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C. a long-run equilibrium.
D. a short-run equilibrium but not a long-run equilibrium.
147. Refer to the graph shown. In the graph, if the price level is P1 and the aggregate demand
curve is AD0 then the economy is:
A. in a recessionary gap.
B. in an inflationary gap.
C. in a long-run equilibrium.
D. fully employed.
148. Refer to the graph shown. If the price level is P1 the:
A. short-run aggregate supply curve will shift up (to the left) in the long run to restore
equilibrium.
B. short-run aggregate supply curve will shift down (to the right) in the long run to restore
equilibrium.
C. aggregate demand curve will shift to the left in the long run to restore equilibrium.
D. aggregate demand curve will shift to the right in the long run to restore equilibrium.
149. Refer to the graph shown. If the price level is P0 the:
A. short-run aggregate supply curve will shift up (to the left) in the long run to restore
equilibrium.
B. short-run aggregate supply curve will shift down (to the right) in the long run to restore
equilibrium.
C. aggregate demand curve will shift up in the long run to restore equilibrium.
D. aggregate demand curve will shift down in the long run to restore equilibrium.
150. Refer to the graph shown. If the price level is P1, then:
A. input prices will fall and output will rise in the long run.
B. both input prices and output will fall in the long run.
C. input prices will rise and output will fall in the long run.
D. both input prices and output will rise in the long run.
151. Refer to the graph shown. If the price level is P0, then:
A. input prices will fall and output will rise in the long run.
B. both input prices and output will fall in the long run.
C. input prices will rise and output will fall in the long run.
D. both input prices and output will rise in the long run.
152. A fiscal policy that increases government spending or cuts taxes is most appropriate when
the economy is in:
A. a recessionary gap.
B. an inflationary gap.
C. a short-run equilibrium.
D. a long-run equilibrium
153. Refer to the graph shown. If the economy is at point D, which of the following policies is
most appropriate to bring the economy to potential?
A. Cut in government spending
B. Cut in taxes
C. Increase in taxes
D. No change in taxes or government spending
154. Refer to the graph shown. An expansionary fiscal policy would be most appropriate when
the economy is at point:
A. E.
B. B.
C. C.
D. D.
155. Refer to the graph shown. A policy that cuts government spending would be most
appropriate when the economy is at point:
A. A.
B. B.
C. C.
D. D.
156. Refer to the graph shown. No changes in fiscal policy are advisable when the economy is
at point:
A. A.
B. B.
C. C.
D. D.
157. Suppose the target rate of unemployment is 5 percent but the actual rate of unemployment
is 4 percent. Given this information, which of the following policies is most appropriate
according to the AS/AD model?
A. A tax cut
B. An increase in government spending
C. A tax increase
D. No change in taxes or government spending
158. Suppose that consumer spending is expected to decrease in the near future. If output is at
potential output, which of the following policies is most appropriate according to the AS/AD
model?
A. An increase in government spending
B. Aan increase in taxes
C. A reduction in government spending
D. No change in taxes or government spending
159. Under what circumstances is it most clear that the government should pursue neither fiscal
nor monetary policy?
A. There is no inflation and the unemployment rate equals the target rate of unemployment
B. Unemployment rate exceeds the target rate of unemployment
C. The economy is experiencing deflation
D. The economy is below potential output
160. Suppose output exceeds potential output and contractionary fiscal policy is enacted.
According to the AS/AD model, in the long run, this fiscal policy will produce:
A. a lower output level and a lower price level than would have occurred if no action were
taken.
B. a lower price level than would otherwise have occurred if no action were taken.
C. a lower output level than would otherwise have occurred if no action were taken.
D. neither a lower price level nor a lower output level than would otherwise have occurred if no
action were taken.
161. Refer to the following graph.
The massive increase in defense spending is best represented by the:
A. AD curve shifting from AD0 to AD1.
B. AD curve shifting from AD1 to AD0.
C. SAS curve shifting from SAS0 to SAS1.
D. SAS curve shifting from SAS1 to SAS0.
162. The presence of wage and price controls in the United States during WWII:
A. had little impact on inflation because of the Depression.
B. helped to reduce the inflationary pressures created by expansionary fiscal policy.
C. helped to reduce the inflationary pressures created by contractionary fiscal policy.
D. was not successful in reducing inflation during this period.
163. World War II created a:
A. budget deficit.
B. budget surplus.
C. smaller budget deficit.
D. smaller budget surplus.
164. During WWII, the U.S. government increased spending:
A. by more than it raised taxes.
B. by the same amount as it raised taxes.
C. by less than it raised taxes.
D. but did not increase taxes.
165. In which of the following situations is a budget surplus most likely to occur?
A. When fiscal policy is expansionary
B. When the economy is contracting
C. When fiscal policy is expansionary and the economy is contracting
D. When fiscal policy is contractionary and the economy is expanding
166. During the early years of the Reagan administration, some of the presidential advisors
argued that tax cuts could reduce inflation because they would give people an incentive to
produce more. Critics of this argument believed that tax cuts would increase inflation, not reduce
it. The critics were arguing that tax cuts move the:
A. aggregate demand curve to the right with little change in long-run aggregate supply.
B. aggregate demand curve to the left with little change in long-run aggregate supply.
C. long-run aggregate supply curve to the right with little change in aggregate demand.
D. long-run aggregate supply curve to the left with little change in aggregate demand.
167. Some economists believe that the good times of the early 2000s were not sustainable due to:
A. higher inflation rates.
B. higher rates of crime.
C. higher deflation rates.
D. an unsustainable financial bubble.
168. Expansionary policy that followed the 2008 recession:
A. led to higher inflation rates than expected.
B. did not reduce unemployment as much as desired.
C. did not reduce the trade deficit as much as desired.
D. led to higher growth rates than expected.
169. Housing prices in the United States fell sharply in 2007 and 2008, contributing to a severe
recession as the AD curve shifted leftward. The ordinary AS/AD model would predict that
falling short-run aggregate supply would bring deflation and move the economy back to potential
output. Which of the following describes the impact of dynamic feedback effects on this return to
potential output?
A. Falling house prices could cause people to buy more houses than they really need, creating a
further crisis as another wave of foreclosures and bankruptcies occurs.
B. As the SAS curve shifts downward, firms respond by increasing their investment in capital
equipment, but rehire few of the laid-off workers, so that employment does not return to normal.
C. Expectations that prices might fall further could cause people to reduce spending, shifting the
AD curve further to the left.
D. The deflation will be counteracted by increases in the money supply from the Federal
Reserve, preventing the price adjustment and keeping the economy below potential output.
170. Refer to the following diagram.
A decline in U.S. housing prices, as in 2007, pushed the AD curve from AD1 to AD2. Dynamic
feedback effects that would destabilize the economy could shift:
A. SAS1 to SAS2.
B. SAS2 to SAS3.
C. AD2 to AD1.
D. AD2 to AD3.
171. One reason the decline in asset prices just before and during the 2008 recession
undermined the health of the economy is that they:
A. raised the value of the dollar making U.S. goods more expensive to foreigners.
B. raised the trade deficit when foreigners reduce purchases of U.S. assets.
C. led to a contraction in consumer loans because the value of collateral declined.
D. undermined consumer and business confidence.
172. Which of the following do economists generally agree is an unacceptable method of
bringing aggregate demand and supply into equilibrium?
A. Increases in the government deficit.
B. Inflation.
C. Increases in the supply of money.
D. Deflation.
173. Fiscal policy is:
A. easy to enact and quick to affect the economy.
B. easy to enact but slow to affect the economy .
C. difficult to enact but quick to affect the economy.
D. difficult to enact and slow to affect the economy.
174. Economists estimate the target rate of unemployment in order to determine:
A. the unemployment rate.
B. the inflation rate.
C. the level of output.
D. potential output.
175. The target rate of unemployment is:
A. difficult to determine.
B. always equal to the actual unemployment rate.
C. changing but easy to estimate.
D. constant.
176. A fiscal policy in which the government attempts to offset any change in aggregate
expenditures that would create a business cycle is called a:
A. supply-side policy.
B. regulatory policy.
C. countercyclical fiscal policy.
D. laissez-faire policy.
177. An expansionary fiscal policy would be countercyclical if it was enacted after:
A. equilibrium income rose above potential income.
B. equilibrium income fell below potential income.
C. inflation rose.
D. unemployment fell.
178. An example of countercyclical fiscal policy is:
A. raising government spending when the economy is above potential.
B. raising government spending when the economy is at potential.
C. reducing government spending when the economy is above potential.
D. reducing government spending when the economy is below potential.
179. Governments are said to fine-tune the economy when they attempt to use fiscal policy to:
A. offset fluctuations in aggregate supply.
B. offset only large fluctuations in aggregate demand.
C. keep the economy always at its target or potential level of income.
D. eliminate unemployment.
180. Most economists agree that fiscal policy:
A. can be used to eliminate most if not all economic fluctuations.
B. can be used to fine tune the economy.
C. cannot be used to fine tune the economy.
D. should not be used to eliminate economic fluctuations, no matter how large or small.
