International Economics, 7e (Gerber)
Chapter 11 An Introduction to Open Economy Macroeconomics
11.1 Introduction: The Macroeconomy in a Global Setting
1) There are no questions for this section.
Topic: Introduction: The Macroeconomy in a Global Setting
11.2 Aggregate Demand and Aggregate Supply
1) Which of the following is true?
A) Points along the aggregate supply curve show the equilibrium levels of output and prices that
are consistent on the demand side of the economy.
B) Points along the aggregate demand curve show the equilibrium levels of output and prices
that are consistent on the supply side of the economy.
C) Aggregate demand shows the levels of GDP and prices where expenditure decisions and
production decisions match.
D) Aggregate supply shows the levels of GDP and prices where expenditure decisions and
production decisions match.
2) Along the aggregate supply curve
A) the horizontal part represents a situation where the economy is operating above full
employment levels.
B) inflation would be a primary concern along the horizontal part of the aggregate supply curve.
C) the horizontal section of the aggregate supply curve represents the limit of production.
D) the middle, upward-sloping part of the aggregate supply curve would be associated with a
growing economy that experienced increased prices from resources that are becoming relatively
scarce.
3) Changes in aggregate demand
A) could be caused by changes in the spending decisions of foreigners.
B) are unlikely to change quickly in response to economic events.
C) are primarily based on changes in firms’ abilities to produce products.
D) are not affected by changes in government policies.
4) Intermediate inputs are
A) goods used for household consumption only.
B) goods used for government consumption only.
C) goods purchased by one business from another to use in production.
D) raw materials used in the production process.
5) If consumption spending increases because people feel more confident about the future,
A) aggregate demand will shift to the left.
B) aggregate demand will shift to the right.
C) aggregate supply will shift to the left.
D) aggregate supply will shift to the right.
6) Suppose the Asian financial crisis decreased U.S. exports. In the aggregate demand/aggregate
supply model, this would be represented as
A) a shift to the right of aggregate supply, which would result in more production for the U.S.
economy.
B) a shift to the left of aggregate supply, which would result in less production for the U.S.
economy.
C) a shift to the right of aggregate demand, leading to more spending and production in the U.S.
economy.
D) a shift to the left of aggregate demand, leading to less spending and production in the U.S.
economy.
7) Economic growth would be illustrated by
A) a rightward shift of aggregate demand.
B) a leftward shift of aggregate demand.
C) a rightward shift of aggregate supply.
D) a leftward shift of aggregate supply.
8) When aggregate demand increases,
A) the price level is likely to rise as GDP rises.
B) the price level is likely to fall as GDP rises.
C) aggregate supply will shift to the right.
D) aggregate supply will shift to the left.
9) If a component of aggregate demand increases,
A) GDP in the United States is likely to increase less than that component of spending increased.
B) GDP in the United States is likely to increase more than that component of spending
increased.
C) GDP in the United States is likely to decrease.
D) GDP in the United States will not change.
10) When spending and incomes in an economy increase,
A) imports are likely to increase.
B) imports are likely to be unchanged.
C) imports are likely to decrease.
D) exports are likely to decrease.
11) Government spending and taxes
A) do not change aggregate demand.
B) are an important component of aggregate supply.
C) do not play a big role in determining GDP.
D) are a major determinant of aggregate demand.
12) Which of the following is NOT one of the factors that could affect the size of the multiplier?
A) What sector of the economy receives the initial increase in spending
B) How the spending is financed
C) Whether the economy is in recession or at full employment
D) Whether the economy is in autarky equilibrium
13) Which of the following would cause an increase in aggregate supply?
A) An increase in factors of production
B) An increase in foreign demand for goods
C) A decrease in productivity
D) An increase in government spending
14) When aggregate demand meets aggregate supply in the horizontal portion of the aggregate
supply curve,
A) a decrease in demand will cause prices to rise but no change in output.
B) a decrease in demand will cause output to rise but no change in prices.
C) a decrease in demand will cause prices to fall but no change in output.
D) a decrease in demand will cause output to fall but no change in prices.
15) When aggregate demand meets aggregate supply in the vertical portion of the aggregate
supply curve,
A) an increase in demand will cause prices to rise but no change in output.
B) an increase in demand will cause output to rise but no change in prices.
C) an increase in demand will cause prices to fall but no change in output.
D) an increase in demand will cause output to fall but no change in prices.
16) For any given increase in spending that is not directly caused by an increase in income, the
impact on equilibrium GDP is greater than the initial spending increase.
17) Taxes, savings, and imports tend to magnify the effect of any spending change in the
economy; that is, if investment spending initially increases, then spending will grow even more
as taxes, savings, and imports increase, so the economic growth will accelerate.
18) When the economy is using all of its factors of production, the aggregate supply curve is
vertical.
19) What typically happens to imports as income and spending rise?
20) Assume that aggregate supply meets aggregate demand in the upward sloping portion of the
AS curve. For each of the following, graph the change in aggregate supply and/or aggregate
demand, and state the effect on prices and output.
1. The demand for U.S. exports increases.
2. Taxes increase.
3. Businesses become less optimistic about the future.
4. The labor force increases.
5. Costs of production increase.
11.3 Fiscal and Monetary Policies
1) Fiscal policy is
A) the selling of government bonds by the Treasury.
B) the deliberate manipulation of the money supply designed to affect the interest rate.
C) the deliberate manipulation of taxation and spending designed to affect the economy.
D) the selling of foreign exchange reserves designed to change the exchange rate.
2) Which of the following may NOT serve as a possible chain reaction for either fiscal or
monetary policy?
A) G↑
⇒
Y↑
⇒
C↑
⇒
Y↑
⇒
C↑....
B) T↓
⇒
Y↑
⇒
C↑
⇒
Y↑
⇒
C↑….
C) M↑
⇒
i↓
⇒
I↓
⇒
Y↓
⇒
C↓….
D) M↑
⇒
i↓
⇒
I↑
⇒
Y↑
⇒
C↑….
3) Starting from a balanced budget, which of the following would NOT cause a government
budget deficit?
A) A decrease in taxes
B) An increase in spending of goods and services
C) An increase in transfer payments
D) A 50 percent increase in spending accompanied by a 50 percent increase in taxes
4) Which of the following is NOT a reason why the effects of tax cuts on government spending
dissipate and each additional change in consumption and income becomes smaller and smaller?
A) Some of the increase in income will be lost through taxation.
B) Some of the increase is saved and does not result in an increase in consumer demand.
C) Some of the increase in consumption will be an additional demand for imported goods.
D) Some of the increase is used for business investment.
5) All of the following make the use of fiscal policy less attractive EXCEPT
A) that it cannot be effective unless it is accommodated with expansionary monetary policy.
B) the substantial margin of error in the value of the multiplier.
C) the legislative lag, which is the time it takes for Congress and the President to pass and
implement the measure.
D) the crowding out effect, which is the decrease in private spending that occurs due to increased
government spending.
6) All of the following took place during the Great Depression EXCEPT
A) an increase in unemployment from about 3.4 percent to about 25 percent and a decrease in
real GDP by about 30 percent between 1929 in 1933.
B) an increase in taxes because of the fear that budget deficits would undermine business
confidence.
C) a fall in the money supply by more than 30 percent.
D) a rise in inflation during the early 1930s.
7) An example of expansionary fiscal policy would be
A) a decrease in government spending to reduce budget deficits.
B) an increase in tax collection to reduce budget deficits.
C) a decrease in interest rates to help stimulate the economy.
D) an increase in government spending on infrastructure to create jobs and improve the
economy.
8) Which of the following is an example of expansionary monetary policy?
A) Open market purchases of bonds
B) A decrease in government spending
C) A decrease in taxes
D) An increase in interest rates
9) Which of the following correctly explains how expansionary monetary policy works?
A) G↑
⇒
C↑
⇒
Y↑
B) T↑
⇒
C↑
⇒
Y↑
C) M↑
⇒
i↓
⇒
I↑
⇒
Y↑
D) M↑
⇒
i↓
⇒
I↓
⇒
Y↑
10) Which of the following correctly explains how expansionary fiscal policy works?
A) G↑
⇒
C↑
⇒
Y↑
B) T↑
⇒
C↑
⇒
Y↑
C) M↑
⇒
i↓
⇒
I↑
⇒
Y↑
D) M↑
⇒
i↓
⇒
I↓
⇒
Y↑
11) Which of the following is an advantage of monetary policy?
A) It is faster to implement than fiscal policy.
B) It acts more directly upon aggregate demand than fiscal policy.
C) It is not subject to multiplier effects.
D) It is unlikely to create inflation.
12) If aggregate supply meets aggregate demand in the vertical part of the AS curve, which of
the following is a true statement about expansionary policies?
A) Monetary policy will be more effective in increasing output.
B) Fiscal policy will be more effective in increasing output.
C) Fiscal and monetary policy will be equally effective in increasing output.
D) Both monetary and fiscal policies will only cause prices to increase.
13) The recent trend internationally has been for the executive and legislative branches of elected
governments to get more control over monetary policy, as has been the case in countries such as
the United States.
14) Contractionary fiscal policy attempts to shift aggregate demand to the right.
15) When a central bank sells bonds, cash reserves throughout the financial system increase,
interest rates fall, and investment spending increases.
16) Expansionary monetary policy involves an increase in the money supply and a fall in interest
rates, leading to a positive expansion in income.
17) Fiscal policy can be implemented more quickly than monetary policy.
18) The gold standard was helpful in stabilizing economies during the Great Depression.
19) Describe some of the potential problems with using expansionary fiscal policy.