Honors Macroeconomics Practice Test
What is the primary goal of modern macroeconomic analysis?
A) To understand microeconomic behavior
B) To manage the distribution of income
C) To analyze national income, unemployment, inflation, and economic growth
D) To study individual market behavior
The term “Gross Domestic Product” (GDP) refers to:
A) The total income earned by a country’s citizens
B) The total market value of all final goods and services produced within a country
C) The total market value of all intermediate goods
D) The total value of exports minus imports
Unemployment that results from a downturn in the business cycle is known as:
A) Frictional unemployment
B) Structural unemployment
C) Cyclical unemployment
D) Seasonal unemployment
The “natural rate of unemployment” refers to:
A) The lowest possible unemployment rate achievable
B) Unemployment that occurs when the economy is at full employment
C) Unemployment caused by technological innovation
D) The unemployment rate during a recession
Inflation is best defined as:
A) A general increase in the prices of goods and services
B) A rise in the cost of living for households
C) A decrease in the purchasing power of money
D) A decrease in overall economic output
Which of the following is considered a consequence of high inflation?
A) Increased purchasing power for consumers
B) Decreased uncertainty in investment decisions
C) Reduced savings due to declining value of money
D) Decreased cost of borrowing
Economic growth is typically measured by changes in:
A) Government spending
B) The unemployment rate
C) The aggregate supply curve
D) Real GDP
A recession is defined as:
A) A period of rapid economic growth
B) A sustained increase in the inflation rate
C) A decline in real GDP for two or more consecutive quarters
D) A rise in the unemployment rate during an economic boom
The aggregate demand curve represents:
A) The total supply of goods and services in the economy
B) The total amount of income earned by households
C) The total demand for goods and services in an economy at various price levels
D) The total investment in capital goods
The Phillips Curve illustrates a relationship between:
A) Inflation and unemployment
B) Unemployment and economic growth
C) Government spending and GDP
D) Interest rates and GDP
If a country’s inflation rate is higher than its trading partners, its exports are likely to:
A) Increase, because they become cheaper
B) Decrease, because they become more expensive
C) Stay unchanged, because exchange rates will adjust
D) Increase, because of improved competitiveness
The primary function of the central bank in modern economies is to:
A) Set income tax rates
B) Manage the money supply and interest rates
C) Regulate wages and prices
D) Control the level of government debt
Which of the following is most likely to cause a shift in the aggregate supply curve?
A) A change in government spending
B) A change in the price level of goods and services
C) A change in resource prices or technology
D) A change in the interest rate
Which of the following is a policy tool used by the government to combat inflation?
A) Increasing government spending
B) Lowering taxes
C) Increasing interest rates
D) Raising the minimum wage
If a country’s real GDP is growing, it means:
A) The economy is expanding, and more goods and services are being produced
B) Unemployment rates are rising
C) The inflation rate is decreasing
D) The labor force is shrinking
The multiplier effect describes how an initial change in spending:
A) Leads to an equal change in the money supply
B) Is multiplied by changes in government policy
C) Is amplified by subsequent rounds of spending in the economy
D) Does not affect the real GDP
Which of the following is likely to result in a shift of the aggregate demand curve to the right?
A) An increase in interest rates
B) A decrease in government spending
C) A tax cut that increases disposable income
D) A decrease in consumer confidence
Which of the following is NOT typically considered a cause of long-term economic growth?
A) Increases in human capital
B) Technological advances
C) Increases in government spending
D) Increases in capital investment
A decrease in the price of oil would likely cause:
A) A rightward shift in the aggregate supply curve
B) A leftward shift in the aggregate demand curve
C) An increase in interest rates
D) A decrease in real GDP
Structural unemployment occurs when:
A) There is a mismatch between the skills of workers and the demands of the job market
B) People are temporarily between jobs
C) The economy is experiencing a downturn
D) There is seasonal variation in employment
The long-run aggregate supply curve is:
A) Vertical, indicating that output is determined by factors like technology and resources
B) Upward sloping, indicating that as prices increase, output increases
C) Downward sloping, indicating that as prices increase, output decreases
D) Horizontal, indicating that output remains constant
The GDP deflator is used to:
A) Measure the rate of inflation
B) Calculate real GDP from nominal GDP
C) Adjust for changes in population
D) Compare GDP growth rates across countries
Which of the following best describes the role of the labor force in economic growth?
A) The size of the labor force does not influence economic growth
B) Economic growth is limited by the size of the labor force
C) The labor force is the primary determinant of inflation
D) A growing labor force contributes to an increase in output
Which of the following would be an example of a supply-side economic policy?
A) A tax cut for consumers
B) A government program to reduce unemployment
C) Investment in infrastructure to reduce production costs
D) A stimulus check to increase consumer spending
A decrease in the savings rate would likely lead to:
A) A decrease in economic growth
B) An increase in investment and capital formation
C) A decrease in inflation
D) An increase in consumer spending
In the short run, an increase in government spending will most likely:
A) Increase the price level and output
B) Decrease unemployment and output
C) Decrease inflation but increase output
D) Increase the price level and decrease output
Which of the following would lead to an increase in aggregate demand?
A) An increase in interest rates
B) An increase in government spending on infrastructure
C) A reduction in consumer confidence
D) A rise in taxes
The “business cycle” refers to:
A) The pattern of GDP growth over time
B) The fluctuations in real GDP over periods of expansion and contraction
C) The change in the money supply
D) The changes in interest rates over time
Which of the following would be classified as an automatic stabilizer in the economy?
A) Tax cuts during a recession
B) Increased government spending on infrastructure
C) Unemployment insurance payments
D) The Federal Reserve’s interest rate changes
A country’s potential output is determined by:
A) The total demand for goods and services in the economy
B) The total number of unemployed workers
C) The economy’s available resources and technology
D) The level of government spending
Which of the following is considered an expansionary fiscal policy?
A) Reducing government spending
B) Increasing taxes
C) Increasing government spending
D) Decreasing the money supply
The concept of “crowding out” occurs when:
A) Increased government spending leads to reduced private sector investment
B) Increased private investment leads to reduced government spending
C) Higher taxes lead to higher private sector savings
D) Government regulation leads to more private sector investment
If the central bank decreases the money supply, the result is likely to be:
A) An increase in interest rates
B) A decrease in inflation
C) A decrease in unemployment
D) An increase in real GDP
The concept of “sticky wages” suggests that:
A) Wages adjust immediately to changes in the economy
B) Wages are fixed by the government and do not change
C) Wages do not adjust quickly in response to economic conditions
D) Wages are determined only by labor unions
What is the primary purpose of monetary policy?
A) To influence the distribution of income
B) To manage the supply of money and interest rates in the economy
C) To increase government spending on infrastructure
D) To control inflation by setting price controls
The real GDP growth rate is the percentage change in:
A) Nominal GDP
B) Real GDP
C) The price level
D) The unemployment rate
Which of the following is an example of a supply-side policy?
A) A tax cut for businesses to encourage investment
B) A direct cash transfer to households
C) An increase in government welfare spending
D) An increase in the minimum wage
A positive output gap occurs when:
A) Actual output is greater than potential output
B) Actual output is equal to potential output
C) Actual output is less than potential output
D) The economy is experiencing a recession
A decrease in the reserve requirement set by the central bank would:
A) Increase interest rates
B) Decrease the money supply
C) Increase the money supply
D) Have no effect on the economy
In a closed economy, which of the following must hold true?
A) Net exports are positive
B) Investment equals savings
C) Imports exceed exports
D) The government must run a surplus
In the Keynesian model, during a recession, government should:
A) Reduce government spending to control inflation
B) Lower taxes to increase consumer spending
C) Raise interest rates to reduce inflation
D) Cut subsidies to businesses to increase output
What is the main function of the Federal Reserve’s open market operations?
A) To regulate banks
B) To control inflation through interest rates
C) To manage the money supply by buying or selling government securities
D) To set tax rates
The “velocity of money” refers to:
A) The total amount of money in circulation
B) The rate at which money changes hands in an economy
C) The value of money relative to foreign currencies
D) The speed at which inflation occurs
The long-run aggregate supply (LRAS) curve is vertical because:
A) In the long run, output is determined by technology and resources, not the price level
B) Price level does not affect the long-term growth rate of the economy
C) The economy always returns to full employment
D) Inflation increases as the economy approaches full employment
The output gap measures the difference between:
A) Potential output and actual output
B) Short-run and long-run aggregate supply
C) National income and net exports
D) Actual and expected inflation
A central bank’s decision to lower interest rates is typically aimed at:
A) Increasing the money supply and boosting economic activity
B) Reducing the money supply to control inflation
C) Decreasing consumer spending
D) Raising interest rates to control inflation
Which of the following would be classified as an increase in aggregate demand?
A) An increase in the cost of raw materials
B) A reduction in interest rates by the central bank
C) A decrease in consumer confidence
D) An increase in taxes
Which of the following is true about inflation expectations?
A) Inflation expectations are irrelevant for economic decision-making
B) Higher inflation expectations can lead to higher wages and prices in the future
C) Inflation expectations only affect short-term interest rates
D) Inflation expectations are fixed and do not change over time
The “money supply” in an economy consists of:
A) Only the cash held by the central bank
B) The total currency in circulation, plus checking and savings account deposits
C) Only the amount of currency in circulation
D) The value of all government bonds and securities
The “balance of payments” refers to:
A) The relationship between imports and exports
B) The record of all economic transactions between residents of a country and the rest of the world
C) The difference between a country’s income and its expenses
D) The total value of a country’s imports
The “natural rate of output” is associated with:
A) Full employment output, where there is no cyclical unemployment
B) The level of output during a recession
C) The level of output when inflation is zero
D) The highest level of output an economy can achieve without inflation
If the economy is in a recession and the government wants to increase aggregate demand, it could:
A) Increase taxes
B) Increase government spending
C) Reduce interest rates
D) Both B and C
A tax cut is expected to shift the aggregate demand curve:
A) To the left, because disposable income decreases
B) To the right, because disposable income increases
C) To the left, because interest rates increase
D) To the right, because investment decreases
Which of the following is a key characteristic of the long-run aggregate supply (LRAS) curve?
A) It is upward sloping, indicating a positive relationship between output and price levels
B) It is downward sloping, indicating an inverse relationship between output and price levels
C) It is vertical, indicating that output is determined by the factors of production
D) It shifts to the right during inflationary periods
The primary difference between nominal GDP and real GDP is:
A) Nominal GDP is adjusted for inflation, while real GDP is not
B) Real GDP is adjusted for inflation, while nominal GDP is not
C) Nominal GDP includes government spending, while real GDP does not
D) There is no difference between nominal GDP and real GDP
In the long run, if an economy is producing at full employment, what happens to the inflation rate?
A) It decreases as the economy adjusts
B) It remains constant
C) It increases as demand for goods and services rises
D) It becomes negative due to deflationary pressure
Which of the following would shift the aggregate supply curve to the right?
A) An increase in wages
B) An improvement in technology
C) An increase in taxes
D) A rise in the price of oil
A key feature of the classical model of economics is that:
A) Prices and wages are sticky in the short run
B) The economy is always in equilibrium at full employment in the long run
C) Government intervention is essential to stabilizing the economy
D) Aggregate demand determines output and employment
The long-run growth rate of an economy is primarily determined by:
A) The level of government spending
B) The size of the labor force and the level of capital investment
C) The rate of inflation
D) The level of interest rates
If an economy is in a recession and the central bank lowers interest rates, what is the most likely immediate effect?
A) A decrease in consumer spending
B) An increase in investment and consumer spending
C) A decrease in aggregate demand
D) An increase in unemployment
In the long run, an increase in government spending will most likely lead to:
A) An increase in inflation and higher output
B) A permanent increase in real GDP
C) A temporary increase in real GDP and a long-term increase in inflation
D) A long-term increase in real GDP with no effect on inflation
A decrease in the money supply will most likely result in:
A) Higher inflation and lower interest rates
B) Lower inflation and higher interest rates
C) Higher inflation and lower output
D) Lower inflation and lower output
A country’s central bank lowers the reserve requirement for commercial banks. What is the most likely outcome?
A) The money supply increases
B) The money supply decreases
C) The central bank’s control over inflation becomes weaker
D) Interest rates rise
Which of the following is the main cause of structural unemployment?
A) Changes in aggregate demand
B) A mismatch between workers’ skills and available jobs
C) A decline in consumer confidence
D) Seasonal variations in employment
Which of the following will most likely lead to a decrease in aggregate demand?
A) A decrease in taxes
B) An increase in government spending
C) A rise in interest rates
D) An increase in consumer confidence
Which of the following is most likely to shift the short-run aggregate supply curve to the left?
A) A decrease in wages
B) A technological improvement
C) A rise in the price of oil
D) An increase in government spending
If the central bank pursues an expansionary monetary policy, it is trying to:
A) Decrease the money supply and raise interest rates
B) Increase the money supply and lower interest rates
C) Reduce government spending
D) Increase taxes
Which of the following best describes the relationship between the unemployment rate and inflation according to the Phillips curve?
A) There is a direct relationship: as unemployment rises, inflation rises.
B) There is an inverse relationship: as unemployment rises, inflation falls.
C) There is no relationship between unemployment and inflation.
D) Both unemployment and inflation rise together.
A situation where inflation is rising, but unemployment remains high, is often referred to as:
A) Demand-pull inflation
B) Cost-push inflation
C) Stagflation
D) Hyperinflation
Which of the following will most likely increase the supply of loanable funds?
A) A rise in the interest rate
B) A decrease in savings
C) An increase in consumer confidence
D) A fall in the tax rate on interest income
If the economy is at full employment, an increase in government spending will likely:
A) Increase output without causing inflation
B) Increase output and cause inflationary pressures
C) Decrease output and cause deflationary pressures
D) Not affect output but will decrease inflation
An increase in the price of imported oil will most likely cause:
A) A leftward shift in the aggregate demand curve
B) A rightward shift in the short-run aggregate supply curve
C) A leftward shift in the short-run aggregate supply curve
D) A rightward shift in the long-run aggregate supply curve
If the central bank raises the discount rate, the immediate effect will likely be:
A) A decrease in the money supply
B) An increase in the money supply
C) A decrease in interest rates
D) An increase in aggregate demand
If the central bank buys government bonds on the open market, it will:
A) Increase the money supply and decrease interest rates
B) Decrease the money supply and increase interest rates
C) Increase taxes and decrease inflation
D) Decrease the money supply and decrease inflation
If inflation is expected to rise, people will:
A) Decrease their consumption and increase savings
B) Increase their consumption to avoid paying higher prices later
C) Increase their investment in financial assets like bonds
D) Increase their saving in anticipation of lower future prices
Which of the following would be an example of a demand-side economic shock?
A) A sudden increase in oil prices
B) A government decision to cut taxes
C) A rise in wages due to collective bargaining
D) A natural disaster that destroys infrastructure
Which of the following would most likely cause a decrease in the equilibrium interest rate?
A) An increase in the demand for loanable funds
B) A decrease in the money supply
C) An increase in the supply of loanable funds
D) A rise in inflation expectations
The primary goal of fiscal policy is to:
A) Control the money supply
B) Influence aggregate demand through government spending and taxation
C) Control inflation by adjusting interest rates
D) Regulate the banking system
If the government increases taxes and reduces spending, this is an example of:
A) Expansionary fiscal policy
B) Contractionary fiscal policy
C) Expansionary monetary policy
D) Contractionary monetary policy
Which of the following would most likely cause an increase in both the price level and real GDP?
A) An increase in interest rates
B) A decrease in government spending
C) An increase in consumer and business confidence
D) An increase in the value of the domestic currency
The main reason why the aggregate demand curve slopes downward is because of:
A) The wealth effect, interest rate effect, and exchange rate effect
B) Changes in resource prices
C) A shift in the production function
D) The multiplier effect
If the central bank is concerned about inflation, it might:
A) Lower interest rates to increase aggregate demand
B) Raise interest rates to decrease aggregate demand
C) Increase government spending to increase aggregate demand
D) Decrease taxes to increase consumption
The supply of loanable funds is primarily determined by:
A) The government’s borrowing needs
B) The interest rate
C) The level of investment in the economy
D) The amount of savings in the economy
Which of the following is a characteristic of an economy in a recession?
A) Unemployment is at its natural rate
B) Real GDP is growing at a rapid pace
C) Aggregate demand is less than aggregate supply
D) Unemployment is higher than the natural rate
The “crowding out” effect suggests that:
A) An increase in government spending will increase private investment
B) An increase in government spending will decrease private investment
C) A decrease in government spending will increase private investment
D) A decrease in taxes will reduce inflation
The long-run aggregate supply curve is vertical because:
A) The economy can only produce a fixed amount of goods in the long run
B) The economy operates at full capacity in the long run
C) Prices have no impact on output in the long run
D) The long-run supply curve is determined by consumer spending
If the central bank decreases the discount rate, the most immediate effect will be:
A) An increase in the money supply
B) A decrease in aggregate demand
C) An increase in interest rates
D) A decrease in the supply of loanable funds
Which of the following is an example of a contractionary monetary policy?
A) Lowering the reserve requirement
B) Increasing government spending
C) Selling government securities on the open market
D) Decreasing taxes
If the central bank raises the federal funds rate, what is the most likely short-term result?
A) Increased borrowing by businesses and consumers
B) A decrease in the money supply
C) Increased investment spending
D) Lower interest rates in the economy
In the context of the business cycle, a period of declining economic activity, falling GDP, and rising unemployment is known as:
A) An expansion
B) A recession
C) A boom
D) A recovery
A decrease in consumer confidence is likely to result in:
A) An increase in aggregate demand
B) A decrease in aggregate demand
C) An increase in short-run aggregate supply
D) An increase in the money supply
The long-run aggregate supply curve is vertical because:
A) It represents the potential output of the economy
B) It assumes that there are no changes in the price level
C) It reflects shifts in aggregate demand
D) It assumes a closed economy
The basic idea behind the Keynesian cross model is that:
A) In the short run, the economy is always at full employment
B) Output is determined by the intersection of aggregate demand and aggregate supply
C) Changes in government spending affect total output through the multiplier effect
D) Price levels adjust to restore equilibrium in the economy
If the economy is operating below full employment, an increase in government spending will likely:
A) Have no effect on real GDP
B) Decrease real GDP
C) Increase both real GDP and inflation
D) Increase real GDP without causing inflation
A reduction in the national debt would most likely result in:
A) An increase in future taxes
B) A decrease in the money supply
C) Lower interest rates in the long run
D) Increased government spending on public goods
If the economy is experiencing inflation, the central bank is likely to:
A) Lower interest rates to stimulate demand
B) Increase interest rates to reduce demand
C) Increase government spending to reduce the price level
D) Implement tax cuts to boost economic activity
If an economy is experiencing deflation, the central bank might:
A) Raise interest rates to reduce inflationary pressures
B) Lower interest rates to encourage borrowing and spending
C) Increase taxes to reduce consumer demand
D) Sell government securities to reduce the money supply
A decrease in taxes will generally lead to:
A) An increase in aggregate supply
B) An increase in aggregate demand
C) A decrease in consumer spending
D) A decrease in the money supply
A decrease in the aggregate price level will lead to:
A) A rightward shift in the aggregate demand curve
B) A leftward shift in the aggregate demand curve
C) An increase in the quantity of real GDP demanded
D) A decrease in the quantity of real GDP demanded
The concept of the multiplier effect refers to:
A) The relationship between price level and real GDP in the short run
B) The change in GDP resulting from an initial change in spending
C) The effect of monetary policy on inflation
D) The effect of taxes on consumer spending
The natural rate of unemployment is:
A) The rate of unemployment that occurs when the economy is in a recession
B) The rate of unemployment associated with inflation
C) The unemployment rate when the economy is operating at full potential
D) The unemployment rate when the economy is experiencing deflation
A decrease in the labor force participation rate is likely to:
A) Increase real GDP
B) Decrease unemployment
C) Decrease potential output
D) Increase inflation
Which of the following is most likely to shift the aggregate supply curve to the right in the long run?
A) A decrease in the price of oil
B) An increase in taxes on corporations
C) A reduction in government spending
D) A decrease in the level of technology
Which of the following is an example of supply-side fiscal policy?
A) A decrease in income taxes to encourage investment
B) An increase in government spending on public goods
C) An increase in the federal funds rate to reduce inflation
D) A decrease in unemployment insurance benefits
In the short run, an increase in the money supply typically causes:
A) Higher interest rates and a decrease in investment
B) Lower interest rates and an increase in investment
C) An increase in the price level and a decrease in output
D) A decrease in the money supply and higher interest rates
Which of the following is most likely to shift the aggregate demand curve to the left?
A) A decrease in the money supply
B) A decrease in government spending
C) An increase in business investment
D) A decrease in taxes
The aggregate supply curve in the long run is vertical because:
A) The economy’s output is limited by the quantity and quality of resources
B) The economy operates at full employment in the long run
C) Prices and wages are flexible in the long run
D) The price level has no effect on the economy’s output in the long run
A recessionary gap is best described as:
A) The difference between potential GDP and actual GDP when the economy is operating above full capacity
B) The difference between potential GDP and actual GDP when the economy is operating below full capacity
C) The amount of inflation that occurs during a period of low unemployment
D) The increase in real GDP that occurs when aggregate demand increases
Which of the following is the primary goal of monetary policy?
A) To reduce government debt
B) To stabilize the currency exchange rate
C) To control inflation and stabilize the economy
D) To regulate the stock market
Which of the following is a tool of expansionary fiscal policy?
A) Decreasing government spending
B) Increasing the reserve requirement
C) Reducing taxes
D) Selling government bonds
A country with a large trade deficit is most likely to experience:
A) A decrease in the domestic currency value
B) An increase in exports
C) A decrease in imports
D) A balanced trade account
According to the classical model of economics, the economy tends to:
A) Be in constant flux and require government intervention to stabilize
B) Always be in a state of equilibrium, with no need for government intervention
C) Experience inflation and unemployment simultaneously
D) Automatically adjust to full employment in the long run
The short-run aggregate supply curve slopes upward because:
A) Prices of all resources are fixed in the short run
B) Wages and input prices are flexible in the short run
C) Firms increase output in response to higher prices
D) Government policy shifts the aggregate demand curve
Which of the following factors would most likely shift the long-run aggregate supply curve to the right?
A) An increase in government spending
B) An increase in the level of education and skills in the workforce
C) A decrease in interest rates
D) An increase in oil prices
In the IS-LM model, an increase in government spending will lead to:
A) A higher level of output and a lower interest rate
B) A higher level of output and a higher interest rate
C) A lower level of output and a lower interest rate
D) A lower level of output and a higher interest rate
In the context of the business cycle, a period of economic recovery is characterized by:
A) Rising unemployment and decreasing GDP
B) Declining inflation and lower interest rates
C) Increasing output, employment, and investment
D) Falling prices and rising interest rates
Which of the following will lead to an appreciation of a country’s currency?
A) A decrease in interest rates
B) A rise in the domestic inflation rate
C) An increase in exports
D) A decrease in foreign direct investment
Which of the following is true of a government running a budget deficit?
A) It is borrowing money to finance its spending
B) It is accumulating savings for future expenditures
C) It has a surplus in its current account
D) It is using fiscal policy to reduce aggregate demand
In the long run, the effect of an increase in the money supply on real GDP is:
A) An increase in real GDP
B) A decrease in real GDP
C) No effect on real GDP
D) A decrease in the inflation rate
A country that has a fixed exchange rate system will:
A) Allow its currency value to fluctuate based on market conditions
B) Adjust its exchange rate in response to changes in inflation
C) Hold large reserves of foreign currency to stabilize its exchange rate
D) Increase its interest rates to lower inflation
If the central bank decreases the reserve requirement, this would likely:
A) Increase the money supply
B) Decrease the money supply
C) Have no effect on the money supply
D) Increase interest rates
An increase in aggregate demand is likely to cause:
A) A decrease in the price level and an increase in real GDP
B) An increase in both the price level and real GDP
C) A decrease in both the price level and real GDP
D) A decrease in real GDP and an increase in the price level
Which of the following would shift the aggregate demand curve to the right?
A) A decrease in government spending
B) A decrease in consumer confidence
C) An increase in interest rates
D) A decrease in taxes
In the Keynesian model, an increase in investment spending will primarily lead to:
A) A direct increase in aggregate supply
B) An increase in aggregate demand
C) A decrease in unemployment
D) A decrease in the money supply
A recessionary gap occurs when:
A) The economy is operating above full employment
B) Aggregate demand exceeds aggregate supply
C) The unemployment rate is lower than the natural rate
D) The economy’s output is below potential output
The Phillips Curve illustrates the trade-off between:
A) Unemployment and inflation
B) Real GDP and aggregate demand
C) Aggregate supply and the price level
D) The money supply and output
If the economy is experiencing inflation, the central bank is likely to:
A) Decrease interest rates to boost investment
B) Increase the money supply to reduce unemployment
C) Increase interest rates to reduce inflationary pressures
D) Decrease government spending to lower the price level
If the government increases taxes, this will likely lead to:
A) A shift to the right in the aggregate demand curve
B) A decrease in consumer spending and a decrease in aggregate demand
C) An increase in inflation
D) A decrease in real GDP
A reduction in the level of savings in an economy will most likely:
A) Increase interest rates
B) Decrease interest rates
C) Increase the money supply
D) Decrease inflation
Which of the following would be most likely to cause an increase in the short-run aggregate supply curve?
A) An increase in the price level
B) A reduction in input prices
C) A decrease in government spending
D) A reduction in the money supply
The crowding-out effect refers to:
A) The reduction in private investment caused by an increase in government spending
B) The increase in consumer spending due to higher interest rates
C) The reduction in government spending caused by high taxes
D) The increase in exports due to higher government spending
If the central bank wants to reduce inflation, it might:
A) Increase government spending
B) Decrease interest rates
C) Increase taxes
D) Increase the money supply
The opportunity cost of unemployment is:
A) The value of the goods and services that could have been produced
B) The value of the time spent in leisure activities
C) The value of the increase in the price level
D) The increase in consumer spending
A shift in the aggregate supply curve to the left can be caused by:
A) An increase in the price level
B) A decrease in the supply of resources
C) A decrease in interest rates
D) An increase in government spending
Which of the following is true regarding the long-run aggregate supply (LRAS) curve?
A) It is upward sloping
B) It slopes downward to the right
C) It is vertical at the natural level of output
D) It shifts upward as inflation rises
Which of the following would likely lead to a decrease in the level of investment in an economy?
A) A decrease in interest rates
B) A decrease in consumer confidence
C) A decrease in corporate taxes
D) A reduction in the federal funds rate
The classical view of the economy suggests that:
A) The government should always intervene to reduce unemployment
B) The economy is self-correcting in the long run
C) Aggregate demand determines the level of output in the economy
D) Monetary policy is ineffective at controlling inflation
The money multiplier is defined as:
A) The ratio of the total money supply to the base money supply
B) The ratio of the increase in GDP to the increase in government spending
C) The amount of money the central bank injects into the economy
D) The rate at which prices increase as the money supply rises
If inflation is expected to rise, what is likely to happen to nominal interest rates?
A) They will fall
B) They will remain the same
C) They will rise
D) They will be unaffected by inflation expectations
An economy that is in a recessionary gap will typically experience:
A) An increase in output and a decrease in unemployment
B) A decrease in output and an increase in unemployment
C) A decrease in output and a decrease in unemployment
D) An increase in output and an increase in inflation
Which of the following is NOT a function of money?
A) Medium of exchange
B) Store of value
C) Unit of account
D) Government-backed investment vehicle
In the short run, an increase in government spending will lead to:
A) An increase in the money supply
B) A leftward shift in the aggregate supply curve
C) A rightward shift in the aggregate demand curve
D) A decrease in inflation
The concept of potential output refers to:
A) The maximum output the economy can produce when resources are fully employed
B) The current level of GDP in the economy
C) The output of an economy in the short run
D) The output level at which inflation is at its highest point
If the money supply increases, ceteris paribus, the value of the currency will likely:
A) Increase
B) Decrease
C) Stay the same
D) Rise and fall alternately
A decrease in the value of the domestic currency relative to other currencies is called:
A) A currency depreciation
B) A currency appreciation
C) A fiscal deficit
D) A trade surplus
Which of the following is a potential effect of inflation on long-term economic growth?
A) It boosts investment and increases capital accumulation
B) It leads to higher uncertainty, which can discourage investment
C) It encourages savings and reduces consumption
D) It improves the purchasing power of consumers
In the Keynesian cross model, the economy will be in equilibrium when:
A) Aggregate demand equals potential output
B) Planned spending equals actual output
C) The aggregate supply curve intersects the aggregate demand curve
D) The price level adjusts to reduce inflation
If the aggregate demand curve shifts to the left, which of the following will likely occur?
A) Higher unemployment and lower inflation
B) Lower unemployment and higher inflation
C) Higher output and higher inflation
D) Lower output and higher inflation
The total value of all final goods and services produced within a country’s borders in a given time period is called:
A) Gross domestic product (GDP)
B) National income
C) Net exports
D) Aggregate supply
The Keynesian model of economics suggests that:
A) The government should intervene to stabilize the economy
B) The economy is self-correcting and requires no government intervention
C) The government should only intervene in times of inflation
D) The economy should always operate at full employment without any government policy
The long-run aggregate supply curve is vertical because:
A) Output is determined by the quantity of resources and technology, not by the price level
B) Aggregate demand does not affect output in the long run
C) The economy always operates below its potential output
D) The price level has no effect on employment in the long run
If the central bank conducts an open market operation by buying government bonds, this will:
A) Increase the money supply and lower interest rates
B) Decrease the money supply and raise interest rates
C) Increase the money supply and raise interest rates
D) Decrease the money supply and lower interest rates
The main goal of expansionary fiscal policy is to:
A) Decrease the money supply and raise interest rates
B) Increase aggregate demand to reduce unemployment
C) Decrease aggregate demand to control inflation
D) Reduce government debt by increasing taxes
Which of the following will likely occur if there is an increase in the cost of raw materials?
A) The aggregate supply curve will shift to the right
B) The aggregate supply curve will shift to the left
C) Aggregate demand will increase
D) The price level will remain unchanged
According to the classical theory of economics, in the long run, the economy:
A) Is always at full employment
B) Is self-correcting and does not require government intervention
C) Needs government intervention to achieve stability
D) Experiences persistent inflationary pressures
Which of the following would be classified as an automatic stabilizer?
A) Government spending on defense
B) A change in the money supply
C) Progressive income taxes
D) A change in the discount rate
The natural rate of unemployment is:
A) The rate of unemployment when the economy is at full employment
B) The rate of unemployment that results from cyclical fluctuations
C) The rate of unemployment that occurs during recessions
D) The rate of unemployment that can be reduced through government intervention
The aggregate supply curve in the short run is:
A) Vertical
B) Horizontal
C) Upward sloping
D) Downward sloping
When a country has a trade deficit, it means that:
A) The country imports more than it exports
B) The country exports more than it imports
C) The country is experiencing inflation
D) The country has a surplus of foreign currency
If a government increases its spending on infrastructure projects, it is likely to:
A) Increase aggregate demand and lower interest rates
B) Decrease aggregate demand and raise interest rates
C) Increase aggregate demand and raise interest rates
D) Decrease aggregate supply and lower interest rates
A country’s real GDP is likely to increase when:
A) The supply of money decreases
B) The central bank raises interest rates
C) There is an increase in investment spending
D) Tax rates on businesses increase
The consumption function shows the relationship between:
A) The total amount of savings and investment in an economy
B) The level of consumption and income in an economy
C) The price level and the quantity of goods demanded
D) The money supply and interest rates
The labor force participation rate is defined as:
A) The ratio of the labor force to the working-age population
B) The ratio of employed workers to the total population
C) The percentage of people who are unemployed
D) The percentage of workers in the economy who are employed full-time
If the economy is operating above full employment, which of the following is likely to occur?
A) A decrease in inflation
B) An increase in unemployment
C) Inflationary pressures will rise
D) A decrease in aggregate demand
The multiplier effect refers to:
A) The impact of changes in government spending on aggregate demand
B) The process by which an increase in autonomous consumption increases aggregate income
C) The ratio of change in GDP to the initial change in spending
D) The effect of a reduction in interest rates on consumption and investment
The equation of exchange (MV = PQ) relates the money supply to:
A) The total value of production in the economy
B) The price level and the quantity of goods and services produced
C) The level of interest rates and aggregate demand
D) The quantity of money and the velocity of money
Which of the following is an example of monetary policy?
A) The government increasing spending on infrastructure
B) The central bank changing the reserve requirement
C) The government changing income taxes
D) The central bank setting the minimum wage
A tax cut that is intended to stimulate the economy would most likely:
A) Increase aggregate demand
B) Decrease aggregate supply
C) Reduce the unemployment rate
D) Reduce inflationary pressures
The Keynesian model suggests that in the short run:
A) The economy will always return to full employment without government intervention
B) The government can help the economy recover from a recession through fiscal policy
C) Changes in the money supply directly affect output and employment
D) The economy adjusts automatically to changes in demand
If the economy is in a liquidity trap, which of the following is true?
A) Monetary policy is highly effective in stimulating the economy
B) Fiscal policy is ineffective in stimulating the economy
C) Interest rates are at a level where they cannot be lowered further
D) There is no demand for money in the economy
A government budget surplus occurs when:
A) Government spending exceeds tax revenue
B) Tax revenue exceeds government spending
C) The central bank increases the money supply
D) There is a trade deficit
Which of the following is an example of an external shock to the economy?
A) A new tax law is passed
B) A major natural disaster occurs
C) A country reduces its interest rates
D) The government increases defense spending
A decrease in the money supply is likely to lead to:
A) An increase in interest rates
B) A decrease in the unemployment rate
C) An increase in consumer spending
D) A decrease in inflation
A decrease in business taxes is likely to:
A) Decrease aggregate supply
B) Increase investment and aggregate demand
C) Decrease aggregate demand
D) Increase the unemployment rate
Which of the following is likely to cause a rightward shift in the long-run aggregate supply curve?
A) An increase in the price level
B) An increase in the level of technology
C) A decrease in government spending
D) A decrease in business taxes
The GDP deflator is used to measure:
A) The overall level of inflation in the economy
B) The rate of unemployment
C) Changes in the money supply
D) The productivity of labor
The short-run Phillips Curve shows the relationship between:
A) Unemployment and inflation in the long run
B) The money supply and interest rates
C) Aggregate demand and the price level
D) Unemployment and inflation in the short run
When an economy is operating in the long run, an increase in the money supply will:
A) Increase real GDP
B) Increase inflation but not real GDP
C) Decrease inflation
D) Increase the unemployment rate
If an economy experiences a demand shock, the Federal Reserve may respond by:
A) Decreasing government spending
B) Increasing interest rates
C) Decreasing taxes
D) Increasing the money supply
Which of the following is an example of supply-side economics?
A) Increasing taxes on businesses to raise government revenue
B) Cutting taxes for individuals to increase consumer spending
C) Reducing government regulations to encourage production
D) Increasing government spending on public works projects
If the economy is experiencing a negative supply shock, the most likely outcome is:
A) A decrease in inflation and an increase in output
B) An increase in inflation and a decrease in output
C) A decrease in both inflation and output
D) An increase in output and a decrease in unemployment
An increase in the labor force participation rate will likely:
A) Increase the natural rate of unemployment
B) Decrease the natural rate of unemployment
C) Increase the level of structural unemployment
D) Decrease the number of unemployed people
The central bank’s main tool for controlling inflation is:
A) Fiscal policy
B) Interest rates
C) Government spending
D) Income taxes
The most direct impact of a decrease in the money supply is:
A) A reduction in aggregate demand
B) An increase in inflation
C) An increase in the real GDP
D) A reduction in the nominal interest rate
If the government reduces taxes, we can expect:
A) A decrease in aggregate demand
B) An increase in consumer spending
C) A decrease in the price level
D) A decrease in business investment
Which of the following is an example of an externality?
A) A tax on carbon emissions
B) A company offering healthcare benefits to its employees
C) Pollution from a factory affecting nearby residents
D) An increase in government spending on infrastructure
The interest rate effect occurs when:
A) A decrease in interest rates causes a decrease in the demand for money
B) Higher interest rates decrease investment and consumption, reducing aggregate demand
C) Lower interest rates increase saving and decrease investment
D) Higher interest rates increase investment and consumption, boosting aggregate demand
Which of the following policies would be most appropriate for combating demand-pull inflation?
A) Increase government spending
B) Lower taxes to increase consumer spending
C) Increase the money supply
D) Increase interest rates and reduce government spending
In the classical model of economics, full employment is achieved when:
A) The economy operates at the natural level of output
B) The economy operates below potential output
C) The economy experiences persistent inflation
D) The government implements expansionary fiscal policies
The marginal propensity to consume (MPC) refers to:
A) The percentage of income spent on imports
B) The change in consumption resulting from a change in disposable income
C) The percentage of income saved rather than consumed
D) The change in savings resulting from a change in interest rates
If the central bank raises the reserve requirement, it will:
A) Increase the money supply
B) Decrease the money supply
C) Have no effect on the money supply
D) Increase interest rates by lowering the money supply
If the economy is operating at full employment, a government policy that increases aggregate demand will most likely lead to:
A) A decrease in inflation and an increase in output
B) A decrease in unemployment and an increase in output
C) An increase in inflation and no change in output
D) An increase in inflation and a decrease in output
The concept of the “velocity of money” refers to:
A) The total supply of money in the economy
B) The number of times money changes hands in a given period
C) The speed at which money circulates between banks
D) The rate at which inflation rises when money supply increases
A progressive tax system is one in which:
A) The tax rate remains constant for all income levels
B) Higher income earners pay a smaller percentage of their income in taxes
C) Lower income earners pay a larger percentage of their income in taxes
D) Higher income earners pay a larger percentage of their income in taxes
If the government increases its spending without raising taxes, this will likely:
A) Shift the aggregate demand curve to the left
B) Increase government debt
C) Decrease interest rates
D) Decrease inflationary pressures
A country is said to have a comparative advantage in producing a good if:
A) It can produce the good using fewer resources than other countries
B) It can produce the good at a lower opportunity cost than other countries
C) It has the largest number of resources to produce the good
D) It has the highest labor productivity in producing the good
In an open economy, the trade balance is the difference between:
A) Imports and exports
B) Savings and investment
C) Government spending and taxes
D) Domestic production and foreign consumption
In the short run, an increase in the price level will:
A) Increase real GDP and decrease the unemployment rate
B) Decrease real GDP and increase the unemployment rate
C) Have no effect on real GDP or unemployment
D) Increase real GDP but have no effect on the unemployment rate
Which of the following is a characteristic of a recessionary gap?
A) The economy is producing above its potential output
B) The unemployment rate is lower than the natural rate
C) Aggregate demand exceeds aggregate supply
D) The economy is producing below its potential output
The Keynesian cross model of income determination shows the equilibrium level of output where:
A) Aggregate demand equals aggregate supply
B) Planned spending equals actual income/output
C) Government spending equals tax revenue
D) The economy operates at full employment
A major reason for the U.S. having a relatively low level of unemployment during times of inflation is:
A) A rapid increase in the supply of money
B) Increased demand for labor due to higher wages
C) Lower interest rates leading to increased investment
D) Labor market flexibility and a strong economy
If the nominal GDP is $2 trillion and the GDP deflator is 120, the real GDP would be:
A) $2 trillion
B) $2.4 trillion
C) $1.67 trillion
D) $1.2 trillion
If a country is experiencing deflation, the central bank is most likely to:
A) Increase the reserve requirement
B) Increase interest rates to reduce inflation
C) Decrease the money supply
D) Lower interest rates to stimulate borrowing and spending
Which of the following is an example of a structural unemployment?
A) A worker loses their job due to a recession
B) A worker loses their job because their skills are no longer in demand
C) A worker quits their job to search for a better opportunity
D) A worker is temporarily laid off due to seasonal changes in demand
A supply-side shock, such as an increase in oil prices, is likely to:
A) Increase inflation and reduce real GDP
B) Increase inflation and increase real GDP
C) Decrease inflation and increase real GDP
D) Decrease inflation and reduce real GDP
The aggregate supply curve is vertical in the long run because:
A) All resources are fully employed at the full employment level
B) The economy can only produce a fixed amount of output in the long run
C) The price level does not affect the economy’s output in the long run
D) Government policies cannot influence long-term production
If the central bank implements expansionary monetary policy, the likely effect is:
A) An increase in aggregate supply
B) A decrease in aggregate demand
C) An increase in aggregate demand
D) A decrease in inflation
A nation’s potential output is determined by:
A) The level of aggregate demand
B) The capacity of its resources and technology
C) The level of government spending
D) The money supply in circulation
If a country’s currency appreciates, this will likely result in:
A) An increase in exports and a decrease in imports
B) A decrease in exports and an increase in imports
C) No change in exports or imports
D) An increase in government revenue from exports
The concept of “crowding out” refers to:
A) The increase in government investment that crowds out private investment
B) The reduction in private sector investment caused by increased government borrowing
C) The effect of monetary policy on private spending
D) The reduction in exports due to higher tariffs
If the government wants to reduce the inflation rate, it can:
A) Increase government spending and lower taxes
B) Decrease the money supply and raise interest rates
C) Increase the money supply and decrease interest rates
D) Increase the minimum wage to reduce consumer spending
The concept of “crowding out” refers to:
A) Increased government spending leading to a reduction in private sector investment
B) The increase in public investment when private investment falls
C) The rise in tax rates that leads to reduced government spending
D) The increase in exports when government debt is reduced
Which of the following would most likely cause a shift to the right of the aggregate supply curve?
A) An increase in wages
B) A technological advancement
C) An increase in government spending
D) A higher tax rate on businesses
Which of the following is a characteristic of a recessionary gap?
A) High inflation and low unemployment
B) Actual output is less than potential output
C) Actual output is greater than potential output
D) The economy is producing at full employment
Which of the following would be an example of an automatic stabilizer?
A) An increase in military spending during a war
B) A decrease in income taxes as people earn more income
C) A government-funded infrastructure project
D) A central bank decision to raise interest rates
Which of the following is an effect of inflation?
A) Decreases in the general price level
B) Increases in the purchasing power of money
C) A decrease in the value of money
D) An increase in the money supply without affecting the economy
If an economy is experiencing a supply-side shock, such as a sudden increase in oil prices, the immediate result is:
A) A decrease in aggregate supply, leading to higher prices and lower output
B) An increase in aggregate supply, leading to lower prices and higher output
C) A decrease in aggregate demand, leading to lower prices
D) An increase in aggregate demand, leading to higher output
What is the term for the total value of all goods and services produced within a country’s borders in a given period?
A) Gross Domestic Product (GDP)
B) Net National Product (NNP)
C) National Income (NI)
D) Gross National Product (GNP)
In the Keynesian model, an increase in government spending will:
A) Shift the aggregate supply curve to the right
B) Shift the aggregate demand curve to the left
C) Shift the aggregate demand curve to the right
D) Have no effect on aggregate demand
If the central bank decreases the reserve requirement, the immediate effect will be:
A) A decrease in the money supply
B) An increase in the money supply
C) A decrease in bank lending
D) An increase in interest rates
Which of the following would most likely cause an increase in aggregate demand?
A) A decrease in consumer confidence
B) A reduction in government spending
C) A tax cut
D) An increase in the interest rate
In the short run, if the government increases its budget deficit by increasing government spending, this will likely result in:
A) An increase in national savings
B) A reduction in aggregate demand
C) An increase in interest rates and private investment
D) A reduction in the money supply
Which of the following is most associated with the classical view of macroeconomics?
A) Government intervention is necessary to maintain full employment
B) The economy is self-correcting in the long run
C) Fiscal and monetary policy can never affect the economy
D) Prices and wages are rigid in the short run
In the long run, the economy tends to operate at:
A) A level of output above its potential
B) A level of output below its potential
C) Full employment output
D) A high inflation rate
An increase in the price level, leading to a reduction in the purchasing power of money, would:
A) Increase consumer spending
B) Decrease consumer spending
C) Have no effect on consumer behavior
D) Increase savings
A government-run health insurance program that increases government spending and the budget deficit would most likely result in:
A) A decrease in the national debt
B) A decrease in the money supply
C) An increase in aggregate demand
D) A decrease in unemployment
The slope of the aggregate supply curve in the short run is:
A) Vertical
B) Horizontal
C) Upward sloping
D) Downward sloping
The natural rate of unemployment includes:
A) Only structural unemployment
B) Only frictional unemployment
C) Structural and frictional unemployment
D) All types of unemployment, including cyclical
If the money supply grows faster than the economy’s real output, the likely result will be:
A) A decrease in inflation
B) An increase in the inflation rate
C) A decrease in interest rates
D) An increase in the value of money
Which of the following is a policy action that would likely result in an increase in aggregate supply?
A) A decrease in taxes on businesses
B) An increase in government spending
C) A rise in consumer confidence
D) A decrease in business investment
If an economy is experiencing deflation, the central bank is likely to:
A) Increase interest rates
B) Decrease government spending
C) Increase the money supply
D) Reduce taxes
When the economy is in a recession, the government may attempt to reduce unemployment by:
A) Raising interest rates to control inflation
B) Increasing government spending or cutting taxes
C) Increasing interest rates to curb inflation
D) Decreasing government spending to balance the budget
In the IS-LM model, the IS curve represents:
A) The relationship between interest rates and national income in the goods market
B) The relationship between the money supply and the interest rate
C) The relationship between investment and savings
D) The relationship between income and investment
In the long run, economic growth is primarily determined by:
A) Changes in government spending
B) Technological improvements and increases in capital
C) Increases in consumer spending
D) Fluctuations in interest rates
A decrease in business taxes is likely to:
A) Increase business investment and shift the aggregate supply curve to the right
B) Decrease business investment and shift the aggregate demand curve to the left
C) Increase government spending
D) Decrease consumer spending
A country experiences an increase in its interest rates, which leads to a higher demand for its currency. This is an example of:
A) A decrease in the value of the currency due to inflation
B) A decrease in exports due to the appreciation of the currency
C) A decrease in imports due to a stronger domestic currency
D) A stronger exchange rate leading to increased foreign investment
Which of the following is most likely to increase the natural rate of unemployment?
A) An increase in the minimum wage
B) A decrease in interest rates
C) An increase in government spending
D) A reduction in income taxes
If the economy is in a recessionary gap, it indicates that:
A) Aggregate supply is too high
B) The economy is producing less than its potential output
C) Inflation is increasing rapidly
D) Unemployment is at a natural level
Which of the following would most likely cause an increase in the demand for money?
A) A decrease in income
B) A decrease in the price level
C) A rise in income
D) A fall in interest rates
In the short run, a decrease in the price of oil would most likely result in:
A) A decrease in aggregate demand
B) An increase in aggregate supply
C) A decrease in output and prices
D) An increase in interest rates
If the central bank increases the reserve requirement, the immediate effect will be:
A) An increase in the money supply
B) A decrease in the money supply
C) A decrease in interest rates
D) An increase in bank lending
The aggregate demand curve shows the relationship between:
A) The price level and the total quantity of goods and services demanded in the economy
B) The price level and the total quantity of goods and services supplied in the economy
C) The national income and the total quantity of goods and services demanded
D) The national income and the total quantity of goods and services supplied
A tax cut is most likely to shift the aggregate demand curve:
A) To the left
B) To the right
C) Upward
D) Downward
If the economy is operating above full employment, the likely result will be:
A) Inflationary pressure
B) Unemployment rates will decrease further
C) A decrease in interest rates
D) A decrease in the price level
In the long run, an increase in government spending will:
A) Increase the price level and output
B) Increase output without changing the price level
C) Not affect output but increase the price level
D) Increase both the price level and interest rates
The long-run aggregate supply curve is:
A) Upward sloping
B) Horizontal
C) Vertical at full employment output
D) Downward sloping
Which of the following best describes a key feature of the Keynesian aggregate supply curve?
A) It is vertical in the short run
B) It is horizontal until the economy reaches full employment
C) It slopes upward continuously
D) It slopes downward as real GDP increases
The concept of potential GDP refers to:
A) The total amount of goods and services produced at the lowest possible price level
B) The amount of output an economy can produce when operating at full employment
C) The total value of goods and services produced in a recession
D) The total output produced during a period of inflation
Which of the following is most likely to result in inflation?
A) A decrease in the money supply
B) An increase in wages without a corresponding increase in productivity
C) A decrease in consumer spending
D) A decrease in the interest rate
In the classical model, the economy is considered to be self-adjusting. This means that:
A) Prices and wages are flexible, and the economy will return to full employment without intervention
B) The government must intervene to correct market failures
C) Unemployment will remain high until the government acts
D) Interest rates are set by the central bank to maintain full employment
The Phillips curve shows the relationship between:
A) Unemployment and inflation
B) Inflation and real GDP
C) Unemployment and interest rates
D) Real GDP and the money supply
A country’s potential GDP is determined by:
A) The money supply
B) The level of government spending
C) The availability of labor, capital, and technology
D) The level of exports and imports
If a country has a current account deficit, it is:
A) Borrowing from other countries to finance its investments
B) Increasing its savings rate
C) Exporting more goods and services than it imports
D) Reducing its foreign debt
Which of the following is a function of money in the economy?
A) Store of value
B) Medium of exchange
C) Unit of account
D) All of the above
In a closed economy, national savings is equal to:
A) Investment
B) Government spending
C) Exports minus imports
D) The budget deficit
Which of the following would most likely occur if the central bank raises the federal funds rate?
A) An increase in the money supply
B) A decrease in the money supply
C) A decrease in consumer spending
D) An increase in government spending
If an economy is experiencing a high level of inflation, the central bank may:
A) Decrease the reserve requirement
B) Lower interest rates
C) Sell government bonds
D) Increase the money supply
In the IS-LM model, the LM curve represents:
A) The relationship between interest rates and national income in the goods market
B) The relationship between the money supply and interest rates in the money market
C) The total investment in the economy
D) The level of government spending and taxation
Which of the following is likely to result in an increase in investment?
A) A decrease in business taxes
B) An increase in interest rates
C) A decrease in consumer confidence
D) An increase in government spending
When the government runs a budget deficit, it:
A) Decreases the national debt
B) Reduces national savings
C) Increases the supply of money
D) Increases the demand for money
A reduction in taxes is likely to:
A) Increase government revenue and shift the aggregate supply curve to the left
B) Increase disposable income, which boosts aggregate demand
C) Decrease the money supply and reduce output
D) Decrease aggregate demand and shift the LM curve to the right
In the context of monetary policy, the primary goal of lowering interest rates is to:
A) Increase consumer and business spending
B) Reduce inflation
C) Increase government spending
D) Decrease the national debt
In the long run, which of the following will shift the aggregate supply curve to the right?
A) A decrease in input prices
B) A decrease in the money supply
C) A decrease in government spending
D) A reduction in taxes on businesses
If the economy is experiencing deflation, the government is most likely to:
A) Increase taxes
B) Reduce interest rates
C) Increase the reserve requirement
D) Decrease government spending
In an open economy, the exchange rate is determined by:
A) The government’s control over the money supply
B) The total amount of exports and imports
C) The demand and supply of the currency in the foreign exchange market
D) The central bank’s interest rate policy
An increase in the minimum wage is likely to:
A) Increase the natural rate of unemployment
B) Decrease aggregate demand
C) Lead to a decrease in wages for low-skilled workers
D) Increase government spending
The short-run aggregate supply curve is upward sloping because:
A) As output increases, the price level falls
B) As output increases, firms hire more workers, and the cost of production rises
C) The money supply increases as output increases
D) Firms expect lower costs of production as output increases
A decrease in the exchange rate will lead to:
A) An increase in exports
B) A decrease in exports
C) An increase in the demand for domestic currency
D) A decrease in the money supply
The primary reason for stagflation is:
A) An increase in government spending
B) An increase in the money supply
C) A supply-side shock, such as rising oil prices
D) A decrease in the aggregate demand
The concept of “inflation targeting” involves:
A) Setting a target level for inflation and using monetary policy to achieve it
B) Using fiscal policy to control inflation
C) Increasing government spending to reduce inflation
D) Raising interest rates to reduce the money supply