1. If the MPC = 2/3 and taxes are increased by 50 then output will: A) increase by 150. . B) decrease by 150. C) increase by 100. D) decrease by 100 E) none of the above.

2. The simple multiplier of Keynes model: A) is an over-simplified description of the economy. B) does not include financial markets or the effects of monetary policy. C) omits interactions changes for government actions. D) is all of the above E) is none of the above.

Use the following information to answer questions 3-6: The President asks you to find the equilibrium level of output for the economy. Suppose your are given that government spending is $10000, investment is $9500, autonomous spending is $6000, taxes are $3000, the marginal propensity to consume is .75, and, finally, the level of net exports is -$1000. What was the multiplier in this case?

3. Given the above, the equilibrium level of output would be? A) 27.500 B) 21.500 C) 89.000 D) 86,000 E) none of the above.

4. In the simple multiplier model, the tax multiplier would be: A) -4/3 B) -4 C) -3 D) same as the govent spending multiplier ... only negative E) none of the above.

5. In the simple multiplier model, the net export multiplier would be A) 4/3 B) 4 C) 3 D) 1/4 E) 3/4

6. Given the above, if exports increased by $1000 (so net now $0), the equilibrium level of output would be: A) 28.500 B) 22.500 C) 90.000 D) 93,000 E) none of the above.

7. Suppose businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases. Their reaction would initially shift a. aggregate demand right. b. aggregate demand left. c. aggregate supply right. d. aggregate supply left.

8. Which of the following shifts aggregate demand to the right? a. Congress reduces purchases of new weapons systems. b. Firms worry about future profits c. The price level falls. d. Net exports increase.

9. Which of the following shifts long-run aggregate supply right? a. an increase in either technology or the human capital stock. b. an increase in human capital but not technology. c. an increase in technology, but not the human capital stock. d. neither an increase in technology nor the human capital stock.

13. Keynes believed that economies experiencing high unemployment should adopt policies to a. reduce the money supply. b. reduce government expenditures. c. increase aggregate demand. d. increase aggregate supply.

14. Potential output is the: A) level of output that is consistent with zero percent unemployment. B) level of output that is consistent with the lowest sustainable unemployment rate. C) highest level of output that is consistent with stable prices in the economy. D) choices A and C. E) choices B and C.

15. A shift in the short-run aggregate supply could be caused by which of the following? A) A change in input prices.

D) A technological innovation. B) A decreased supply of oil or energy.

E) All of the above. C) The breakdown of OPEC.

16. Suppose that government spending rises. Assuming that the economy is operating at potential GDP, the long-run effect of this policy change should be: A) higher prices with no change in output.

D) lower prices with higher output. B) higher prices with higher output.

E) lower prices with no change in output. C) higher prices with lower output.

17. Which of the following is an accurate statement according to the classical model? A) Prices and wages always respond quickly to clear markets. B) The aggregate supply curve is vertical above potential GDP. C) Changes in aggregate demand affect only the price level. D) Policy can have no effect on the level of employment because it cannot change the level of GDP. E) All of the above.

18. A Keynesian would recommend which of the following for an economy with a low level of output in equilibrium? A) An increase in government spending. B) A governmentally instituted higher price of oil. C) A rationing of an essential input. D) None of the above. E) All of the above.

19. True/False/Uncertain: In the classical model, large reductions in demand can cause unemployment to rise even if the economy were initially operating well below its potential.

20. True/False/Uncertain: A classical economist believes that prices and wages would respond to preserve equilibrium at potential GDP if only governmental obstacles to the appropriate adjustments were not in place.

21. The larger the Marginal Propensity to Consume (MPC), the _____________ the impact of changes in net exports a) smaller b) greater c) more negative d) less likely e) doesn't have an impact

22. In the long-run, changes in output are solely determined by: a) interest rates b) the price level c) aggregate demand d) factors of production

23. Because(the) _______________ does not affect the long-run determinants of real GDP, the long-run aggregate-supply is vertical.

24. In the classical model, changes in Aggregate demand are important only in determining __________________. In the Keynesian Model, these changes in AD affect _______________ as well.

25. If the mpc is 10% (or .1) then an initial increase in government spending by $10,000 will cause an increase in aggregate demand of: a) $1000 b) $10,000 c) $100,000 d) $1,000,000 e) $10

26. The Federal Reserve can influence output levels (and thus employment) by influencing the level of _______________________.

27. Crowding out can occur because as the government raising spending: a) interest rates will fall because of lower taxes b) net exports will increase along with government spending c) the government will lower taxes as well d) the government's borrowing will reduce investment spending e) None of the above

Using the following information to answer questions 28-30: Suppose you are given the following information. Autonomous spending is at $3000, government spending is at $4000, investment spending is at $2000, net exports are $1000, taxes are set at $3000 and the mpc is .8 or 80%.

28. The equilibrium output for this economy would be: a) $7600 b) $9500 c) $38,000 d) $24,000 e) none of the above

29. For every $1 the government increases spending, in theory, the economy would grow by: a) 80 cents b) $4 dollars c) 20 cents d) $5 dollars e) none of the above

30. For every $1 the government increases TAXES by, in theory, the economy would shrink by: a) 80 cents b) $4 dollars c) 20 cents d) $5 dollars e) none of the above

31. The Classical model emphasizes the role of ________________________ and the Keynesian model emphasizes the short-run role of _________________________. 32. If the government wants to increase spending, one potential issue is that the government would have to "pay" for this by either _____________________________ or by

____________________________

33. In the classical model, changes in Aggregate demand affect _______________. In the Keynesian Model, these changes affect _________________.

34. True/False/ Uncertain: If people are spending a great proportion of their income, attempts to take government action will be less effective.

35. The key difference between the Keynesian and Classical schools is the _____________ at which markets adjust to changes in equilibrium.

36. The recessionary gap occurs when ________________________ is less than _____________________.

37. A shift in the short-run aggregate supply could be caused by which of the following? A) A change in input prices. D) A technological innovation. B) A shift in net exports. E) All of the above. C) Changes in the MPC.

38. A Classical economics would recommend which of the following for an economy with a low level of output in equilibrium? A) An increase in government spending. B) Setting price controls for the supply markets. C) Issuing a new tax policy D) None of the above. E) All of the above.

39. An increase in AD in the short run will cause _________________ to shift _______________. In the long-run, it will cause _____________________ to increase.

40. The liquidity trap referring to when actions by the Fed to increase ___________________ stop impacting peoples' decisions to ______________________.

43. Suppose businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases. Their reaction would initially shift a. aggregate demand right. b. aggregate demand left. c. aggregate supply right. d. aggregate supply left.

44. Most economists believe that classical theory describes the world a. in the short run. b. in the long run. c. in both the short run and the long run. d. in neither the short run nor the long run.

EQUATION: C + I + G + NX - (mpc x T) (1 - mpc)