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1. The aggregate supply curve relating the price level to real GDP has three distinguishing segments. Which one of the following indicates the segments? A) The horizontal segment reflects the increasing pressure on the price level as firms bid for resources. The upward-sloping segment reflects the availability of unused resources. The vertical segment reflects the full employment of all resources. B) The horizontal segment reflects the availability of unused resources. The upward-sloping segment reflects the full employment of all resources. The vertical segment reflects the increasing pressure on the price level as firms bid for resources. C) The horizontal segment reflects the full employment of all resources. The upward-sloping segment reflects the increasing pressure on the price level as firms bid for resources. The vertical segment reflects the availability of unused resources. D) The horizontal segment reflects the availability of unused resources. The downward-sloping segment reflects decreasing pressure on the price level as firms bid for resources. The vertical segment reflects the full employment of all resources. E) The horizontal segment reflects the availability of unused resources. The upward-sloping segment reflects increasing pressure on the price level as firms bid for resources. The vertical segment reflects the full employment of all resources. 2. Fiscal policy is government action to influence aggregate demand and in turn to influence the level of real GDP and the price level, through: A) expanding and contracting the money supply. B) regulation of net exports. C) changes in government spending and/or tax revenues. D) encouraging businesses to invest. 3. “It would be an undue hardship to require people whose income is below $15,000 per year to pay income taxes.” This statement reflects which of the following principles for a tax? A) Benefits-received. B) Inexpensive-to-collect. C) Ability-to-pay. D) Fairness of contribution. 4. Exhibit 14-6 Aggregate supply curve nar004-1.jpg In Exhibit 14-6, the aggregate supply curve becomes vertical at GDP = $1,200 because: A) there are no more workers available at any wage rate to increase real GDP. B) the price level remains constant. C) the only workers available would demand higher wage rates. D) the economy is experiencing low employment and low production. E) the Treasury is no longer allowed to explain away the deficit with creative accounting 5. Exhibit 14-8 Aggregate demand and supply nar005-1.jpg In Exhibit 14-8, if aggregate demand shifts from AD3 to AD4, real GDP will: A) rise from $7.0 to $8.0, and the price level will rise from 120 to 140. B) rise from $7.0 to $8.0, and the price level will rise from 120 to 170. C) rise from $7.0 to $8.0, and the price level will rise from 100 to 140. D) not change, and the price level will rise from 120 to 140. E) rise from $4.0 to $8.0, and the price level will rise from 120 to 140. 6. The marginal propensity to consume (MPC) is computed as the change in consumption divided by the change in: A) GDP. B) income. C) saving. D) none of the above 7. Which of the following is not a component of the aggregate demand curve? A) Government spending (G). B) Investment (I). C) Consumption (C). D) Net exports (X – M). E) Saving. 8. Find the tax multiplier if the MPC is 0.75. A) -4. B) -3. C) 0.33. D) 3. E) 4. 9. Exhibit 14-2 Aggregate supply and demand curves nar001-1.jpg In Exhibit 14-2, the change in equilibrium from E1 to E2 represents: A) cost-push inflation. B) demand-pull inflation. C) price-push inflation. D) wage-push inflation. 10. If the marginal propensity to consume (MPC) is 0.50, the value of the spending multiplier is: A) 5. B) 1. C) 2. D) 5. 11. The nation has its own MPC. When national income increases from $300 billion to $400 billion, national consumption increases from $300 billion to $360 billion. At Y = $400 billion, the MPC is: A) 0.2. B) 0.5. C) 0.6. D) 0.67. E) 1.33. 12. A rightward shift in the aggregate demand curve can be caused by an increase in: A) the price level. B) business investment spending. C) taxes. D) production costs. 13. After 1970, the share of federal spending allocated to national defense: A) declined sharply, while the share allocated to income security increased substantially. B) rose sharply, while the share allocated to income security declined substantially. C) was relatively constant, while the share allocated to income security declined modestly. D) declined modestly, while the share allocated to income security was relatively constant. 14. If a person is taxed $1,000 on an income of $10,000, taxed $2,000 on an income of $20,000, and taxed $3,000 on an income of $30,000, this person is paying a (an): A) progressive tax. B) regressive tax. C) proportional tax. D) poll tax. E) excise tax. 15. If an inflationary boom exists, the appropriate fiscal policy is to: A) increase the budget deficit. B) increase government spending and hold taxes constant. C) decrease government spending and/or raise taxes. D) hold government spending constant and decrease taxes. 16. The aggregate supply curve reflects the relationship between the price: A) of a particular good and the quantity supplied by all firms producing that good. B) of a particular good and the quantity supplied by the aggregate economy. C) level and the quantity supplied of all goods in the economy. D) level and the quantity of all goods purchased in the economy. 17. Automatic stabilizers are government programs that: A) exaggerate the ups and downs in aggregate demand without legislative action. B) bring expenditures and revenues automatically into balance without legislative action. C) shift the budget toward a deficit when the economy slows but shift it toward a surplus during an expansion. D) increase tax collections automatically during a recession. 18. A decrease in aggregate supply will cause the price level to: A) rise and GDP to fall. B) rise and GDP to rise. C) rise and the unemployment rate to fall. D) fall and GDP to rise. E) fall and the unemployment rate to rise. 19. Exhibit 14-3 Aggregate supply and demand curves nar002-1.jpg The shift from AS1 to AS2 in Exhibit 14-3 could be caused by a (an): A) sudden increase in the price of oil. B) increase in input prices for most firms. C) increase in workers’ wages. D) all of the above. 20. The interest-rate effect is the impact on real GDP caused by the relationship between the price level and the interest rate. A) direct B) independent C) linear D) inverse 21. The Keynesian analysis of fiscal policy argues that: A) fiscal policy should generally be expansionary except during periods of economic recession. B) fiscal policy should generally be restrictive except during inflationary booms. C) the federal budget should be balanced annually except during war. D) the federal budget should be used to maintain aggregate demand at a level consistent with full employment. 22. The real balances effect predicts that higher prices: A) make people worse off by reducing the value of their wealth, leading them to save more and spend less. B) make people worse off by reducing the value of their wealth, leading them to save less and spend more. C) make people better off by increasing the value of their wealth, leading them to save less and spend more. D) increase borrowing, leading to higher interest rates and less investment. E) make domestic goods relatively more expensive, increasing the demand for domestic goods and decreasing the demand for foreign goods. 23. When households’ marginal propensity to consume (MPC) increases, the size of the spending multiplier: A) also increases. B) decreases. C) remains unchanged. D) reacts unpredictably. 24. The Laffer curve is representative of which of the following schools? A) Supply-side school. B) Rational expectations school. C) Keynesians. D) Neo-Keynesians. E) Classical school. 25. Which of the following is not a component of the aggregate demand curve? A) Consumption (C). B) Investment (I). C) Government spending (G). D) Net exports (X – M). E) All of the above are components. 26. Keynesian analysis stresses that a tax cut that increases the government’s budget deficit or reduces its budget surplus: A) is appropriate during a period of inflation. B) will increase the money supply. C) will stimulate aggregate supply and, thereby, promote employment. D) will stimulate aggregate demand and, thereby, promote employment. 27. In the aggregate demand and aggregate supply model, A) the factors that cause the demand curves in both models to slope downward are the same. B) the factors that cause the supply curves in both models to slope upward are the same. C) the upward-sloping aggregate demand curve intersects the downward-sloping aggregate supply curve to determine the economy’s price level and GDP. D) the upward-sloping aggregate supply curve intersects the downward-sloping aggregate demand curve to determine the economy’s price level and GDP. E) the price level never changes even with shifts in aggregate demand and aggregate supply. 28. The aggregate demand curve: A) would be little affected by a technological advancement. B) shifts to the right when spending decreases. C) shifts to the left when there is a decrease in taxes. D) cannot move independently of the aggregate supply curve. E) shifts to the right when there is an expectation that future income will fall. 29. Because of the automatic stabilizers, a decline in the level of economic activity will cause: A) a reduction in tax revenues collected. B) an increase in government expenditures. C) a greater budget deficit. D) all of the above. 30. In the classical range of the aggregate supply curve, greater spending for consumer and investment goods results in: A) stagflation. B) more unemployment. C) greater output. D) a higher price level. 31. Stagflation is a period of time when the economy is experiencing: A) inflation and low unemployment. B) high unemployment and low levels of inflation at the same time. C) high inflation and high unemployment at the same time. D) low inflation and low unemployment at the same time. 32. Assume the economy is in recession and real GDP is below full employment. The marginal propensity to consume (MPC) is 0.50, and the government follows Keynesian economics by using expansionary fiscal policy to increase aggregate demand (total spending). If an increase of $1,000 billion aggregate demand can restore full employment, the government should: A) increase spending by $250 billion. B) decrease spending by $500 billion. C) increase spending by $1,000 billion. D) increase spending by $500 billion. 33. When the federal government is running a budget deficit: A) government tax revenues exceed government expenditures. B) government expenditures exceed government tax revenues. C) the economy must be in an economic recession. D) the size of the national debt will decline. 34. Generally, most economists feel that a sales tax is: A) regressive. B) proportional. C) progressive. D) fair. 35. In the aggregate demand/aggregate supply model, a country’s full-employment real GDP is represented by: A) prices. B) aggregate demand. C) aggregate supply. D) an increase in the general level of prices. 36. A tax multiplier equal to -4.30 would imply that a $100 tax increase would lead to a: A) $430 decline in real GDP. B) $430 increase in real GDP. C) 4.3 percent increase in real GDP. D) 4.3 percent decrease in real GDP. E) 43 percent decrease in real GDP. 37. The effect of an increase in aggregate supply is a (an): A) increase in the general level of prices and a decrease in real output. B) increase in the general level of prices and an increase in real output. C) decrease in the general level of prices and a decrease in real output. D) decrease in the general level of prices and an increase in real output. 38. Demand-pull inflation is associated with a (an): A) decrease in the aggregate supply curve. B) increase in the aggregate supply curve. C) increase in the aggregate demand curve. D) decrease in the aggregate demand curve. E) decline in the availability of a productive resource 39. A tax is proportional if, as a person’s income rises, the: A) tax rate is constant. B) tax rate falls. C) tax rate rises. D) amount of the tax is constant. E) amount of the tax falls. 40. The net exports effect is the inverse relationship between net exports and the ____ of an economy. A) potential real GDP B) chain-price deflator C) price level D) consumption spending 41. Exhibit 14-4 Aggregate supply and demand curves nar003-1.jpg In Exhibit 14-4 which of the following is not consistent with a shift in the aggregate demand curve from AD1 to AD2? A) A decrease in consumer spending. B) An increase in investment. C) An increase in government spending. D) An increase in net exports. 42. The fraction of each added dollar of income that is used for consumption is called the: A) average propensity to consumer (APC). B) autonomous consumption rate (ACR). C) marginal consumption propensity (MCP). D) marginal propensity to consume (MPC). 43. A decrease in real GDP would affect the U.S. economy by: A) cutting tax revenues and raising government expenditures. B) cutting government expenditures and raising tax revenues. C) raising both tax revenues and government expenditures. D) cutting both government expenditures and tax revenues. 44. Exhibit 14-8 Aggregate demand and supply nar005-1.jpg In Exhibit 14-8, if aggregate demand shifts from AD1 to AD2, A) real GDP will increase from $3.0 to $7.0, and the price level will remain the same. B) real GDP will increase from $3.0 to $4.0, and the price level will remain the same. C) real GDP and the price level will both remain the same. D) real GDP will increase from $3.0 to $4.0, and the price level will increase from 100 to 140. 45. Exhibit 14-8 Aggregate demand and supply nar005-1.jpg In Exhibit 14-8, when aggregate demand shifts from AD4 to AD5, the economy experiences: A) cost push-inflation. B) cost-pull inflation. C) demand-push inflation. D) demand-pull inflation. E) price-pull inflation. 46. Which of the following categories accounted for the lowest percent of the total federal government expenditures in recent years? A) Income security. B) National defense. C) Education and health. D) Interest on the national debt. 47. If aggregate demand increases in the intermediate range of the aggregate supply curve then the: A) price level rises and real GDP falls. B) price level rises and real GDP rises. C) price level falls and real GDP falls. D) price level falls and real GDP rises. 48. Which of the following can be classified as a regressive tax? A) Excise tax. B) Sales tax. C) Gasoline tax. D) All of the above. 49. Exhibit 14-4 Aggregate supply and demand curves nar003-1.jpg In Exhibit 14-4, point E2 represents: A) real GDP above full-employment GDP. B) real GDP that equals full-employment GDP. C) a depression. D) real GDP below full-employment GDP. 50. Which of the following is an example of a progressive tax? A) The excise tax on cigarettes. B) The federal tax on gasoline. C) The federal personal income tax. D) All of the above. 51. Some cities finance their airports with a departure tax: every person leaving the city by plane is charged a small fixed dollar amount that is used to help pay for building and running the airport. The departure tax follows the: A) benefits-received principle. B) ability-to-pay principle. C) flat-rate taxation principle. D) public-choice principle. 52. Exhibit 14-2 Aggregate supply and demand curves nar001-1.jpg A shift in the aggregate supply curve in Exhibit 14-2 from AS1 to AS2 would be caused by a (an): A) decrease in input prices. B) increase in input prices. C) increase in real GDP. D) decrease in real output. 53. When price level in the United States rises, A) there is a increased demand for borrowed money. B) producers’ demand for new machinery increases, contributing to an increase in aggregate demand. C) Americans tend to buy more foreign goods and services. D) the French, Canadians, and Japanese would find our exports more attractive. E) to replenish the value of your real wealth, you would save less and consume more. 54. If no fiscal policy changes are made, suppose the current aggregate demand curve will increase horizontally by $1,000 billion and cause inflation. If the marginal propensity to consume is 0.75, federal policymakers could follow Keynesian economics and restrain inflation by decreasing: A) government spending by $250 billion. B) taxes by $100 billion. C) taxes by $1,000 billion. D) government spending by $1,000 billion. 55. The marginal propensity to consume (MPC) is computed as the change in: A) consumption divided by the change in savings. B) consumption divided by the change in income. C) consumption divided by the change in GDP. D) None of the above. 56. If the marginal propensity to save (MPS) is 0.10, the value of the spending multiplier is: A) 1. B) 9. C) 10. D) 90. 57. Given full-employment output = $2,800, equilibrium real GDP = $2,500, and MPS = 0.25, which of the following changes would most likely bring the economy to a full-employment level of real GDP? A) $300 decrease in taxes. B) $75 increase in government spending. C) $75 decrease in taxes. D) $300 increase in government spending. E) $75 decrease in government spending. 58. Exhibit 16-4 Marginal tax rate lines nar006-1.jpg In Exhibit 16-4, line A represents a (an): A) regressive tax. B) progressive tax. C) proportional tax. D) ability-to-pay tax. 59. When an economy is operating below its potential capacity, Keynesian economists argue that: A) taxes should be raised if the government is currently running a budget deficit. B) taxes should be lowered but only if the government is running a budget surplus. C) the government should cut taxes and/or increase spending in order to stimulate aggregate demand. D) all of the above. 60. “Tax cuts, by providing incentives to work, save, and invest, will raise employment and lower the price level.” This argument is made by the: A) Keynesian economists. B) supply-side economists. C) classical economists. D) monetarists.

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