2) (05.01 MC) Which of the following best explains the effect of a contractionary fiscal and monetary policy on the aggregate demand of an economy?

The aggregate demand decreases, due to a decrease in taxes and reserve requirements.

The aggregate demand decreases, due to an increase in taxes and reserve requirements.

The aggregate demand increases, due to an increase in taxes and reserve requirements.

The aggregate demand remains unaffected, due to decreases in taxes and reserve requirements.

The aggregate demand remains unaffected, due to increases in taxes and reserve requirements.

4) (4.07 MC)

The following table shows the amount of money people would be willing to demand and supply for different rates of interest:

Real rate of interest (%)	Funds demanded ($)	Funds supplied ($)
2	25000	10000
4	20000	13000
6	15000	15000
8	10000	17000
10	5000	20000

What is the equilibrium rate of real interest in this economy, and what will happen at a 10% interest rate?

The equilibrium rate of real interest is 2%; and at a 10% interest, there will be excess demand for funds in the economy.

The equilibrium rate of real interest is 2%; and at a 10% interest, there will be excess savings in the economy.

The equilibrium rate of real interest is 6%; and at a 10% interest, there will be excess savings in the economy.

The equilibrium rate of real interest is 6%; and at a 10% interest, there will be excess demand for funds in the economy.

The equilibrium rate of real interest is 8%; and at a 10% interest, there will be excess demand for funds in the economy.

8) (05.07 MC) Which of the following is the expected outcome of a reduction in income taxes on high-income individuals?

Only decrease aggregate demand

Increase aggregate demand and increase aggregate supply Increase aggregate demand and decrease aggregate supply

Only increase aggregate supply

Decrease aggregate demand and decrease aggregate supply

10) (05.02 MC) Use the graph to answer the question that follows. In the accompanying graph, the long-run Phillips curve has shifted from LR to LR. Which of the following could explain this shift?

Expansionary fiscal policy that reduces unemployment and increases inflation

A lower expected rate of inflation

The economy moving, reaching full employment, with real GDP corresponding to long-run aggregate supply

More efficient labor markets that reduce frictional unemployment and the natural rate of unemployment

An inward shift in short-run aggregate supply that increases cyclical unemployment

14) (03.01 LC) Which of the following components will be included in determining the aggregate demand of a country?

Consumption of durable goods by foreign households

Per capita income of the population

Technological innovation

The government spending for new highway construction

The net value of cotton exported by another country

19) (04.06 MC) In a banking system with limited reserves, which of the following best explains why a monetary policy cannot help a country remove the inflationary gap in the economy?

A crowding out effect reduces private investment.

An increase in taxes discourages investment in the economy.

An increase in the reserve ratio does not translate to changes in the interest rate quickly.

Buying of securities leads to a decrease in the amount of credit in the economy.

Government spends too much on the unnecessary areas.

24) (03.08 MC) Which of the following is the result of an economy implementing a contractionary fiscal policy?

The aggregate demand curve will shift to the left.

The aggregate demand curve will shift to the right.

The economy will experience a crowding-out effect.

The government will increase its spending on education.

The tax rates in the economy will decrease.

33) (05.01 MC) Which of the following policy combinations will reduce private business investment? Assume the banking system operates with limited reserves.

The government decreasing spending, and the central bank decreasing the reserve requirement

The government increasing spending, and the central bank increasing the reserve requirement

The government increasing tax rates, and the central bank buying securities

The government increasing tax rates, and the central bank decreasing the reserve requirements

The government increasing tax rates, and the central bank selling securities 37) (01.06 HC)

Suppose the demand for beef in the market changed due to a sudden increase in chickens affected by bird flu in the country. Which point on the graph shows the new equilibrium price for beef?

P1

P1 - P3

P2

P2 - P1

P3

42) (03.06 MC) Assume an economy is in short-run equilibrium with a real output (or real GDP) of Y₀ and a price level of PL₀. If the government increases income taxes on all income levels, what is the likely effect?

An increase in real output and a decrease in the price level

A decrease in real output and a decrease in the price level

An increase in real output with an indeterminate effect on the price level

An increase in real output and an increase in the price level

An indeterminate effect on real output and an increase in the price level

48) (02.03 MC) Which of the following individuals is considered "cyclically" unemployed by economists?

Mary, who recently retired and is now doing volunteer work at her church

Jane, who has just graduated from college and is assessing different accounting job offers

Charles, who is working 10 hours per week as a waiter, while seeking a better job with more hours

Edward, who has been laid out from building houses, as a result of fewer housing starts

Irene, who has turned 18, graduated from high school and has begun searching for her first job

50) (03.05 MC) Which of the following is true if the economy is in long run equilibrium?

There is an inflationary output gap in the economy.

There is a deflationary output gap in the economy.

Equilibrium is unstable and will go on fluctuating.

There is full employment in the economy.

Full employment level is not achievable in the long run.

52) (01.06 MC)

Which of the following accurately represents the disequilibrium in the market?

Qd = P*

Qd = Qs

Qs

Qs = P*

Qs > Qd

54) (04.02 MC)

Assume that the inflation-adjusted interest rate is 4% and that the expected rate of inflation is 5%. What is the interest rate charged by banks on loans?

-1%

1%

4%

5%

9%

55) (06.05 HC) What will the effect of depreciation of the domestic currency (owing to contractionary fiscal policy) be on the net exports and aggregate demand of a country?

The net exports will increase, but the aggregate demand of the country will decrease.

The net exports will decrease, but the aggregate demand of the country will increase.

Both the net exports and the aggregate demand of the country will increase.

Both the net exports and the aggregate demand of the country will decrease.

The net exports will decrease, and the aggregate demand may increase or decrease.

56) (04.03 LC) The basic money supply, M1, is defined as the value of

currency in circulation plus bank reserves

demand deposits plus savings accounts

currency in circulation plus existing government bonds

currency in circulation plus demand deposits

currency in circulation, plus demand deposits, plus saving accounts

57) (02.02 LC) What will be the impact of costs associated with environmental pollution while computing the GDP of a country?

Decreases nominal GDP and real GDP, as well

Decreases real GDP but increases nominal GDP

GDP stays unaffected

Increases nominal GDP and real GDP, as well

Increases real GDP but decreases nominal GDP

58) (05.03 MC) Which of the following could occur if a central bank keeps decreasing the money supply constantly in an economy?

The nominal GDP and the real output both increase.

The nominal GDP decreases as the price level increases.

The price level will decrease and the real output will be unaffected. The price level and the real output will increase in direct proportion to the change in the money supply.

The real GDP and nominal GDP will both decrease in direct proportion to the change in the money supply.

Graph for number 37

(01.06 HC) Use the graph to answer the question that follows. Price/$ $1 p3 p2 d3 d1 d2 O q2 91 93 Quantity