1

According to a circular flow diagram of a given country, which of the following is false?

a) Income received by households can be spent, saved, or used to pay taxes

b) Expenditures received by firms can be used to pay resources, taxes, or investment spending

c) Governments receive tax revenue, borrow money, and conduct government spending

d) Currency received from foreign countries can be used to purchase exports, and currency sold to foreign countries is used to purchase imports

2

According to the circular flow diagram (i) ____ spend, are net lenders, and pay taxes (ii) ____ spend, are borrowers, and pay taxes and (iii) ____ spend, borrow, and do not pay taxes.

a) households, governments, firms

b) households, firms, governments

c) firms, households, governments

d) firms, governments, households

3

If firms spend more in resource markets

a) more firm revenue is received from the goods and services market

b) less firm revenue is received from the goods and services market

c) less income is received by household

d) less income is spent on goods and services

4

As the price level in an economy decreases

a) Exports will decrease and imports will increase

b) Investment spending will decrease

c) Resource costs will decrease in the long-run

d) The purchasing power of wealth decreases

5

Suppose the aggregate price level (GDP Deflator) in the economy increases. Which of the following will NOT occur?

a) The aggregate demand curve will shift inward

b) A decrease in the purchasing power of money causes a decrease in consumer spending

c) The "interest rate effect" will cause a decrease in consumer and investment spending

d) An increase in profits, given constant costs in the short-run, causes firms to increase production

6

As the price level in an economy decreases

a) Aggregate demand increases

b) Interest rate increase

c) Aggregate quantity demanded increases

d) Aggregate supply increases

7

In the long run, as the aggregate price level in an economy increases there is

a) An increase in the quantity supplied by firms

b) No change in the quantity supplied by firms

c) A decrease in the quantity supplied by firms

d) An increase in the quantity demanded by households

8

In the short-run, as the aggregate price level in an economy increases there is

a) A decrease in the quantity supplied by firms

b) No change in the quantity supplied by firms

c) An increase in the quantity demanded by households

d) An increase in the quantity supplied by firms

9

Regarding Aggregate Supply, as the price level increases

a) Firm profits will increase in the short-run, but not the long-run

b) Firm profits will decrease in the short-run, but not in the long-run

c) Firm profits will increase in the short-run and the long-run

d) Firm profits will decrease in the short-run and the long-run

10

How will an economy "self-correct" if actual production is currently less than potential production?

a) Aggregate demand will increase

b) Aggregate demand will decrease

c) Short-run aggregate supply will increase

d) Short-run aggregate supply will decrease