1. AD/AS Fiscal Policy Exit and Fiscal Policy 100 100 100 100 100 200 200
Monetary Policy
Foreign Exchange
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Exit

2. AD/AS for 100
If the SRAS shifts right, what will happen to income and employment?
In this case, income and employment will both increase. This is because output or GDPr goes up, causing u% to go down or employment to go up. As more people have jobs, income goes up as well.
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3. AD/AS for 200
In an economy with completely flexible wages, an increase in labor productivity will change output and real wages in which way?
The increase in labor productivity will shift the SRAS to the right, thus increasing output or GDPr, decrease u%, and increase real wages (more people earn incomes and the PL goes down).
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4. AD/AS for 300
Stagflation is most likely caused by what type of shift involving AD or AS?
A leftward shift or decrease in SRAS. This is usually a result of a negative supply shock such as an increase in oil prices, an increase in wages due to labor union negotiations, or monopoly/oligopoly situations which increase prices and limit output.
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5. AD/AS for 400
An increase in personal income taxes will most likely cause AD and AS to change in which of the following ways?
AD AS
No change Decrease
No change Increase
Decrease No change
Decrease Increase
Increase No change
C. AD will decrease as personal consumption goes down. AS will be unaffected.
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6. AD/AS for 500
When companies restructure their operating costs to decrease production costs, the AS curve, PL, and real output will change in which ways?
The AS shifts right, the PL goes down, and real output (real GDP) goes up.
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7. AD/AS and Fiscal Policy for 100
A decrease in labor productivity will shift which curve in which direction (AD or AS)?
The AS curve to the left.
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8. AD/AS and Fiscal Policy for 200
Which of the following would cause the SRAS to shift to the right?
An increase in the wage rate.
An increase in the real interest rate.
An increase in the natural rate of unemployment.
A decrease in the capital stock.
A decrease in the expected price level.
E. This would cause firms to produce more now to take advantage of the currently higher prices.
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9. AD/AS and Fiscal Policy for 300
A decrease in business taxes would lead to an increase in national income by increasing which of the following:
The money supply
Unemployment AD AS
AD and AS
E. Both AD and AS.
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10. AD/AS and Fiscal Policy for 400
In order to fight recession, what tools would be used for fiscal policy and how would they be used?
Decrease taxes, increase government spending, or do a combination of both.
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11. AD/AS and Fiscal Policy for 500
“Crowding Out” refers to a decrease in what?
Investment spending due to increased interest rates caused by government deficit spending to fight recession.
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12. Fiscal Policy for 100
Suppose that autonomous consumption is $500 and the marginal propensity to consume is If disposable income rises by $2,000, consumption spending will increase by __________.
$1,800 or .9 x $2,000.
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13. Fiscal Policy for 200
If the federal government reduces its budget deficit when the country is close to full-employment, which is most likely to result?
Inflation increases.
Tax revenues increase
Interest rates decrease
Unemployment will decrease
The international value of the dollar will increase.
C. Interest rates will decrease due to the reduced demand for loanable funds by the government. To run a budget deficit, the government will reduce its demand for loanable funds. Tax revenues may or may not increase.
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14. Marginal Propensity to consume.
Fiscal Policy for 300
The spending multiplier is determined by the ____________________.
Marginal Propensity to consume.
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15. Fiscal Policy for 400
In a closed economy with only lump sum taxes, if the marginal propensity to consume is .8, a $100 Billion increase in government spending will cause a maximum increase in output of ________________.
$500 Billion. The multiplier is 1/1-MPC or x $100 B = $500 Billion
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16. Fiscal Policy for 500
An equal increase in government spending matched by an equal increase in taxes will cause what changes to AD, real GDP, the price level, and the unemployment rate.
This will increase AD, real GDP, and the PL, while decreasing u%. This is a balanced budget multiplier question. The balanced budget multiplier = 1. An equal increase in G financed by and equal increase in T results in a change in AD equal to the increase in G.
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17. Monetary Policy for 100
If the money supply stays constant, but money demand increases, what will happen to the interest rate and the quantity of money?
The increase in money demand increases the interest rate, but the quantity of money stays constant because the money supply doesn’t change.
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18. Monetary Policy for 200
If the economy has significant unemployment, and increase in which of the following would most likely cause employment to increase and the interest rate to decrease.
Purchases of government bonds by the central bank.
Transfer payments
Reserve requirements
Government expenditures
Investment in basic infrastructure
A. Buying bonds increases the money supply, reduces interest rates, increases AD/GDPr, and reduces unemployment.
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19. Monetary Policy for 300
If the Fed engages in open market operations to reduce inflation, what will happen to the money supply, bank reserves, nominal interest rates, the PL, and unemployment rate.
The money supply and bank reserves will go down, interest rates will increase, the PL will decrease, and unemployment rate will increase.
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20. Monetary Policy for 400
What Fed actions can shift the AD curve to the left?
If the Fed employs contractionary monetary policy, what would happen to interest rates, investment and consumption spending, AD, output, and prices.
Increase the reserve requirement, sell government securities to the public, and increase the discount rate.
Interest rates increase, investment and consumption spending decrease, AD decreases, and output and prices decrease.
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21. Monetary Policy for 500
If the Fed buys $300 Billion of government securities from the public and the reserve ratio is 15%, what is the maximum increase in the money supply?
$2000 Billion. 1/.15 = Deposit Expansion Multiplier or x $300 = $2,000 Billion.
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22. Depreciate, making U.S. imports from Britain more expensive.
Foreign Exchange for 100
If the exchange rate between the U.S. $ and British Pound changed from $3 per £1 to $4 per £1, and domestic prices in both nations stayed the same, then the U.S. dollar would ____________________ and the cost of British imports to the U.S._________.___
Depreciate, making U.S. imports from Britain more expensive.
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23. Foreign Exchange for 200
What factors could cause the U.S. $ to appreciate?
An increase in U.S. real interest rates, a decrease in U.S. price level, and an increase in the income/wealth of the U.S.’s trading partners.
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24. Into the U.S., causing the dollar to appreciate.
Foreign Exchange for 300
If the real interest rate in the U.S. increases relative to the rest of the world, then capital should flow _______________ causing the dollar to ___________________.
Into the U.S., causing the dollar to appreciate.
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25. Foreign Exchange for 400
What would cause the U.S. dollar to depreciate relative to the euro?
An increase in household income in the U.S.
An increase in interest rates in the U.S.
An increase in household income in Europe.
A decrease in interest rates in Europe.
A decrease in the U.S. price level.
A. This would cause Americans to buy more European imports, causing the euro to appreciate and dollar to depreciate.
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26. Foreign Exchange for 500
If the world operates on a flexible exchange rate system and the central bank of Mexico increases its money supply, but other nations do not change theirs, how will Mexico’s inflation rate and value of the Mexican peso will most likely change?
With an increase in the money supply AD and the price level in Mexico will increase. With increased inflation, the price of Mexican exported products goes up and fewer foreigners demand pesos to buy Mexican exports. This causes the peso to depreciate.
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