True / False
1. Free markets coordinate economic activity in such a way as to eliminate the possibility of inflation or unemployment.
a.
True
b.
False
False
Moderate
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Issue: Why Does the Market Permit Unemployment?
2. The counterpart to the unsold output of firms is the lack of jobs for workers willing to work.
a.
True
b.
False
True
Moderate
DISC: Labor markets
United States – BPROG: Analytic
Labor markets
Issue: Why Does the Market Permit Unemployment?
3. Investment spending is a leakage from the circular flow model.
a.
True
b.
False
False
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
4. When demand for goods and services is high, firms are more likely to hire more workers.
a.
True
b.
False
True
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
5. If the economy is suffering a recession, inventories are probably falling.
a.
True
b.
False
False
Moderate
6. When spending falls short of output, additional inventories are created.
a.
True
b.
False
True
Moderate
7. Equilibrium GDP occurs when total spending equals total output.
a.
True
b.
False
True
Easy
Equilibrium
8. Producers will change their prices when GDP is at the equilibrium level.
a.
True
b.
False
False
Moderate
Equilibrium
9. The expenditure schedule includes the consumption function.
a.
True
b.
False
True
Easy
10. When income rises, total expenditures remain constant.
a.
True
b.
False
False
Moderate
11. When GDP decreases, consumption spending increases.
a.
True
b.
False
False
Moderate
12. An expenditure schedule shows the relationship between GDP and total output.
a.
True
b.
False
False
Easy
13. If investment spending depends on GDP, this is called induced investment.
a.
True
b.
False
True
Easy
14. Leakages from the circular flow include saving and imports.
a.
True
b.
False
True
Easy
15. Leakages are offset by investment and government spending in the circular flow model.
a.
True
b.
False
True
Easy
16. Injections include saving and taxes.
a.
True
b.
False
False
Easy
17. In a simplified circular flow model with no government, in equilibrium, S = I + (X − IM).
a.
True
b.
False
True
Difficult
Equilibrium
18. Equilibrium is the point where total spending equals total output, or GDP.
a.
True
b.
False
True
Easy
Equilibrium
19. When GDP is less than total spending, GDP will fall.
a.
True
b.
False
True
Moderate
Equilibrium
20. If total spending is greater than current output, GDP will rise.
a.
True
b.
False
True
Moderate
Equilibrium
21. Total expenditures can be written as C + I + G + (X − IM).
a.
True
b.
False
True
Easy
Equilibrium
22. An increase in the U.S. price level (foreign prices held constant) will cause a leftward shift in the aggregate demand
curve.
a.
True
b.
False
False
Moderate
23. A given income-expenditure diagram always assumes a variable price level.
a.
True
b.
False
Easy
24. An economic recession in Japan will cause the aggregate demand curve in the United States to shift to the right.
a.
True
b.
False
False
Moderate
25. The aggregate demand curve has an upward slope due to the positive relationship between the price level and
aggregate quantity demanded.
a.
True
b.
False
False
Moderate
26. A change in the price level will cause a shift in the expenditure schedule.
a.
True
b.
False
True
Moderate
27. A decrease in the price level causes a lower equilibrium quantity demanded.
a.
True
b.
False
False
Easy
28. A recessionary gap exists when the equilibrium level of GDP exceeds potential GDP.
a.
True
b.
False
False
Easy
29. When equilibrium GDP falls below potential GDP, an inflationary gap exists.
a.
True
b.
False
False
Easy
30. If firms are experiencing falling inventories, one can expect that firms will cut production.
a.
True
b.
False
False
Moderate
31. The U.S. economy in 2009 was characterized by an excess level of output. This corresponds to a recessionary gap.
a.
True
b.
False
True
Moderate
32. The equilibrium level of GDP is always accompanied by full employment and stable prices.
a.
True
b.
False
False
Easy
33. Inventory reductions caused by strong demand are signals to retailers to order more products.
a.
True
b.
False
True
Moderate
34. If inventories are being depleted, firms may respond by cutting prices.
a.
True
b.
False
False
Moderate
35. The full employment level of GDP is sometimes referred to as “potential GDP.”
a.
True
b.
False
True
Easy
economics
36. In a capitalist market economy, recessions and inflation can occur because of coordination failures.
a.
True
b.
False
True
Moderate
37. In a capitalist market economy, the decision to save is made by the same people who make the major investment
decisions.
a.
True
b.
False
False
Moderate
38. High unemployment and high rates of inflation are examples of coordination successes.
a.
True
b.
False
False
Easy
39. Market economies are likely to suffer from recessions and inflation because the government plans all economic
activity.
a.
True
b.
False
False
Moderate
40. The multiplier can be expressed as the ratio of the change in Y over the change in I.
a.
True
b.
False
True
Easy
41. Workers in a nearby pizza restaurant may indirectly enjoy income increases from a nearby construction process.
a.
True
b.
False
True
Moderate
42. If the unemployed were hired, they would have the monies to purchase goods which would otherwise be unsold.
a.
True
b.
False
True
Easy
43. If savings exceeds investment at full employment, demand will fall short of total output.
a.
True
b.
False
True
Moderate
44. In the simplified circular flow diagram, leakage can occur when consumers save some income.
a.
True
b.
False
True
Moderate
Equilibrium
45. One of the primary functions of markets could be labeled
a.
stimulation.
b.
coordination.
c.
planification.
d.
decentralization.
Easy
Issue: Why Does the Market Permit Unemployment?
46. In a market economy, the decisions about what to produce and how much of each good or service to produce are made
by
a.
government officials.
b.
economic planners.
c.
central bankers.
d.
consumers and producers.
Easy
DISC: Markets, market failure, a – DISC: Markets, market failure, and externalities
United States – BPROG: Analytic
Markets, market failure, and ext – Markets, market failure, and externalities
Issue: Why Does the Market Permit Unemployment?
47. When constructing a basic macroeconomic model, several assumptions (not realistic, but necessary to simplify the
analysis) are made. Which of the following are assumed to be constant?
a.
the price level
b.
the rate of interest
c.
the foreign exchange rate
d.
the level of government spending
e.
All of the above are held constant.
e
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: Why Does the Market Permit Unemployment?
48. In a simple macroeconomic model, only one component of expenditures is allowed to change:
a.
investment.
b.
consumption.
c.
net exports.
d.
government spending.
e.
transfer payments.
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: Why Does the Market Permit Unemployment?
49. Economists are very good at explaining how individual markets work. Economists are less successful at explaining
a.
market pricing.
b.
recessions and inflation.
c.
central planning.
d.
business firm profits.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: Why Does the Market Permit Unemployment?
50. The main examples of macroeconomic coordination failures are
a.
profit declines.
b.
relative price changes.
c.
recessions and depressions.
d.
consumer taste changes.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: Why Does the Market Permit Unemployment?
51. Recessions and depressions are the principal examples of
a.
market failure.
b.
coordination failure.
c.
central planning.
d.
socialist contradictions.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Issue: Why Does the Market Permit Unemployment?
52. Economists before Keynes assumed that equilibrium GDP occurred
a.
automatically.
b.
only with the help of government stabilization.
c.
if spending was generally greater than output.
d.
only in socialist economies with central planning.
a
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
53. Which of the following questions are not answered by the process of demand side GDP determination?
a.
How large is equilibrium GDP?
b.
Does the economy have unemployment?
c.
Is demand side equilibrium consistent with supply side equilibrium?
d.
Does the economy have inflation?
e.
All of the above are not answered.
e
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
The Meaning of Equilibrium GDP
54. John Maynard Keynes concluded that investment spending is determined by
a.
business confidence.
b.
economic expectations.
c.
psychological perceptions about the economy.
d.
All of the above are correct.
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
55. By definition, total production must always equal total
a.
sales.
b.
demand.
c.
purchases.
d.
income.
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
56. At the equilibrium level of income it must be true that total
a.
income equals total spending.
b.
product equals total output.
c.
output equals total inventory.
d.
income equals total saving.
a
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
57. Total output equals total income
a.
only at equilibrium.
b.
always.
c.
only at non-equilibrium levels of income.
d.
never.
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
58. If total spending exceeds total output, then
a.
inventory levels will rise.
b.
inventory levels will remain constant.
c.
inventory levels will fall.
d.
output will eventually decrease.
c
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
59. If inventory levels are decreasing, then we should expect business firms to
a.
decrease prices.
b.
decrease output.
c.
lay off workers.
d.
increase output.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
60. When businesses are cutting back production, then it probably true that
a.
total spending is greater than total output.
b.
total output is greater than total income.
c.
total spending is less than total output.
d.
inventory levels are decreasing.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
61. If retail managers are ordering extra merchandise from their wholesale distributors, then it is probably true that
a.
total output is greater than total spending.
b.
price levels are decreasing.
c.
inventory levels are increasing.
d.
inventory levels are decreasing.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
62. If total spending is less than total output, then price levels will
a.
rise and output will increase.
b.
rise and output will decrease.
c.
fall and output will increase.
d.
fall and output will decrease.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
63. An expenditure schedule model with no government sector shows the relationship between
a.
C and national product.
b.
C and disposable income.
c.
C + I and national income.
d.
GDP and disposable income.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
64. Equilibrium GDP on the demand side occurs when total spending
a.
equals total production, and inventories are zero.
b.
equals total production, and firms are unable to adjust inventories.
c.
exceeds total production, and inventories are rising.
d.
equals total production, and inventories remain at desired levels.
e.
is less than total production, and inventories are falling.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Meaning of Equilibrium GDP
65. An increase in the U.S. price level will
a.
increase the slope of the expenditure schedule.
b.
decrease the slope of the expenditure schedule.
c.
shift the expenditure schedule upward.
d.
shift the expenditure schedule downward.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Mechanics of Income Determination
66. If the U.S. economy is experiencing falling price levels, the
a.
expenditure schedule will shift downward.
b.
expenditure schedule will shift upward.
c.
slope of the expenditure schedule increases.
d.
slope of the expenditure schedule decreases.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
67. Which of the following shows the relationship between national income (GDP) and total spending?
a.
Demand schedule
b.
Consumption curve
c.
Expenditure schedule
d.
Balance schedule
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Mechanics of Income Determination
68. If net exports decrease, the expenditure schedule will
a.
get steeper.
b.
get flatter.
c.
shift upward.
d.
shift downward.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Mechanics of Income Determination
69. If net exports are reduced, the expenditure schedule will shift
a.
downward and equilibrium real GDP will rise.
b.
upward and equilibrium real GDP will rise.
c.
downward and equilibrium real GDP will fall.
d.
upward and equilibrium real GDP will fall.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Mechanics of Income Determination
70. The expenditure schedule will shift upward when
a.
net exports decrease.
b.
net exports increase.
c.
total imports increase.
d.
total exports decrease.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
The Mechanics of Income Determination
71. Investment spending might be larger when GDP is higher. Such added investment as GDP rises is called
a.
mutual investment.
b.
induced investment.
c.
positive investment.
d.
net investment.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply