ve l

Pri c

e L

evel

Pric

e L

e ve l

R ea l O u tp u t R ea l O u tp u t R ea l O u tp u t R ea l O u tp u t(A ) (B ) C( ) (D )

130. OPEC raises the price of its oil significantly. (See Figure 8.6) A) A. B) B. C) C. D) D.



131. American consumers suddenly acquire a greater taste for Japanese products, ceteris paribus. (See Figure 8.6) A) A. B) B. C) C. D) D.


132. A technological breakthrough significantly reduces the cost of computerizing production lines. (See Figure 8.6) A) A. B) B. C) C. D) D.


133. A new government program results in a sudden increase in U.S. exports. (See Figure 8.6) A) A. B) B. C) C. D) D.


134. Between 1995 and 2000, the stock market's value increased significantly, adding billions of dollars to the wealth of U.S. households and businesses. (See Figure 8.6) A) A. B) B. C) C. D) D.


135. On October 24, 1929, the U.S. stock market crashed. By the end of the year, over $40 billion of wealth had vanished. (See Figure 8.6) A) A. B) B. C) C. D) D.


136. Between 1930 and 1935, millions of U.S. farm families lost their farms, and less was produced by the remaining farms. (See Figure 8.6) A) A. B) B. C) C. D) D.


137. During the Great Depression most other countries suffered similarly long and deep losses of output and employment, which in turn meant less purchases of U.S. goods and services. (See Figure 8.6) A) A. B) B. C) C. D) D.


138. During World War II, the U.S. government spent huge amounts of money to fund the war effort, ceteris paribus. (See Figure 8.6) A) A. B) B. C) C. D) D.



139. When the economy overheated, the U.S. government cooled it down with higher taxes, spending reductions, and less money. (See Figure 8.6) A) A. B) B. C) C. D) D.


140. In 2001 interest rates dropped to 40-year lows which decreased the cost of borrowing for businesses and consumers. (See Figure 8.6) A) A. B) B. C) C. D) D.


141. During the late 1990s, productivity in many U.S. industries increased because of technological advances. (See Figure 8.6) A) A. B) B. C) C. D) D.


142. The value of the dollar plummeted in international currency markets, causing foreigners to buy more American goods. (See Figure 8.6) A) A. B) B. C) C. D) D.



Figure 8.7

R E A L O U T P U T

PRIC

E LE

VEL

A D 5

A S

A D 4

A D 3A D 2A D 1


143. Using Figure 8.7, a shift in aggregate demand from AD1 to AD2 is most likely to cause: A) An increase in real output and an increase in the price level. B) An increase in real output, but no change in the price level. C) An increase in price level, but no change in real output. D) An decrease in price level, but no change in real out put.






146. For the economy depicted in Figure 8.7, the worst unemployment problem would exist when AD is located at: A) AD1. B) AD2. C) AD3. D) AD5.


147. For the economy depicted in Figure 8.7, the worst inflation problem would exist when AD is located at: A) AD1. B) AD2. C) AD3. D) AD5.


The following multiple-choice questions require critical thinking about In the News and World View articles that appeared in the text.

148. One In the News article is titled "Market in Panic as Stocks Are Dumped in 12,894,600 Share Day; Bankers Halt It." Which of the following shifts in the stock market would be most likely based on the headline? A) Supply curve and demand curve should shift leftward. B) Supply curve should shift leftward, and demand curve should shift rightward. C) Supply curve should shift rightward, and demand curve should shift leftward. D) Supply curve and demand curve should shift rightward.



149. An In the News article reports "The stock markets of the country tottered on the brink of panic yesterday as a prosperous people . . . attempted simultaneously to sell a record-breaking volume of securities for whatever they would bring." Which of the following shifts would be most likely based on this information? A) Aggregate demand should shift to the left. C) Aggregate supply should shift to the left. B) Aggregate demand should shift to the right. D) Aggregate supply should shift to the right.


150. One World View article states "The Great Depression was not confined to the U.S. economy." This implies that many other countries: A) Were producing inside their production-possibilities curves. B) Experienced high rates of unemployment. C) Experienced a decrease in real GDP. D) All of the above.


151. One World View article is titled "Global Depression." The countries that experienced the depression: A) Experienced GDP growth, but at a rate below the long-term trend. B) Experienced higher employment levels than previously recorded. C) Suffered substantial losses of output and employment. D) Experienced high unemployment but an increase in output.


152. Three World View articles discuss the different short-term growth rates across countries. Short-term growth involves: A) An increase in aggregate supply. B) An increase in aggregate demand. C) A rightward shift of the production-possibilities curve. D) Expansionary supply-side policy.


True/False Questions

STABLE OR UNSTABLE?

T F 153. Classical economists believe in the use of policy levers to achieve desired macro outcomes.

Answer: False Type: Basic Understanding Page: 151

T F 154. The cornerstone of Classical thought is flexible wages and prices.

Answer: True Type: Basic Understanding Page: 151


T F 155. Keynes believed that a market-driven economy was inherently stable.


T F 156. According to the Classical view, the economy will not self-adjust to deviations from its long-term growth trend.


T F 157. According to Keynes, the inherent instability of the market place requires government intervention.


HISTORICAL CYCLES

T F 158. The average growth rate of the U.S. economy was approximately 3 percent per year from 1929 through 2001.


T F 159. During a recession, real output actually falls.


T F 160. World War II contributed to the Great Depression because it eliminated the demand for civilian goods and services.


T F 161. A growth recession occurs when GDP grows at a rate below the long-term growth trend.


T F 162. During the 1990s, the U.S. economy experienced one of the longest periods of economic expansion in history.


A MODEL OF THE MACRO ECONOMY

T F 163. One measure of macroeconomic performance is the price level.



T F 164. One measure of macroeconomic performance is the level of unemployment.


T F 165. If the population is growing, then the economy must be expanding.


T F 166. Changes in the availability of money have little impact on the macro performance of the economy.


T F 167. External shocks include wars, natural disasters, and trade disruptions.


T F 168. All economists believe that market-driven economies are stable.


AGGREGATE DEMAND AND AGGREGATE SUPPLY

T F 169. Business cycles result from recurrent shifts of the aggregate supply and demand curves.


T F 170. Macro outcomes are the result of the interaction between aggregate supply and aggregate demand.


T F 171. The real-balances effect states that higher prices make money more valuable.

Answer: False Type: Definition Page: 160

T F 172. The quantity of real output supplied rises as the price level rises, ceteris paribus.


T F 173. The profit effect depends on some costs declining when the average price level rises.



T F 174. The profit effect occurs because, in the short run, resource costs typically do not increase as rapidly as the price of goods and services.


T F 175. A stable equilibrium means there is no tendency for price or output to change.


T F 176. Equilibrium is unique; it is the only price-output combination that is mutually compatible with aggregate supply and demand.

Answer: True Type: Definition Page: 162

T F 177. A surplus occurs at the price level where aggregate demand equals aggregate supply.


COMPETING THEORIES OF SHORT-RUN INSTABILITY

T F 178. Economic policy explains the business cycle, while macroeconomic theories try to control it.


T F 179. Supply-side theories of the business cycle focus on the unwillingness of producers to supply more goods and services at existing prices.


T F 180. Eclectic economists blame both the demand side and the supply side for the undesirable macro outcomes.


LONG-RUN SELF-ADJUSTMENT

T F 181. The long-run aggregate supply curve is upward sloping, while the short-run aggregate supply curve tends to be vertical.



T F 182. In the long run the AS curve is vertical so shifts in the aggregate demand curve affect output but not the price level.


T F 183. In the long run, shifts in the aggregate demand curve affect the price level but not the level of output.


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