Economics 630 Third Exam Morris 4/ 2001 Instructions: Mark your answers on the attached answer sheet. Hand in both the answer sheet and this test. Put your name on both. 1. The inflation problems of the 1970’s were caused mostly by a. positive supply shocks b. negative supply shocks c. negative demand shocks d. positive demand shocks 2. The kind of condition described in the previous question has often been called a. stagflation b. demand pull c. cost pull d. demand push 3. Which of the following could cause autonomous spending, and therefore aggregate demand, to increase a. an increase in wealth b. an increase in interest rates c. a fall in stock prices d. a contractionary fiscal policy e. a contractionary monetary policy 4. The price level increases as we move up the aggregate supply curve because a. costs of production decrease b. costs of production increase c. imports of consumer products increase d. prices increase e. prices decrease 5. Which of the following would cause aggregate demand to increase (the AD curve to shift to the right)? a. a decrease in the price level b. an increase in the price level c. an increase in taxes d. an increase in government spending e. an increase in interest rates 6. If at some price level aggregate demand exceeds aggregate supply, we would expect a. prices to rise and output to rise as we move toward equilibrium b. prices to fall and output to rise as we move toward equilibrium c. prices to rise and output to fall as we move toward equilibrium d. prices to fall and output to fall as we move toward equilibrium 7. Starting at equilibrium at full employment, an increase in taxes would likely cause a. an increase in output b. an increase in the price level c. a decrease in inventories d. a decrease in output e. an increase in consumption 8. If the Fed imposes a contractionary monetary policy, which of the following is most likely to happen as a result? a. the equilibrium level of GDP will increase b. the natural rate of unemployment will decrease c. the money supply would increase d. interest rates will increase e. interest rates will decrease 9. A severe negative supply shock would tend to cause a ___ price level and a ___ real output. a. higher, higher b. higher, lower c. lower, higher d. lower, lower 10. Which of the following is not a good example of a demand shock? a. a tax increase b. a tax decrease c. a fall in interest rates d. a reduction in government spending e. an increase in the price of natural gas 11. The Fed can fight unemployment by a. An expansionary monetary policy b. attacking the fundamental causes of demand-pull inflation c. raising the interest rate d. raising aggregate supply through cost increases e. selling bonds on the open market 12. Some would like to see an increase in the minimum wage to $7.00. If congress voted to increase the minimum wage to this level, which of the following is most likely to occur? a. a decrease in costs and an upward shift of the AD curve b. a decrease in costs and a downward movement along the AD curve c. a decrease in costs and a downward shift of the AS curve d. an increase in costs and an upward shift of the AS curve e. an increase in costs and a downward movement along the AS curve 13. In the previous question, what would be the outcome for the economy predicted by the AD/AS model? a. more inflation and more unemployment b. more inflation and less unemployment c. a lower rate of inflation and more unemployment d. a lower rate of inflation and less unemployment 14. When you hear on the radio that Alan Greenspan wants to lower interest rates, we know that he will do this by a. increasing the money supply b. reducing aggregate demand c. reducing unemployment d. increasing the price level e. increasing aggregate supply 15. Since World War II, the U.S. economy has been characterized by consistent a. very high rates of inflation b. decreases in the price level c. ongoing inflation d. zero inflation e. falling rates of inflation 16. The Fed responds to changes in the business cycle by manipulating a. the money supply b. the demand for money c. tax rates d. government spending e. the costs of production 17. The only way for ongoing inflation to occur over a long period of time is for those in control of the economy to consistently impose a. an expansionary fiscal policy b. a contractionary monetary policy c. an expansionary monetary policy d. a contractionary fiscal policy e. an contractionary monetary policy combined with an expansionary fiscal policy 18. The way the Fed overcame the inflationary economy of the 1970’s was to a. impose a recession on the economy b. learn to work more closely with fiscal policy c. maintain a more constant rate of inflation d. lower interest rates e. raise taxes and restrain government spending 19. In the above question, the consequence of the Fed’s action was to a. shift the long run Philips curve to the right b. shift the long run Phillips curve to the left c. shift the short run Phillips curve upward d. shift the short run Phillips curve downward 20. If there is a sudden demand shock (e.g., a war), what would an activist Fed do if it wanted to prevent the price level from rising? a. increase the money supply, thereby raising interest rates b. increase the money supply, thereby lowering interest rates c. decrease the money supply, thereby raising interest rates d. decrease the money supply, thereby lowering interest rates 21. The long-run Philips curve shows that a. there is a trade-off between inflation and unemployment in the long run b. there is a trade-off between inflation and unemployment in the short run c. there is a trade-off between the interest rate and unemployment in the long run d. that the natural rate of unemployment is an absurd idea e. there is no trade-off between inflation and unemployment in the long run 22. The concept of a long run Philips curve tends to show the validity of a. fiscal policy b. active monetary policy c. the Classical, self-regulating model of how the economy works d. the Keynesian approach to the economy 23. Deficits increase automatically whenever there is a. an expansionary period (boom) in the economy b. a expansionary monetary policy in effect c. an expansionary fiscal policy in effect d. a recession e. an increase in tax revenues 24. As a percentage of GDP, which component of government spending has been consistently decreasing over the past decade? a. federal nonmilitary purchases b. transfer payments c. interest payments on the national debt d. military purchases 25. The two largest sources of tax revenue to the federal government are a. corporate income taxes and personal income taxes b. sales taxes and personal income taxes c. Social Security taxes and corporate income taxes d. Social Security taxes and personal income taxes e. property taxes and sales taxes 26. The major cause of the increase in federal spending as a percent of GDP is a. defense spending b. transfer payments c. high levels of public and private investment d. government spending on non-military equipment e. monetary policy 27. A taxpayer’s marginal tax rate a. is always larger than his or her average tax rate b. declines as his or her income increases c. can exceed 50% for extremely high incomes d. can be smaller than the average tax rate at extremely high incomes e. is identical to the Social Security tax rate for low income workers 28. A federal budget surplus a. is a stock (vs. flow) variable b. tends to increase the national debt c. would tend to increase interest rates d. would tend to lower interest rates 29. When the government runs a deficit, it usually does the following: a. it buys government bonds from the public b. it asks the Treasury Department to print money to pay for the deficit c. is sells new government bonds to the public d. it borrows money directly from the Federal Reserve e. it asks the Federal Reserve to print money to pay for the deficit 30. Which of the following would cause a change in aggregate demand? a. a change in fiscal policy b. a change in the costs of production c. a change in inventories d. a change in the price level e. a change in GDP |
