1. Inflation, Unemployment, and Stabilization Policies: Review Questions
AP Economics
Mr. Bordelon

2. The government has a budget surplus if:
Its total revenues are equal to its total expenditures.
Its total revenues are less than its total expenditures.
Its total revenues are greater than its total expenditures.
The money supply is less than total expenditures.
The money supply is less than the money demand.

3. The government has a budget surplus if:
Its total revenues are equal to its total expenditures.
Its total revenues are less than its total expenditures.
Its total revenues are greater than its total expenditures.
The money supply is less than total expenditures.
The money supply is less than the money demand.

4. The cyclically-adjusted budget balance is:
An estimate of the contractionary fiscal policy needed to close an inflationary gap.
An estimate of the tax increase needed to compensate for larger government transfers so that the budget remains balanced.
An estimate of the expansionary fiscal policy needed to close a recessionary gap.
An estimate of what the budget balance would be if real GDP was exactly equal to potential output.
An estimate of what the budget balance would be if the unemployment rate was equal to zero.

5. The cyclically-adjusted budget balance is:
An estimate of the contractionary fiscal policy needed to close an inflationary gap.
An estimate of the tax increase needed to compensate for larger government transfers so that the budget remains balanced.
An estimate of the expansionary fiscal policy needed to close a recessionary gap.
An estimate of what the budget balance would be if real GDP was exactly equal to potential output.
An estimate of what the budget balance would be if the unemployment rate was equal to zero.

6. If the economy is operating well below potential output, which of the following is likely?
The cyclically-adjusted budget balance deficit is smaller than the actual budget balance.
The cyclically adjusted budget balance deficit is larger than the actual budget balance.
The cyclically-adjusted budget balance and the actual budget balance are unrelated.
The cyclically-adjusted budget balance and the actual budget balance are the same.
The cyclically-adjusted budget balance minus the actual budget balance is equal to zero.

7. If the economy is operating well below potential output, which of the following is likely?
The cyclically-adjusted budget balance deficit is smaller than the actual budget balance.
The cyclically adjusted budget balance deficit is larger than the actual budget balance.
The cyclically-adjusted budget balance and the actual budget balance are unrelated.
The cyclically-adjusted budget balance and the actual budget balance are the same.
The cyclically-adjusted budget balance minus the actual budget balance is equal to zero.

8. Suppose that the U.S. debt is $7 trillion dollars at the beginning of the fiscal year. During the fiscal year, the government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion. At the end of the fiscal year, the debt is:
$10.5 trillion.
$6.5 trillion.
$9 trillion.
$7.5 trillion.
$8.5 trillion.

9. Suppose that the U.S. debt is $7 trillion dollars at the beginning of the fiscal year. During the fiscal year, the government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion. At the end of the fiscal year, the debt is:
$10.5 trillion.
$6.5 trillion.
$9 trillion.
$7.5 trillion.
$8.5 trillion.

10. If the government experiences a recessionary gap:
Holding everything else constant, the budget deficit would increase.
Contractionary fiscal policy would help correct this problem.
An increase in taxes or a decrease in government purchases would shift the AD curve to the right.
Unemployment would most likely be falling.
Real GDP would most likely be rising.

11. If the government experiences a recessionary gap:
Holding everything else constant, the budget deficit would increase.
Contractionary fiscal policy would help correct this problem.
An increase in taxes or a decrease in government purchases would shift the AD curve to the right.
Unemployment would most likely be falling.
Real GDP would most likely be rising.

12. If the money market is initially in equilibrium at point E and the central bank ____ bonds, then the interest rate will:
Sells; move toward point H.
Sells; move toward point L.
Buys; remain at point E.
Sells; remain at point E.
Buys; move toward point H.

13. If the money market is initially in equilibrium at point E and the central bank ____ bonds, then the interest rate will:
Sells; move toward point H.
Sells; move toward point L.
Buys; remain at point E.
Sells; remain at point E.
Buys; move toward point H.

14. A sale of bonds by the Fed:
Raises interest rates and increases the money supply.
Raises interest rates and decreases the money demand.
Lowers interest rates and reduces the money supply.
Lowers interest rates and increases the money supply.
Raises interest rates and reduces the money supply.

15. A sale of bonds by the Fed:
Raises interest rates and increases the money supply.
Raises interest rates and decreases the money demand.
Lowers interest rates and reduces the money supply.
Lowers interest rates and increases the money supply.
Raises interest rates and reduces the money supply.

16. If the Federal Reserve is conducting an expansionary monetary policy, the Fed will:
Buy Treasury bills on the open market, money supply will decrease, interest rate will fall, planned investment will fall, and the AD curve will shift to the left.
Sell Treasury bills on the open market, money supply will decrease, interest rate will rise, planned investment will fall, and the AD curve will shift to the left.
Buy Treasury bills on the open market, money supply will increase, interest rate will fall, planned investment will rise, and the AD curve will shift to the right.
Sell Treasury bills on the open market, money supply will increase, interest rate will rise, planned investment will rise, and the AD curve will shift to the left.
Buy Treasury bills on the open market, money supply will increase, interest rate will fall, planned investment will fall, and the AD curve will shift to the left.

17. If the Federal Reserve is conducting an expansionary monetary policy, the Fed will:
Buy Treasury bills on the open market, money supply will decrease, interest rate will fall, planned investment will fall, and the AD curve will shift to the left.
Sell Treasury bills on the open market, money supply will decrease, interest rate will rise, planned investment will fall, and the AD curve will shift to the left.
Buy Treasury bills on the open market, money supply will increase, interest rate will fall, planned investment will rise, and the AD curve will shift to the right.
Sell Treasury bills on the open market, money supply will increase, interest rate will rise, planned investment will rise, and the AD curve will shift to the left.
Buy Treasury bills on the open market, money supply will increase, interest rate will fall, planned investment will fall, and the AD curve will shift to the left.

18. The Federal Reserve’s Open Market Committee has decided that the federal funds rate should be 2% rather than the current rate of 1.5%. The appropriate open market action is to _____ Treasury bills to _____ the money _____ curve.
Sell; decrease; demand
Sell; decrease; supply
Buy; decrease; supply
Buy; increase; demand
Sell; increase; supply

19. The Federal Reserve’s Open Market Committee has decided that the federal funds rate should be 2% rather than the current rate of 1.5%. The appropriate open market action is to _____ Treasury bills to _____ the money _____ curve.
Sell; decrease; demand
Sell; decrease; supply
Buy; decrease; supply
Buy; increase; demand
Sell; increase; supply

20. To close a recessionary gap using monetary policy, the Fed should _____ the money supply to _____ investment and consumer spending, and shift the aggregate demand curve to the _____.
Increase; increase; left
Decrease; decrease; left
Increase; increase; right
Decrease; decrease; right
Decrease; increase; right

21. To close a recessionary gap using monetary policy, the Fed should _____ the money supply to _____ investment and consumer spending, and shift the aggregate demand curve to the _____.
Increase; increase; left
Decrease; decrease; left
Increase; increase; right
Decrease; decrease; right
Decrease; increase; right

22. Suppose the economy is initially at E1, where AD1 intersects SRAS1 and LRAS. Now, suppose that the AD1 shifts to AD2. That shift is likely due to:
An increase in the aggregate price level.
A decrease in government expenditure.
An increase in tax rates.
A decrease in investment spending.
An increase in money supply.

24. Suppose the economy is initially at E1, where AD1 intersects SRAS1 and LRAS. Now, suppose that the AD1 shifts to AD2. That shift is likely due to:
An increase in the aggregate price level.
A decrease in government expenditure.
An increase in tax rates.
A decrease in investment spending.
An increase in money supply.

25. Suppose the economy is initially at E1, and then moves to E2 where AD2 intersects SRAS1. Finally the economy moves to E3. The classical model of price level:
Assumes that the economy moves from E1 to E3 and ignores E2; thus only inflation increases but real GDP remains the same.
Assumes that the economy moves E2 to E3 and ignores E1; thus, only real GDP increases but inflation remains the same.
Assumes that the economy moves from E2 to E3; thus, only inflation decreases but real GDP remains the same.
Assumes that the economy moves from E1 to E2 and ignores E3; thus, both inflation and real GDP remain the same.
Assumes that the economy moves from E1 to E3 and ignores E2; thus, only real GDP increases but inflation remains the same.

26. Suppose the economy is initially at E1, and then moves to E2 where AD2 intersects SRAS1. Finally the economy moves to E3. The classical model of price level:
Assumes that the economy moves from E1 to E3 and ignores E2; thus only inflation increases but real GDP remains the same.
Assumes that the economy moves E2 to E3 and ignores E1; thus, only real GDP increases but inflation remains the same.
Assumes that the economy moves from E2 to E3; thus, only inflation decreases but real GDP remains the same.
Assumes that the economy moves from E1 to E2 and ignores E3; thus, both inflation and real GDP remain the same.
Assumes that the economy moves from E1 to E3 and ignores E2; thus, only real GDP increases but inflation remains the same.

27. In economies that are experiencing persistently high inflation, an increase in the money supply will have:
A positive effect on the real quantity of money in the long run.
A negative effect on the real quantity of money, as aggregate price level increases by more than the money supply.
A positive effect on the aggregate real output in the long run.
No effect on the real quantity of money, making money neutral in the long run.
A negative effect on the aggregate real output in the long run.

28. In economies that are experiencing persistently high inflation, an increase in the money supply will have:
A positive effect on the real quantity of money in the long run.
A negative effect on the real quantity of money, as aggregate price level increases by more than the money supply.
A positive effect on the aggregate real output in the long run.
No effect on the real quantity of money, making money neutral in the long run.
A negative effect on the aggregate real output in the long run.

29. In the long run, the only effect of monetary policy is on:
The long-run aggregate supply.
The interest rate.
The aggregate output level.
The aggregate price level.
The rate of unemployment.

30. In the long run, the only effect of monetary policy is on:
The long-run aggregate supply.
The interest rate.
The aggregate output level.
The aggregate price level.
The rate of unemployment.

31. If the money supply increases by 10%, in the long run:
Unemployment drops by 10%.
The price level increases by 10%.
Real GDP increases by 10%.
Unemployment drops by 20%.
The interest rate falls by 10%.

32. If the money supply increases by 10%, in the long run:
Unemployment drops by 10%.
The price level increases by 10%.
Real GDP increases by 10%.
Unemployment drops by 20%.
The interest rate falls by 10%.

33. When the Treasury Department borrows from the public to finance the government’s purchases of goods and services, and the Fed purchases the debt back from the public in the form of Treasury bills, it is known as:
Moral suasion.
Money illusion.
Structuring the deficit.
Monetizing the debt.
Devaluing the currency.

34. When the Treasury Department borrows from the public to finance the government’s purchases of goods and services, and the Fed purchases the debt back from the public in the form of Treasury bills, it is known as:
Moral suasion.
Money illusion.
Structuring the deficit.
Monetizing the debt.
Devaluing the currency.

35. The inflation tax is:
The increase in the real value of money held by the public caused by inflation.
The decrease in the real value of money held by the public caused by inflation.
The result of the indexing wages to inflation.
Cost of living adjustments, or COLAS.
The increase in income taxes caused by inflation.

36. The inflation tax is:
The increase in the real value of money held by the public caused by inflation.
The decrease in the real value of money held by the public caused by inflation.
The result of the indexing wages to inflation.
Cost of living adjustments, or COLAS.
The increase in income taxes caused by inflation.

37. Real seignorage is equal to the following equation:
Real interest rate x money supply.
Rate of growth of money supply x real money supply.
Real interest rate – inflation rate.
Rate of growth of money supply ÷ price index.
Inflation rate + real interest rate

38. Real seignorage is equal to the following equation:
Real interest rate x money supply.
Rate of growth of money supply x real money supply.
Real interest rate – inflation rate.
Rate of growth of money supply ÷ price index.
Inflation rate + real interest rate

39. If the money supply grows by 4%, and the real money supply is $100 billion, real seignorage is:
$2.5 trillion.
$40 billion.

40. If the money supply grows by 4%, and the real money supply is $100 billion, real seignorage is:
$2.5 trillion.
$40 billion.

41. The relationship between the output gap and the unemployment rate can be summarized as:
When the output gap is negative, the unemployment rate is below the natural rate.
When the output gap is zero, the unemployment rate is also zero.
When there is an inflationary gap, the unemployment rate is above the natural rate.
When the output gap is positive, the unemployment rate is below the natural rate.
When the output gap is negative, the unemployment rate is equal to the natural rate.

42. The relationship between the output gap and the unemployment rate can be summarized as:
When the output gap is negative, the unemployment rate is below the natural rate.
When the output gap is zero, the unemployment rate is also zero.
When there is an inflationary gap, the unemployment rate is above the natural rate.
When the output gap is positive, the unemployment rate is below the natural rate.
When the output gap is negative, the unemployment rate is equal to the natural rate.

43. When the actual unemployment rate is equal to the natural rate of unemployment:
The unemployment rate is zero.
Potential output exceeds actual output.
The output gap is zero.
Actual output exceeds potential output.
The output gap is positive.

44. When the actual unemployment rate is equal to the natural rate of unemployment:
The unemployment rate is zero.
Potential output exceeds actual output.
The output gap is zero.
Actual output exceeds potential output.
The output gap is positive.

45. A liquidity trap is a situation in which:
Using expansionary monetary policy is not effective, because the real interest rate is negative.
Aggregate demand falls, because consumers do not have enough liquidity to consume.
Using expansionary monetary policy is not effective because, the nominal interest rate is almost zero.
Lenders are trapped by large loans with declining rates of return.
Using expansionary fiscal policy is not effective because the budget is in a deficit.

46. A liquidity trap is a situation in which:
Using expansionary monetary policy is not effective, because the real interest rate is negative.
Aggregate demand falls, because consumers do not have enough liquidity to consume.
Using expansionary monetary policy is not effective because, the nominal interest rate is almost zero.
Lenders are trapped by large loans with declining rates of return.
Using expansionary fiscal policy is not effective because the budget is in a deficit.

47. A supply shock:
Only moves us along the short-run aggregate supply curve.
Only moves us along the short-run Phillips curve.
Shifts the short-run Phillips curve and the short-run aggregate supply curve.
Shifts the short-run aggregate supply curve, but not the short-run Phillips curve.
Shifts the short-run Phillips curve, but not the short- run aggregate supply curve.

48. A supply shock:
Only moves us along the short-run aggregate supply curve.
Only moves us along the short-run Phillips curve.
Shifts the short-run Phillips curve and the short-run aggregate supply curve.
Shifts the short-run aggregate supply curve, but not the short-run Phillips curve.
Shifts the short-run Phillips curve, but not the short- run aggregate supply curve.

49. SRPC2 is based on an expected inflation rate of:
0%.
1%.
2%.
5%.
7%.

50. SRPC2 is based on an expected inflation rate of:
0%.
1%.
2%.
5%.
7%.

51. The natural rate of unemployment is:
3%.
5%.
7%.
8%.
1%.

52. The natural rate of unemployment is:
3%.
5%.
7%.
8%.
1%.

53. The non-accelerating-inflation rate of unemployment is:
3%.
5%.
7%.
8%.
2%.

54. The non-accelerating-inflation rate of unemployment is:
3%.
5%.
7%.
8%.
2%.

55. If workers expect a lower rate of inflation, the short-run Phillips curve will:
Remain constant, but there will be a movement down the curve.
Be unaffected.
Shift up.
Shift down.
Remain constant, but there will be a movement up the curve.

56. If workers expect a lower rate of inflation, the short-run Phillips curve will:
Remain constant, but there will be a movement down the curve.
Be unaffected.
Shift up.
Shift down.
Remain constant, but there will be a movement up the curve.

57. Suppose you are told that the short-run Phillips curve has shifted upward. Which of the following must have happened?
The AD curve has shifted to the right.
The AD curve has shifted to the left.
The SRAS curve has shifted to the right.
The SRAS curve has shifted to the left.
The LRAS curve has shifted to the right.

58. Suppose you are told that the short-run Phillips curve has shifted upward. Which of the following must have happened?
The AD curve has shifted to the right.
The AD curve has shifted to the left.
The SRAS curve has shifted to the right.
The SRAS curve has shifted to the left.
The LRAS curve has shifted to the right.

59. Suppose you are told that there has been a downward movement along the fixed short-run Phillips curve. Which of the following must have happened?
The AD curve has shifted to the left.
The AD curve has shifted to the right.
The SRAS curve has shifted to the left.
The SRAS curve has shifted to the right.
The LRAS curve has shifted to the right.

60. Suppose you are told that there has been a downward movement along the fixed short-run Phillips curve. Which of the following must have happened?
The AD curve has shifted to the left.
The AD curve has shifted to the right.
The SRAS curve has shifted to the left.
The SRAS curve has shifted to the right.
The LRAS curve has shifted to the right.

61. Monetarists believe that:
Short-run problems are not likely to occur.
GDP fluctuations will be less pronounced if the Federal Reserve uses discretionary monetary policy.
Price fluctuations are likely to occur in the short or long runs.
GDP will grow steadily if the money supply grows steadily.
GDP will grow steadily if government spending grows steadily.

62. Monetarists believe that:
Short-run problems are not likely to occur.
GDP fluctuations will be less pronounced if the Federal Reserve uses discretionary monetary policy.
Price fluctuations are likely to occur in the short or long runs.
GDP will grow steadily if the money supply grows steadily.
GDP will grow steadily if government spending grows steadily.

63. Politicians have an incentive to push the unemployment rate below the natural rate of unemployment right before their re-election because:
The expansionary monetary policy is used to finance the campaigns.
The political benefits are immediate and the economic costs are delayed.
The Phillips curve is horizontal in the long run.
The opportunistic seignorage gains are very large.
The contractionary fiscal policy increases political contributions.

64. Politicians have an incentive to push the unemployment rate below the natural rate of unemployment right before their re-election because:
The expansionary monetary policy is used to finance the campaigns.
The political benefits are immediate and the economic costs are delayed.
The Phillips curve is horizontal in the long run.
The opportunistic seignorage gains are very large.
The contractionary fiscal policy increases political contributions.

65. In the classical model, it is thought that the long run:
And short-run aggregate supply curves are both upward sloping.
Aggregate supply curve is vertical and the short-run aggregate supply curve is upward sloping.
And short-run aggregate supply curves are both vertical.
Aggregate supply curve is upward sloping and the short-run aggregate supply curve is vertical.
Aggregate supply curve is upward sloping and the short-run aggregate supply curve is downward sloping.

66. In the classical model, it is thought that the long run:
And short-run aggregate supply curves are both upward sloping.
Aggregate supply curve is vertical and the short-run aggregate supply curve is upward sloping.
And short-run aggregate supply curves are both vertical.
Aggregate supply curve is upward sloping and the short-run aggregate supply curve is vertical.
Aggregate supply curve is upward sloping and the short-run aggregate supply curve is downward sloping.

67. According to the Keynesian view, if this economy shifts from AD1 to AD2, let’s say due to a large decline in investment spending by businesses, then:
The price level will increase, but real GDP will decrease.
The GDP will increase, but the price level will not change.
The price level will increase, but real GDP will not change.
Both the GDP and the price level will decrease.
The price level will decrease, but real GDP will not change.

68. According to the Keynesian view, if this economy shifts from AD1 to AD2, let’s say due to a large decline in investment spending by businesses, then:
The price level will increase, but real GDP will decrease.
The GDP will increase, but the price level will not change.
The price level will increase, but real GDP will not change.
Both the GDP and the price level will decrease.
The price level will decrease, but real GDP will not change.

69. According to the classical view, if this economy shifts from AD1 to AD2, let’s say due to a large decline in investment spending by businesses, then:
The price level will increase, but real GDP will decrease.
The GDP will increase, but the price level will not change.
The price level will increase, but real GDP will not change.
Both the GDP and the price level will decrease.
The price level will decrease, but real GDP will not change.

70. According to the classical view, if this economy shifts from AD1 to AD2, let’s say due to a large decline in investment spending by businesses, then:
The price level will increase, but real GDP will decrease.
The GDP will increase, but the price level will not change.
The price level will increase, but real GDP will not change.
Both the GDP and the price level will decrease.
The price level will decrease, but real GDP will not change.

71. If crowding out occurs:
Increases in consumption are offset by decreases in government spending.
Increases in the money supply are offset by dollar outflows in foreign trade.
Increases in government spending cause higher interest rates and decreased investment spending.
Decreases in government spending cause lower interest rates and decreased investment spending.
Increases in government spending cause higher interest rates and increased investment spending.

72. If crowding out occurs:
Increases in consumption are offset by decreases in government spending.
Increases in the money supply are offset by dollar outflows in foreign trade.
Increases in government spending cause higher interest rates and decreased investment spending.
Decreases in government spending cause lower interest rates and decreased investment spending.
Increases in government spending cause higher interest rates and increased investment spending.

73. Rational expectations suggest people and firms:
Base their expectations on the recent past.
Base their expectations on government announcements.
Base their expectations on “animal spirits.”
Take all available information into account when forming their expectations.
Can never behave rationally because they will never possess all available information.

74. Rational expectations suggest people and firms:
Base their expectations on the recent past.
Base their expectations on government announcements.
Base their expectations on “animal spirits.”
Take all available information into account when forming their expectations.
Can never behave rationally because they will never possess all available information.

75. The modern consensus about macroeconomic policy is that:
Only monetary policy works against recessions but fiscal policy is effective only in the long run.
Both expansionary monetary and fiscal policies can reduce unemployment in the long run.
Both expansionary monetary and fiscal policies are effective in the short run but not in the long run.
Discretionary monetary and fiscal policies are effective in the short run and in the long run.
Discretionary monetary and fiscal policies are effective in the long run, but not in the short run.

76. The modern consensus about macroeconomic policy is that:
Only monetary policy works against recessions but fiscal policy is effective only in the long run.
Both expansionary monetary and fiscal policies can reduce unemployment in the long run.
Both expansionary monetary and fiscal policies are effective in the short run but not in the long run.
Discretionary monetary and fiscal policies are effective in the short run and in the long run.
Discretionary monetary and fiscal policies are effective in the long run, but not in the short run.

77. The following recommendation is consistent with which view of the macroeconomy? “A decrease in taxes will alleviate a recessionary gap.”
Classical
Keynesian
Monetarist
Modern consensus
Rational expectations

78. The following recommendation is consistent with which view of the macroeconomy? “A decrease in taxes will alleviate a recessionary gap.”
Classical
Keynesian
Monetarist
Modern consensus
Rational expectations

79. The following recommendation is consistent with which view of the macroeconomy? “The government should avoid deficit spending because of the crowding-out effect on investment spending.”
Classical
Keynesian
Monetarist
Modern consensus
Rational expectations

80. The following recommendation is consistent with which view of the macroeconomy? “The government should avoid deficit spending because of the crowding-out effect on investment spending.”
Classical
Keynesian
Monetarist
Modern consensus
Rational expectations

81. The following recommendation is consistent with which view of the macroeconomy? “Use monetary policy to stabilize the economy and use fiscal policy only when monetary policy is ineffective.”
Classical
Keynesian
Monetarist
Modern consensus
Rational expectations

82. The following recommendation is consistent with which view of the macroeconomy? “Use monetary policy to stabilize the economy and use fiscal policy only when monetary policy is ineffective.”
Classical
Keynesian
Monetarist
Modern consensus
Rational expectations

83. Most economists believe that discretionary fiscal policy should be used sparingly because of the risk of:
Budget deficits.
Political business cycles.
Budget surpluses.
Sacrificing equity in order to achieve efficiency.
Lower interest rates.

84. Most economists believe that discretionary fiscal policy should be used sparingly because of the risk of:
Budget deficits.
Political business cycles.
Budget surpluses.
Sacrificing equity in order to achieve efficiency.
Lower interest rates.