QUESTION 1

Note: For answeringallquestions in this Quiz, keep in mind that ademand shockis a change in the equilibrium real GDP determined by the crossing points of IS and LM curves. Asupply shockis a change in the production capacity. When the change ispositive, the shock is called favorable. When the change isnegative, the shock is called adverse. Themagnitude of a demand shockis the absolute value of the change in equilibrium real GDP, and themagnitude

a supply shockis the absolute value of the change in the production capacity.

The production capacity of an economy is

a.

the output that it produces when the entire capital stock in the economy is fully utilized.

b.

the output that it produces when every adult in the economy is fully employed.

c.

the output that it produces when every adult in the economy is fully employed.

d.

the minimum output that it can produce at any moment given its resources.

e.

the maximum output that it can produce on a sustained basis.

f.

the minimum output that it can produce on a sustained basis.

QUESTION 21.

The amount of output that an economy can produce in the short run

a.

is exactly equal to the economy's production capacity, no more and no less.

b.

can drop below the economy's production capacity, but cannot rise above that level.

c.

can rise above the economy's production capacity, but cannot drop below that level.

d.

can deviate from its production capacity depending on the intensity of resource use.

QUESTION 31.

If prices are fully flexible in an economy in the short run, GDP of that economy would always

a.

deviate from the economy's production capacity.

b.

be equal to the economy's production capacity.

c.

be above the economy's production capacity.

d.

be below the economy's production capacity.

QUESTION 41.

In macroeconomics, "liquidity trap" refers to a situation where

a.

an economy is in overheating and its LM curve has become horizontal at zero interest rate.

b.

an economy is in recession and its LM curve has become horizontal at zero interest rate.

c.

an economy is in recession and excessive liquidity drives up the aggregate expenditure.

d.

an economy is in overheating and its LM curve has become vertical.

e.

an economy is in recession and its LM curve has become vertical.

QUESTION 51.

In 2019, the European economy was in a long-run equilibrium. In 2020, the with the outbreak of COVID-19, (1) many European households curtailed their consumption as they became concerned about potential loss of their employment and income. Also, (2) the pandemic prevented households from purchasing some of the goods and services that they would have bought if the risks of exposure to COVID-19 were absent due to both mandatory lockdowns and restrictions as well as voluntary decisions by households to reduce economic activity outside of their immediate residential areas and spending on basic needs. Finally, (3) investment expenditure declined as businesses in Europe wondered when the economy would recover.The three observations described heresuggest that as a result of the pandemic, the European economy must have experienced:(recall that you should select the best answer only)

a.

no demand or supply shock.

b.

a favorable demand shock.

c.

an adverse demand shock.

d.

a favorable supply shock.

e.

an adverse supply shock.

QUESTION 61.

The U.S. economy suffered major aggregate supply and demand shocks due to the COVID-19 pandemic in 2020. The demand shock was much more severe than the supply shock in the sense that in the absence of policy intervention, the short-run equilibrium real output determined by the IS-LM curves would have declined much more than the shrinkage in production capacity. If the U.S. government and the Fed had not responded to the situation with their expansionary fiscal and monetary policies, by the end of 2020

a.

both inflation and GDP would have risen.

b.

both inflation and GDP would have dropped.

c.

inflation would have declined, but GDP would have risen.

d.

inflation would have risen, but GDP would have declined.

QUESTION 71.

This question is based on an article from The Economist, "Lessons of the 1930s," published on December 10, 2011. The article mentions several reasons why the Great Depression became a much bigger disaster that it would otherwise have been. Based on the article, which one of the following factors is commonly viewed by the economists as a key cause of the deepening of the Great Depression?

a.

In the early 1930s, labor costs rose due to government intervention.

b.

In the early 1930s, the government's regulatory burden on businesses more than doubled.

c.

In the early 1930s, fiscal and monetary policies became severely contractionary.

d.

In the early 1930s, fiscal and monetary authorities slashed taxes and interest rates.

e.

In the early 1930s, various countries colluded over their exchange rate and trade policies.

QUESTION 81.

The article, "Lessons of the 1930s," discusses the debates regarding the impact of macroeconomic policies on the recovery of the US economy during 1933 and 1936. According to this discussion, which one of the following is claimed by some economists as a contributory factor in that recovery?

a.

Increased government spending.

b.

Roosevelt's determination to get the budget balanced.

c.

Congress's spending cuts.

d.

Congress's tax increases.

e.

Doubling of the reserve requirements by the Fed.

QUESTION 91.

According to the article, "Lessons of the 1930s," reliance on the gold standard for exchange rate determination in the early 1930s

a.

helped stabilize European economies and financial systems.

b.

contributed to destabilization of European economies and financial systems.

c.

had no impact on the stability of European economies and financial systems.

d.

had no similarity with the use of the euro system in Europe these days.

e.

freed central banks to expand the money supply and reflate their economies.

QUESTION 101.

The article, "Lessons of the 1930s," points out that the trade policies followed by the governments after the collapse of the gold standard in the early 1930s have lessons for the ways in which the current economic crises around the world should be addressed. One of these lessons for the United States is that

a.

the US should sanction any country that devalues its currency against the US dollar.

b.

the US should sanction any country that revalues its currency against the US dollar.

c.

the US should impose trade restrictions on imports from countries like China that manipulate their currencies' exchange rates

d.

the US should coordinate its trade and macroeconomic policies with other countries to avoid competitive devaluations.

e.

the US should devalue its currency to expand its net exports and speed up its recovery process.