unit+three--national+income+and+price+determination

Unit Three--National Income and Price Determination

Answer Page--Unit Three

Topics may include: Classical Theory, Keynesian Theory, Aggregate Demand, Aggregate Supply, recession, depression, AD/AS curves, Natural Rate of Output, Nonprice-Level Determinants, Fiscal Policy, Laffer Curve, crowding-out effect, Multiplier effect, Phillips Curve, Money, Monetary Policy, Stocks, Bonds


 * __ Rachel Williams (1-10) __**

1. Which of these trends is incorrectly matched with the effect it would have on aggregate demand? a) increase in consumer wealth – increase in AD b) increase in taxes – decrease in AD c) decrease in consumer expectations – decrease in AD d) increase in household debt – increase in AD e) increase in government spending – increase in AD

2. Which of these economic scenarios represents an automatic stabilizer during an expansionary fiscal policy? a) A rise in income levels requires people to pay a larger amount in income taxes. b) The government begins a new highway construction program that will bring jobs to thousands of workers. c) The success of a new advertising campaign reaps a large profit for a big corporation. As a result, the government claims more of their money in corporate income taxes. d) The government raises the salary of all of its employees. e) More families qualify for welfare benefits due to a recessionary slump in the economy.

3. If a country’s marginal propensity to consume is .8, what would their decrease in GDP be if taxes were raised by $400? a) $500 b) $1600 c) $2000 d) $400 e) $100

4. Which of the following is NOT true of the Phillips curve? a) Its y axis represents inflation b) A contractionary period would shift the Philips curve to the right c) An expansionary period would move a point on the Phillips curve to the left along the line d) Its x axis represents unemployment e) The Phillips curve shows the tradeoff between two unwanted economic situations

5. If a country’s marginal propensity to save is .4, which of the following is NOT true? a) A $100 increase in government spending would increase GDP by $250 b) The tax multiplier would be -1.5 c) The investment multiplier would be 1.67 d) The government spending multiplier would be 2.5 e) A $300 increase in taxes would decrease GDP by $450

6. Based on cost-benefit analysis, which of the following projects is incorrectly matched with the smart investment decision? a) Invest - A $75 return is acquired from a project that cost $85. b) Don’t Invest – A project that costs $40 dollars to produce will earn $32 in return. c) Invest – A project with no input costs will bring a profit of $13. d) Invest – After paying a $60 initiation fee, you will make $30 every month for a year. e) Don’t Invest – After paying a $60 initiation fee, you will make $30.

7. Which of these descriptions of an AD/AS graph would NOT signify the need for expansionary efforts? a) The equilibrium point between supply and demand is to the left of the LRAS curve. b) Increases in oil production costs move the supply curve to the left. c) Any investors withdraw from the market, shifting the AD curve to the left. d) Any artificial increase in aggregate demand causes cost-push inflation, moving the AD curve to the right. e) The AD curve shifts to the left as speculation for next year’s economy becomes unfavorable.

8. Which of the following is not true about the economic issue of “crowding-out”? a) It occurs when an expansionary fiscal policy is implemented without an expansionary monetary policy. b) It causes interest rates to rise. c) It can lead to lower consumer and investment spending. d) The government’s borrowing of money “crowds out” households and businesses from the financial market. e) It occurs when an expansionary monetary policy is implemented without an expansionary fiscal policy. 

9. Which of the following is NOT true of the above graph? a) If the government was currently at point P and lowered the tax rates, this would decrease revenue. b) It is known as the Laffer curve. c) An increase in taxes always leads to an increase in revenue. d) In order to move from point R to point P, the government would need to lower the tax rates. e) Point P is the equilibrium point at which the most revenue can be collected based on the tax rate.



10. Which of these economic situations would NOT cause the shift in the graph shown above? a) A large amount of nonrenewable resources are discovered in Indonesia, causing input prices to decrease. b) The government issues a tax cut for citizens in a specific income range. c) The government increases spending to launch a new space program on Pluto. d) Speculation for next year’s economy is looking up. e) There is a surge of investment in U.S. stocks.

//__ **David Hurst** __//__ **(11-20)** __ 11. In which of the following ways does the real-balance effect influence price level and real GDP? a) Price Level: __Increase__, Real GDP: __Increase__ b) Price Level: __Increase__, Real GDP: __Decrease__ c) Price Level: __Decrease__, Real GDP: __No change__ d) Price Level: __Decrease__, Real GDP: __Increase__ e) Price Level: __Decrease__, Real GDP: __Decrease__

12. The relationship between inflation rate and unemployment rate is shown in the a) Keynesian theory b) Laffer curve c) Phillips curve d) AD/AD curves e) Multiplier effect

13. In which of the following ways does the crowding-out effect influence interest rates and quantity of money? a) Interest rates: __Increase__, Quantity of Money: __Increase__ b) Interest rates: __Increase__, Quantity of Money: __Decrease__ c) Interest rates: __Increase__, Quantity of Money: __No change__ d) Interest rates: __Decrease__, Quantity of Money: __Increase__ e) Interest rates: __Decrease__, Quantity of Money: __Decrease__

14. The market price of bonds can vary depending on

I. The interest rate II. Who bought the bonds III. How many bonds were sold

a) I only b) II only c) III only d) II & III e) I, II, II



15. The following graph best shows which of the following economic cycle conditions? a) Peak b) Recovery c) Expansion d) Recession e) Trough

16. The term monetary policy can be most accurately explained as:

I. Changes in taxes and government expenditures made by Congress to stabilize the economy. II. Manipulation of government spending and taxes to stabilize domestic output, employment, and the price level. III. A changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth.

a) I only b) II only c) III only d) I and II only e) I and III only

17. A decline in the aggregate demand will primarily affect real output and employment only if prices are: a) inflexible upward b) inflexible downward c) flexible upward d) flexible downward e) none of the above

18. A change in domestic resource prices, prices of imported resources, and market power are all factors that can primarily shift the: a) aggregate demand curve b) aggregate supply curve c) long-run aggregate supply curve d) money demanded curve e) money supplied curve

19. Which of the following are factors that cause aggregate demand down-slopping?

I. Wealth effect II. Interest rate effect III. Foreign purchases effect.

a) I only b) II only c) III only d) I and II only e) I, II, and III 20. According to the graph, in which the AD is the “before” curves and AD1, AD2, and AD3 are the “after curves. Other things equal, a decline in net exports caused by a change in comes abroad is depicted by which curve? a) AD1 b) AD2 c) AD3 d) AD2 & AD3 e) AD, no shift

**__Susan Speaker (21-30)__**

Total population: 1000 Total Employed Adults: 800 Total Unemployed Adults: 40

21. What is the size of the labor force? (Use above information) a) 1000 b) 800 c) 1040 d) 840 e) 1840

22. What is the unemployment rate? (Use above information) a) unknown, as we do not know the number of part-time workers b) 5% c) 4.7% d) 4% e) 16%

23. GDP is $12 million, consumer spending is $8 million, government spending is $4 million, exports are $3 million, and imports are $4. How much is spent for investments? a) $ 2 million b) $1 million c) $4 million d) $3 million e) Cannot be calculated given this information

 24. Which of the following would cause this shift? a) Wage rates decrease b) Government regulation decreases c) Prices of inputs increase d) Productivity rates increase e) Consumption spending increases

25. What is a fiscal policy action that would be appropriate during a period of rapidly increasing CPI? a) Increase government spending for research b) Increase personal income taxes c) Increase transfer payments to those mostly severely affected by the rising price index d) Decrease supply of oil e) Selling bonds on an open market

26. When combating a recession, which of the following fiscal policy actions should be taken? a) Taxes: decrease government spending: decrease b) Taxes: decrease government spending: increase c) Taxes: decrease government spending: no change d) Taxes: increase government spending: increase e) Taxes: increase government spending: decrease

 27. When the change in the graph above occurs, what fiscal policy should be taken? a) Sell bonds on the open market b) Buy bonds on the open market c) Increase personal income taxes d) Decrease personal income taxes e) Decrease government spending.

28. If a government increases expenditures, how will it affect output, price level and employment? a) Output: Increase Price level: Increase employment: Decrease b) Output: Increase Price level: Decrease employment: Increase c) Output: Decrease Price level: Decrease employment: Decrease d) Output: No change Price level: Increase employment: Decrease e) Output: Increase Price level: Increase employment: Increase

29. How will an Increase in personal income taxes affect output, price level and employment? a) Output: Increase Price level: Increase employment: Decrease b) Output: Increase Price level: Decrease employment: Increase c) Output: Decrease Price level: Decrease employment: Decrease d) Output: No change Price level: Increase employment: Decrease e) Output: Increase Price level: Increase employment: Increase

30. How will a decrease in business taxes and regulations affect output, price level and employment? a) Output: Increase Price level: Increase employment: Decrease b) Output: Increase Price level: Decrease employment: Increase c) Output: Decrease Price level: Decrease employment: Decrease d) Output: No change Price level: Increase employment: Decrease e) Output: Increase Price level: Increase employment: Increase


 * __Anthony Farber (31-40)__**

31. A leftward shift in aggregate demand will cause employment and price level change in which ways? __Employment/ Price Level__ a) Increase/ Decrease b) Decrease/ Increase c) Decrease/ No Change d) Decrease/ Decrease e) No Change/ Decrease

32. The economies automatic stabilizers include: 1. A progressive personal income tax 11. Unemployment compensation 111. Congressional action that increases tax rates a) 1 only b) 11 only c) 111 only d) 1 and 11 only e) 1 and 111 only

Use information for questions 33 and 34 Total population: 5,000 Total Employed Adults: 2,500 Total Unemployed Adults: 500

33. What is the size of the labor force? a) 2,000 b) 5,000 c) 2,500 d) 3,000 e) 8,000

34. What is the unemployment rate? a) 20% b) unknown, as we do not know the number of discouraged workers c) 15% d) 10% e) Not given

35. If Susan's disposable income increases from $550 to $600 and her level of personal consusmption expenditures increase from $430 to $480, you may conclude that her marginal propensity to a) consume is 0.25 b) consume is 0.8 c) consume is 0.4 d) save is 0.8 e) save is 0.4

36. Which of the following is NOT an aggregate demand shifter? a) taxes b) consumer wealth c) government spending d) government regulations e) exchange rates

37. The investment demand curve: a) has no relationship between interest rate and investment b) shows a direct (positive) relationship between interest rates and investment c) shifts to the right when real interest rate rises d) shifts to the right when real interest rate rises e) shows a inverse (negative) relationship between interest rate and investment

38. Which of the following is NOT an aggregate supply shifter? a) productivity b) household debt c) input prices d) government regulations e) business taxes and subsides

39. What fiscal policy actions would be effective in fighting a recession? __Taxes/ Government Spending__ a) No Change/ $10 billion decrease b) $10 billion decrease/ $10 billion increase c) $10 billion decrease/ $10 billion decrease d) $10 billion increase/ No Change e) $10 billion increase/ $10 billion increase



40. What would cause the change in the graph? a) Tax increase b) Expectations decrease c) Government spending increase d) Productivity increases e) Returns decrease


 * __Azeem Feroz (41-50)__**

41. Which of the following is NOT a reason why product prices tend to be "sticky" or inflexible in a downward direction? a) Wage contracts b) Morale, effort, and productivity c) Inflexible GDP d) Fear of pice wars e) Minimum wage

42. Contractionary fiscal policy includes:

I. Decreased government spending II. Increased taxes III.Selling bonds on the open market

a) I only b) II only c) III only d) I and II only e) I, II, and III

43. Tax revenues automatically increasing during a economic expansions and decreasing during recessions is referred to as: a) Crowding -out Effect b) Built-in Stability c) Fiscal Policy d) Monetary Policy e) Wealth Effect

44. Several problems of timing may arise in connection with fiscal policy, these include:

I. Recognition Lag II. Administrative Lag III. Operational Lag

a) I only b) II only c) III only d) I and II only e) I, II, and III

45. Refer to the diagram above. If the economy's tax rate is set at c, a decrease to a tax rate of b will: a) Shift the curve to the right b) Increase the size of the deficit c) Increase total tax revenue d) Shift aggregate supply to the left e) Have no effect.

46. Refer to the diagram. Suppose the price level is P1 and GDP is at its full employment potential Qf. Given time to fully adjust to the change in the price level, a shift in aggregate demand from AD1 to AD2 would move the economy to: a) Point a b) Point b c) Point c d) Point d e) Not enough information

47. What is one of the central ideas behind the Laffer Curve? a) At a tax rate of 100%, tax revenue is maximized. b) An increase in tax rate always causes an increase in tax revenue. c) The current marginal tax rate is regressive. d) The current marginal tax rate is proportional. e) A cut in the tax rate may increase tax revenue.

48. A simultaneous increase in government spending and taxes would: a) Have no impact on GDP b) Increase GDP c) Decrease GDP d) Relieve an inflationary gap e) Expand an inflationary gap

49. All else equal, the government spending multiplier: a) = the tax multiplier b) = the investment multiplier c) < the tax multiplier d) > the tax multiplier e) < the net export multiplier

50. A decrease in the money supply would: a) Raise interest rates, reducing investment and GDP b) Raise interest rates, increasing investment and lowering GDP c) Raise interest rates, causing no immediate changes in investment or GDP d) Lower interest rates, increasing investment and GDP e) Lower interest rates, reducing investment and GDP