1.Assume a contractionary gap of $4 trillion. With MPC equal to 0.75, what would be the recommended fiscal policy action in order to return output to full employment levels?

a. Increase taxes by $4 trillion

b. Decrease spending by $1 trillion

c. Increase spending by $1 trillion

d. Purchase $1 trillion worth of government securities

e. Decrease taxes by $4 trillion

2.The natural rate of unemployment

a. means that the economy will always operate at its natural rate

b. is equal to the total of frictional and structural employment

c. means that the economy will always realize its potential output

d. is a fixed unemployment rate of 5% that does not change over time

e. is unattainable given an economy's existing resources.

3.Due to mainstream pessimism about labor markets, many unemployed workers end their search for jobs. What effect does this have on the labor force?

a. Rises because more people are now structurally unemployed

b. Falls because discouraged workers are not counted in the official measurement of labor force

c. Not affected because discouraged workers are not counted in the official measurement of labor force

d. Falls because the amount of frictional unemployment has increased.

e. Rises because cyclical unemployment is increasing.