1. In deriving AD, when the cost of borrowing to purchase goods and services increases, the quantity demanded for those goods and services will generally decrease. This is a description of the

	interest rate effect to explain aggregate demand's negative slope
	interest rate effect to explain aggregate demand's positive slope
	cause of shifts in the aggregate demand model
	impact of people's real wealth on aggregate demand
	substitution effect explanation for the overstatement of inflation

2. A $5 increase in the expenditure increases the total output by the maximum of $25. Which of the following is the correct marginal propensity to save?

	0.2
	0.8
	0.6
	0.4
	0.5

3. Which of the following best describes the reason for trade-off between inflation and unemployment in the short run?

	Sticky prices and wages
	Sticky prices and flexible wages
	Flexible prices and sticky wages
	Flexible prices and wages
	Producers' unwillingness to respond to price changes

4. Which of the following will shift the short-run aggregate supply curve (SRAS) to the left?

	Decrease in resource availability
	Decrease in wage rate
	Decrease in price level
	Increase in productivity
	Decrease in corporate tax rates

5. What is true about movement along the aggregate supply curve in the short run?

	There is an inverse relationship between inflation and the unemployment rate.
	There is no direct relationship between inflation and the unemployment rate.
	There is a positive relationship between inflation and the unemployment rate.
	An increase in inflation creates a demand shock that in turn increases the unemployment rate.
	There is an inverse relationship between the general price level and the wage rate.

6. Which of the following is the reason for the lack of long-run trade-off between unemployment and inflation?

	Flexible prices and wages in the long run
	Flexible wages and fixed prices in the long run
	Flexible prices and fixed wages in the long run
	Fixed prices and wages in the long run
	Fixed prices and flexible wages in the short run

7. Which of the following is true about the characteristics of the long-run aggregate supply curve and the production possibilities curve?

	Resources are fully employed in both curves.
	Price is an important variable to determine the curves.
	A rightward shift in the long-run aggregate supply curve resembles a leftward shift of the production possibility curve.
	A leftward shift in both long-run aggregate supply curve and production possibility curve reflects an increase in the total output.
	A production possibility curve is constructed when all the inputs are fixed, and in the case of the long-run aggregate supply curve, all the inputs are flexible.

8. Which of the following would be the result of an increase in private investment in an economy due to favorable interest rates and expectations in the short run?

	Output would decrease, aggregate demand would decrease, and unemployment would decrease.
	Output would increase, aggregate demand would increase, and unemployment would increase.
	Output would decrease, aggregate demand would decrease, and unemployment would increase.
	Output would decrease, aggregate demand would increase, and unemployment would increase.
	Output would increase, aggregate demand would increase, and unemployment would decrease.

9. Assuming that the economy is initially in a long-run equilibrium, which one of the following scenarios would result from a sudden increase in aggregate demand in the short run?

	The economy will face inflation and a decrease in output.
	The economy will face depression and an increase in output.
	The economy will face stagflation and an increase in output.
	The economy will face inflation and an increase in output.
	The economy will face deflation and a decrease in output.

10. Which of the following best explains how recessionary gaps in the economy are fixed by self-adjustment in the long run?

	The decrease in wages will increase the short-run aggregate supply and increase output to the full employment level.
	The increase in wages will decrease the short-run aggregate supply and increase output to higher than the full employment level.
	The increase in wages will increase the short-run aggregate supply and increase output to the full employment level.
	The decrease in wages will decrease the short-run aggregate supply and decrease output to lower than the full employment level.
	The increase in wages will decrease the short-run aggregate supply and increase output to the full employment level.

11. An economy in long-run equilibrium experiences a temporary leftward shift in the short-run aggregate supply (SRAS) curve. Which of the following explains the self-adjustment of the economy in the long run?

	The positive supply shock will reduce output and increase unemployment, but once wages increase, the output will return to the full employment level.
	The negative supply shock will reduce output and increase unemployment, but once wages decrease, the output will return to the full employment level.
	The negative supply shock will increase output and decrease unemployment, but once wages decrease, the output will return to the full employment level.
	The positive supply shock will reduce output and unemployment, but once wages increase, the output will return to the full employment level.
	The negative supply shock will increase output and unemployment, but once wages decrease, the output will return to the full employment level.

11. How can an expansionary fiscal policy be useful in an economy?

	Decreasing money supply can help relieve inflationary pressures in the economy.
	Increasing tax rates can help relieve inflationary pressures in the economy.
	Decreasing tax rates can help relieve inflationary pressures in the economy.
	Increasing government expenditures can help relieve recessionary pressures in the economy.
	Increasing money supply can help relieve recessionary pressures in the economy.

12. Which of the following accurately describes a limitation of fiscal policy?

	The spending multiplier will always be more effective than the tax multiplier because of savings.
	The government can have no direct impact on aggregate demand in the economy.
	The government can influence the price level but not real output or aggregate demand.
	The government has the ability to slow inflation but not close a recessionary gap.
	There is always a time lag to discretionary fiscal policy between action and impact.

13. How do automatic stabilizers function during times of an economic downturn?

	Transfer payments will increase, and income tax revenues will decrease.
	Transfer payments and income tax revenues will increase.
	Transfer payments will decrease, and income tax revenues will remain the same.
	Transfer payments will remain the same, and income tax revenues will decrease.
	Transfer payments and income tax revenues will decrease.

14. As automatic stabilizers, transfer payments ________ and income taxes ________ in order to maintain ________ when the economy is experiencing a negative output gap.

	increase; decrease; aggregate demand
	increase; increase; unemployment
	decrease; decrease; aggregate demand
	decrease; increase; money supply
	increase; increase; aggregate demand