microeconomics

Topics: Monetary policy, Supply and demand, Aggregate demand Pages: 14 (3367 words) Published: September 20, 2014
Practice Test # 3

Useful formulas/expressions:
(1) MPC = ∆ C / ∆ DI or ∆ C / ∆ YD & MPC + MPS = 1 (2) Exp. Multiplier = 1/(1-MPC) ∆GDP = Exp Mult. * ∆AE (3) Δ AE = Δ Income * MPC
(4) DD Multiplier = 1/rrr ∆DD = DD Mult. * ∆Reserves

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____1.Long-run full-employment equilibrium assumes:
a.
a downward-sloping production function.
b.
a downward-sloping long-run supply curve (LRAS).
c.
the CPI index price level equals the equilibrium wage rate.
d.
the CPI equals aggregate demand (AD) equals short-run aggregate supply (SRAS) equals long-run aggregate supply (LRAS).

____2.Which of the following would cause a decrease in the short-run aggregate supply curve (SRAS)? a.
An increase in oil prices.
b.
An advance in technology.
c.
An increase in the CPI.
d.
An increase in the long-run aggregate supply curve (LRAS).

Exhibit 10A-1 Aggregate demand and supply model

____3.Beginning in Exhibit 10A-1 from long-run equilibrium at point E1, the aggregate demand curve shifts to AD2 . The economy's path to a new long-run equilibrium is represented by a movement from: a.

E3 to E1 to E2.
b.
E1 to E3 to E2.
c.
E2 to E1 to E2.
d.
E1 to E2 to E3.

____4.Aggregate demand's downward-sloping character reflects three principal influences as shown in which of the following? a.
People's desire to maintain real wealth holdings, the interest rate, and international trade. b.
People's desire to increase the price level, the interest rate, and the economic growth effect. c.
The interest rate, the economic growth effect, and international trade. d.
Cost-pull inflation, demand-pull inflation, and the need to maintain real wealth holdings. e.
Recession phases of the business cycle, upturns, and downturns.

____5.The interest-rate effect is the impact on real GDP caused by the ____ relationship between the price level and the interest rate. a.
direct
b.
independent
c.
linear
d.
inverse

____6.Which of the following will not shift the aggregate demand curve to the right? a.
Consumers becoming more optimistic about the future.
b.
An increase in government spending.
c.
Business optimism increases.
d.
Consumers become pessimistic about the future.

____7.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.

Exhibit 10-8 Aggregate demand and supply

____8.In Exhibit 10-8, if aggregate demand shifts from AD3 to AD2, real GDP will: a.
fall from $7.0 to $4.0, and the price level will not change. b.
not change, and the price level will fall from 120 to 100.
c.
fall from $7.0 to $3.0, and the price level will fall from 120 to 100. d.
fall from $8.0 to $4.0, and the price level will fall from 120 to 100. e.
fall from $7.0 to $4.0, and the price level will fall from 120 to 100.

Exhibit 11-1 income and consumption data

Income (Y)
Change in Income
Consumption
(C)
0

500
1,000
1,000
1,400
2,000
1,000
2,200
3,000
1,000
2,900
4,000
1,000
3,500
5,000
1,000
4,000

____9.In Exhibit 11-1, when income (Y) is increased from $0 to $1,000 to $2,000, the marginal propensity to consume: a.
is 1.
b.
decreases from 0.9 to 0.8.
c.
decreases from 0.8 to 0.7.
d.
increases from 0.8 to 0.9.
e.
is negative.

____10.Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC) is 0.50, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of $1,000...
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