1.The FEline shows the level of output at which the ________ market is in equilibrium.

A) Goods

B) Asset

C) Labor

D) Money

2.Which of the following would shift the FEline to the right?

A) An adverse supply shock

B) An increase in labor supply

C) A decrease in the capital stock

D) An increase in the future marginal productivity of capital

3.If a country's working-age population decreases, then ________ and the FEline ________.

A) the labor supply curve shifts to the right; shifts to the right

B) the labor supply curve shifts to the right; shifts to the left

C) the labor supply curve shifts to the left; shifts to the right

D) the labor supply curve shifts to the left; shifts to the left

E) the labor demand curve shifts to the left; shifts to the left

4.A tremendous flood along the Mississippi River destroys thousands of factories, reducing the nation's capital stock by 5%. What happens to current employment and the real wage rate? (Hint: investment-saving diagram.)

A) Both employment and the real wage rate would increase.

B) Both employment and the real wage rate would decrease.

C) Employment would increase and the real wage would decrease.

D) Employment would decrease and the real wage would increase.

Decreased capital stock leads to lower marginal product of labor lower demand for labor; the shift of the labor demand curve to the left results in a new equilibrium with decrease in both the real wage and employment.

5.The IScurve shows the combinations of output and the real interest rate for which

A) the goods market is in equilibrium.

B) the labor market is in equilibrium.

C) the financial asset market is in equilibrium.

D) an increase in output will cause the market-clearing interest rate to be bid up.

6.Any change that reduces desired saving relative to desired investment (for a given level of output) causes the real interest rate to ________ and shifts the IS curve ________.

A) increase; down and to the left

B) increase; up and to the right

C) decrease; down and to the left

D) decrease; up and to the right

7.A decline in expected future output would cause the IScurve to

A) shift up and to the right.

B) shift down and to the left.

C) remain unchanged.

D) shift up and to the right only if people face borrowing constraints.

A decline in expected future output leads to lower desired consumption today and higher desired saving, shifting the desired saving curve down and to the right. This causes the real interest rate to decrease for a given level of output, shifting the IS curve down and to the left.

8.An increase in the effective tax rate on capital would cause the IS curve to

A) shift up and to the right.

B) shift down and to the left.

C) remain unchanged.

D) remain unchanged if taxes are fully deductible from income; otherwise, shift up and to the right.

A increase in the effective tax rate on capital leads to lower desired investment, shifting the desired investment curve down and to the left. This causes the real interest rate to decrease for a given level of output, shifting the IS curve down and to the left.

9.An increase in the money supply would cause theIS curve to

A) shift up and to the right.

B) shift down and to the left.

C) remain unchanged.

D) shift up and to the right only if people face borrowing constraints.

10.TheIScurve would unambiguously shift up and to the right if there were

A) an increase in both government purchases and corporate taxes.

B) an increase in both government purchases and the expected future marginal product of capital.

C) an increase in the expected future marginal product of capital and a decrease in expected future output.

D) a decrease in both corporate taxes and the expected future marginal product of capital.

11.A decline in the price of a bond causes the yield of the bond to

A) rise.

B) fall.

C) remain unchanged.

D) rise if it's a short-term bond, fall if it's a long-term bond.

12.The LMcurve

A) is horizontal.

B) is vertical.

C) slopes downward.

D) slopes upward.

13.Looking only at the asset market, an increase in output would cause

A) the LMcurve to shift down and to the right.

B) the LMcurve to shift up and to the left.

C) an increase in the real interest rate along the LMcurve.

D) a decrease in the real interest rate along the LMcurve.

14.TheLMcurve illustrates that when income increases, the

A) price level must increase to clear the asset market.

B) real interest rate on nonmonetary assets must increase to clear the asset market.

C) price level must increase to clear the goods market.

D) real interest rate on nonmonetary assets must increase to clear the goods market.

15.A change that increases the real money supply relative to real money demand causes

A) the LMcurve to shift down and to the right.

B) the LMcurve to shift up and to the left.

C) the IScurve to shift down and to the left.

D) theIScurve to shift up and to the right.

16.Banks decide to raise the interest rate they pay on checking accounts from 1% to 2%. This action would

A) increase money demand, shifting the LMcurve up and to the left.

B) increase money demand, shifting the LMcurve down and to the right.

C) decrease money demand, shifting the LMcurve up and to the left.

D) decrease money demand, shifting theLMcurve down and to the right.

17.You have just read that the Federal Reserve has increased the money supply to avoid a recession. For a given price level, you would expect the LMcurve to

A) shift up and to the left as the real money supply falls.

B) shift up and to the left as the real money supply rises.

C) shift down and to the right as the real money supply falls.

D) shift down and to the right as the real money supply rises.

18.When all markets in the economy are simultaneously in equilibrium, we say

A) markets are complete.

B) markets are perfect.

C) there is disequilibrium.

D) there is general equilibrium.

19.To reach general equilibrium, the price level adjusts to shift the ________ until it intersects with the ________.

A) IS curve; FEline and LMcurve

B) FEline; LMandIScurves

C) LMcurve; FE line and IS curve

D) NDcurve; FEline and NScurve

20.Suppose the intersection of the ISand LMcurves is to the left of the FEline. What would most likely eliminate a disequilibrium among the asset, labor, and goods markets?

A) A rise in the price level, shifting the LMcurve up and to the left

B) A fall in the price level, shifting the LMcurve down and to the right

C) A rise in the price level, shifting the IScurve up and to the right

D) A fall in the price level, shifting the IS curve down and to the left

21.After a temporary beneficial supply shock hits the economy, general equilibrium is restored by

A) a shift down and to the left of the IScurve.

B) a shift to the left of the FEline.

C) a shift up and to the left of the LMcurve.

D) a shift down and to the right of the LMcurve.

22.A temporary decrease in government purchases causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium.

A) rise; rise

B) rise; fall

C) fall; rise

D) fall; fall

23.A temporary decrease in government purchases causes the real interest rate to ________ and the price level to ________ in general equilibrium.

A) rise; rise

B) rise; fall

C) fall; rise

D) fall; fall

24.A decrease in money supply causes the real interest rate to ________ and the price level to ________ in general equilibrium.

A) rise; rise

B) remain unchanged; fall

C) remain unchanged; rise

D) fall; fall

25.Classical economists think general equilibrium is attained relatively quickly because

A) the real interest rate adjusts quickly.

B) the level of output adjusts quickly.

C) the real wage rate adjusts quickly.

D) the price level adjusts quickly.

26.Keynesian economists believe that in the short run

A) money neutrality exists and prices adjust rapidly.

B) money neutrality does not exist and prices adjust rapidly.

C) money neutrality exists and prices do not adjust rapidly.

D) money neutrality does not exist and prices do not adjust rapidly.

27.Under monetary neutrality, an increase in the money supply causes output to ________ and the price level to ________.

A) rise; rise

B) rise; not change

C) not change; not change

D) not change; rise