AP MACROECONOMICS Test Booklet

U5 MCQs

1. According to the long-run Phillips curve, which of the following is true?

(A) Unemployment increases with an increase in inflation.
(B) Unemployment decreases with an increase in inflation.
(C) Increased automation will lead to lower levels of structural unemployment in the long run.
(D) Changes in the composition of the overall demand for labor tend to be deflationary in the long run.
The natural rate of unemployment is independent of monetary and fiscal policy changes that affect aggregate
(E)
demand.

2. According to the short-run Phillips curve, a contractionary fiscal policy will result in
(A) a decrease in both unemployment and prices
(B) a decrease in inflation and an increase in unemployment
(C) a decrease in both wage rates and unemployment
(D) an increase in both wage rates and unemployment
(E) an increase in unemployment due to crowding out

3. According to the short-run Phillips curve, a decrease in unemployment is expected to be accompanied by

(A) higher labor-force participation
(B) an increase in inflation
(C) an increase in the productivity of capital
(D) an increase in the government deficit
(E) a decrease in real gross domestic product

4. According to the short-run Phillips curve, lower inflation rates are associated with
(A) higher unemployment rates
(B) higher government spending
(C) larger budget deficits
(D) greater labor-force participation rates
(E) smaller labor-force participation rates

5. According to the short-run Phillips Curve, there is a trade-off between

(A) interest rates and inflation
(B) the growth of the money supply and interest rates
(C) unemployment and economic growth
(D) inflation and unemployment
(E) economic growth and interest rates

6. Which of the following is true about the Phillips curve?

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(A) A change in aggregate demand does not shift the long-run Phillips curve (LRPC).
(B) A change in aggregate demand does not cause a movement along the short-run Phillips curve (SRPC).
(C) The LRPC shows the trade-off between unemployment and inflation but the SRPC does not.
(D) Changes in expected inflation affect the LRPC only.
(E) Negative supply shocks affect the LRPC only.

7. Assume that the country of Alpha has a balanced budget. If the government and central bank of Alpha implement
expansionary fiscal and monetary policies in order to address a recession, what effect would these policies have in
the short run on the government budget and interest rates?

Government Budget Interest Rates

A Move toward deficit Increase
B Move toward deficit Indeterminate
C Remain in balance Decrease
D Move toward surplus Decrease
E Move toward surplus Indeterminate

(A) A
(B) B
(C) C
(D) D
(E) E

8. An increase in aggregate demand will cause which of the following?

(A) A movement along a given short-run Phillips curve
(B) The long-run Phillips curve to become horizontal
(C) The short-run Phillips curve to shift to the left
(D) The long-run Phillips curve to shift to the right
(E) The long-run Phillips curve to shift to the left

9. An increase in both the inflation rate and the unemployment rate can be illustrated by
(A) a movement along the short-run Phillips curve
(B) a rightward shift of the short-run Phillips curve
(C) a leftward shift of the short-run Phillips curve
(D) a rightward shift of the aggregate demand curve
(E) a leftward shift of the aggregate demand curve

10. An increase in the expected inflation rate will cause the

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(A) short-run Phillips curve to shift to the left

(B) short-run Phillips curve to shift to the right
(C) long-run Phillips curve to shift to the left
(D) long-run Phillips curve to shift to the right
(E) actual inflation rate to fall below the expected inflation rate

11. An increase in which of the following will lead to lower inflation and lower unemployment?
(A) Exports
(B) Aggregate demand
(C) Labor productivity
(D) Government spending
(E) The international value of domestic currency

12. A reduction in inflation can best be achieved by which of the following combinations of fiscal and monetary policy?
Fiscal Policy: Increase Taxes
(A)
Monetary Policy: Increase administered interest rates
Fiscal Policy: Decrease taxes
(B)
Monetary Policy: Increase administered interest rates
Fiscal Policy: Decrease Taxes
(C)
Monetary Policy: Decrease administered interest rates
Fiscal Policy: Decrease government spending
(D)
Monetary Policy: Decrease administered interest rates
Fiscal Policy: Increase government spending
(E)
Monetary Policy: Decrease administered interest rates

13. A rightward shift of the short-run Phillips curve is most likely due to
(A) an increase in aggregate demand
(B) a decrease in aggregate demand
(C) a decrease in the expected rate of inflation
(D) an increase in the expected rate of inflation
(E) an increase in aggregate supply

14. A short-run Phillips curve shows an inverse relationship between

(A) interest rates and borrowing
(B) inflation and unemployment
(C) income and consumption
(D) prices and quantity demanded
(E) inputs and outputs

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15. Assume that the economy is at full employment. Policymakers wish to maintain the price level but want to
encourage greater investment. Which of the following combinations of monetary and fiscal policies would best
achieve this goal?

Monetary Policy Fiscal Policy

(A)
No change Contractionary

Monetary Policy Fiscal Policy

(B)
Expansionary No change

Monetary Policy Fiscal Policy

(C)
Expansionary Contractionary

Monetary Policy Fiscal Policy

(D)
Expansionary Expansionary

Monetary Policy Fiscal Policy

(E)
Contractionary Expansionary

16. Assume that the government implements a deficit-reduction policy that results in changes in aggregate income and
output. Then the Federal Reserve engages in monetary policy actions that reverse the changes in income and output
caused by fiscal policy action. Which of the following sets of changes in taxes, government spending, and
administered interest rates is most consistent with these policies?

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Taxes Government Spending Administered Interest Rates

(A)
Increase Increase Decrease

Taxes Government Spending Administered Interest Rates

(B)
Increase Decrease Decrease

Taxes Government Spending Administered Interest Rates

(C)
Increase Decrease Increase

Taxes Government Spending Administered Interest Rates

(D)
Decrease Increase No change

Taxes Government Spending Administered Interest Rates

(E)
Decrease Decrease Decrease

17. A stimulative fiscal policy combined with a restrictive monetary policy will necessarily cause
(A) gross domestic product to increase
(B) gross domestic product to decrease
(C) interest rates to fall
(D) interest rates to rise
(E) the federal budget deficit to decrease

18. If the government implements an expansionary fiscal policy, what action can the central bank take to maintain a
stable interest rate, assuming the banking system has limited reserves?
(A) Increase the required reserve ratio
(B) Increase personal income tax rates
(C) Decrease personal income tax rates
(D) Sell government bonds
(E) Buy government bonds

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19. Which of the following monetary and fiscal policy mixes will reduce unemployment?
(A) Decreasing interest on reserves and increasing taxes
(B) Decreasing interest on reserves and decreasing taxes
(C) Increasing interest on reserves and increasing government spending
(D) Increasing interest on reserves and decreasing government spending
(E) Increasing interest on reserves and increasing taxes

20. Which of the following could cause a movement along a country’s short-run Phillips curve toward higher
unemployment and lower inflation?
(A) A significant reduction in energy prices
(B) A recession in the economies of the nation’s major trading partners
(C) A decrease in savings by the country’s consumers
(D) A movement of the economy from the recovery phase to the expansionary phase of the business cycle
(E) An improvement in technology

21. If the government decreases spending while the country’s central bank decreases its administered interest rates,
which of the following will definitely occur?
(A) The aggregate demand curve will shift to the right.
(B) The aggregate demand curve will shift to the left.
(C) The short-run aggregate supply curve will shift to the right.
(D) Interest rates will fall.
(E) Interest rates will rise.

22. If both contractionary monetary policy and contractionary fiscal policy are carried out, what will most likely happen
to interest rates and real gross domestic product in the short run?
(A) Both interest rates and real will increase.
(B) Both interest rates and real will decrease.
(C) Interest rates will decrease, and real will stay the same.
(D) Interest rates will increase, and real will decrease.
(E) Real will decrease, and the change in interest rates will be indeterminate.

23. If the government simultaneously engages in expansionary monetary and fiscal policies, which of the following is
the effect on interest rates and unemployment?

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Interest Rates Unemployment

(A)
Increase Indeterminate

Interest Rates Unemployment

(B)
Increase Decrease

Interest Rates Unemployment

(C)
Decrease Decrease

Interest Rates Unemployment

(D)
Indeterminate Decrease

Interest Rates Unemployment

(E)
Indeterminate Increase

24. A contractionary monetary policy combined with an expansionary fiscal policy will
(A) decrease both income and consumption
(B) increase both income and consumption
(C) have uncertain effects on the interest rate and investment
(D) increase the interest rate and decrease investment
(E) increase both the interest rate and investment

25. Which of the following policy choices represents a combination of fiscal and monetary policies designed to bring
the economy out of a recession?
(A) Decreasing both taxes and the money supply
(B) Increasing both taxes and the money supply
(C) Increasing government spending and decreasing the policy rate
(D) Increasing both taxes and the policy rate
(E) Engaging in deficit spending and government bond sales

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26. The economy of Country X is experiencing demand-pull inflation as a result of an increase in consumer spending. If
the government and central bank of Country X want to reduce inflation and the banking system of Country X has
ample reserves, which of the following combinations of fiscal and monetary policy would be most effective to
achieve their goal in the short run?

Fiscal Policy Action Monetary Policy Action

A Decrease government spending Increase administered interest rates
B Decrease government spending Decrease administered interest rates
C Increase income taxes Decrease administered interest rates
D Decrease income taxes Increase administered interest rates
E Increase transfer payments Increase administered interest rates

(A) A
(B) B
(C) C
(D) D
(E) E

27. Which of the following combinations of fiscal and monetary policies will correct a severe recession?
(A) Increasing income tax rates and increasing administered interest rates
(B) Increasing income tax rates and decreasing administered interest rates
(C) Decreasing income tax rates and increasing administered interest rates
(D) Decreasing income tax rates and decreasing administered interest rates
(E) Decreasing income tax rates and increasing the policy rate

28. If a contractionary fiscal policy is followed by an expansionary monetary policy, nominal interest rate and
employment would most likely be affected in which of the following ways in the short run?

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Nominal Interest Rate Employment

(A)
Increase Increase

Nominal Interest Rate Employment

(B)
Increase Decrease

Nominal Interest Rate Employment

(C)
Decrease Decrease

Nominal Interest Rate Employment

(D)
Decrease Indeterminate

Nominal Interest Rate Employment

(E)
Indeterminate Decrease

29. Assuming a banking system with limited reserves, which of the following will most likely happen if a country’s
government decreases its spending and the central bank increases the money supply?
(A) An increase in unemployment and an appreciation of the currency
(B) An increase in interest rates and a decrease in aggregate supply
(C) A decrease in interest rates and an increase in investment spending
(D) A depreciation of the currency and an increase in imports
(E) An increase in aggregate demand and unemployment

30. Assume a country’s government increases taxes and its central bank increases its administered interest rates. The
actions will result in an increase in which of the following in the short run?
(A) Aggregate demand
(B) Aggregate supply
(C) Investment spending
(D) Unemployment
(E) Inflation

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31. Which of the following policies, if appropriately sized, would provide expansion during a recession with the
smallest change in interest rates?
(A) A decrease in government spending and a decrease in administered interest rates
(B) An increase in government transfer payments and an increase in administered interest rates
(C) A decrease in taxes and a decrease in the interest rate on reserves
(D) An increase in government spending and an increase in the interest rate on reserves
(E) An increase in taxes and an increase in administered interest rates

32. If the actual inflation rate is less than the expected inflation rate, which of the following must be true?
(A) There is an inflationary gap.
(B) The economy is in long-run equilibrium.
(C) Potential real output exceeds equilibrium real output.
(D) The cyclical rate of unemployment equals zero.
(E) The frictional rate of unemployment equals zero.

33. If the Federal Reserve wishes to use monetary policy to reinforce Congress' fiscal policy changes, it should
(A) decrease its administered interest rates when government spending is increased
(B) decrease its administered interest rates when government spending is decreased
(C) increase its administered interest rates when government spending is increased
(D) increase its administered interest rates when income taxes are decreased
(E) decrease its administered interest rates when income taxes are increased

34. Suppose that the Federal Reserve is committed to keeping the nominal interest rate fixed. To maintain the interest
rate target in the face of an expansionary fiscal policy, the Federal Reserve can do which of the following?
(A) Increase the prime rate
(B) Increase the discount rate
(C) Increase the federal funds rate
(D) Decrease its administered interest rates
(E) Decrease income tax rates

35. Which of the following combinations of policies is designed to decrease inflation?

(A) An increase in taxes and a decrease in the interest rate on reserves
(B) An decrease in taxes and an increase in administered interest rates
(C) A decrease in taxes and a decrease in administered interest rates
(D) An increase in government spending and a decrease in the interest rate on reserves
(E) A decrease in government spending and an increase in the interest rate on reserves

36. Which of the following mixes of fiscal and monetary policy would reduce inflation?

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Fiscal Policy Monetary Policy

(A)
Decrease spending Increase interest on reserves

Fiscal Policy Monetary Policy

(B)
Decrease taxes Increase interest on reserves

Fiscal Policy Monetary Policy

(C)
Increase taxes Decrease interest on reserves

Fiscal Policy Monetary Policy

(D)
Increase spending Increase interest on reserves

Fiscal Policy Monetary Policy

(E)
Increase spending Decrease interest on reserves

37. Assume a country’s banking system has ample reserves. Which of the following combinations of fiscal and
monetary policy will reduce the price level?
(A) Increasing income taxes and buying government bonds
(B) Decreasing income taxes and selling government bonds
(C) Increasing government spending and decreasing administered interest rates
(D) Decreasing government spending and increasing administered interest rates
(E) Decreasing government spending and decreasing administered interest rates

38. If an economy is in long-run equilibrium, which of the following combinations of policy actions will necessarily
result in inflation in the short run?
(A) Decreasing administered interest rates and increasing government spending
(B) Increasing the discount rate and decreasing income taxes
(C) Increasing the required reserve ratio and increasing the discount rate
(D) Selling government bonds on the open market and decreasing government spending
(E) Buying government bonds on the open market and decreasing government spending

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39. If government spending increases and at the same time a country’s central bank conducts monetary policy to
increase its policy rate, the interest rate and private investment in plant and equipment will most likely change in
which of the following ways?
(A) The interest rate will increase and private investment in plant and equipment will increase.
(B) The interest rate will increase and private investment in plant and equipment will decrease.
(C) The interest rate will increase and private investment in plant and equipment will not change.
(D) The interest rate will not change and private investment in plant and equipment will decrease.
(E) The interest rate will decrease and private investment in plant and equipment will decrease.

40. If the economy is in a severe recession, which of the following policy actions is most appropriate?
(A) Keeping administered interest rates constant and reducing budget deficits
(B) Decreasing government spending and taxes by the same amount
(C) Increasing government spending and decreasing administered interest rates
(D) Increasing both administered interest rates and taxes
(E) Decreasing government transfer payments and increasing taxes

41. Policies intended to reduce demand-pull inflation are most likely to increase which of the following in the short
run?
(A) Gross domestic product
(B) The labor force participation rate
(C) The price level
(D) Unemployment
(E) Wage levels

42.

Which of the following would cause a movement from point S to point R on the short-run Phillips curve above?

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(A) An unanticipated increase in government spending

(B) An unanticipated adverse supply shock
(C) A decrease in net investment
(D) An increase in real interest rates
(E) An increase in the labor-force participation rate

43.

A country’s economy is currently in equilibrium at point R. Which of the following policy actions could the
country’s government take to achieve potential output (Yp)?
(A) Decreasing the money supply
(B) Decreasing investment tax credits
(C) Increasing interest rates
(D) Increasing government expenditures
(E) Increasing the minimum wage

44. Which of the following could cause simultaneous increases in inflation and unemployment?
(A) A decrease in government spending
(B) A decrease in the money supply
(C) A decrease in the velocity of money
(D) An increase in inflationary expectations
(E) An increase in the overall level of productivity

45. Which of the following relationships is illustrated by a short-run Phillips curve?

(A) A decrease in the rate of inflation is accompanied by an increase in the rate of economic growth.
(B) A decrease in the rate of inflation is accompanied by an increase in the rate of unemployment.
(C) An increase in the rate of inflation is accompanied by a decrease in the rate of economic growth.
(D) An increase in the rate of inflation is accompanied by an increase in the rate of unemployment.
(E) A decrease in the rate of economic growth is accompanied by a decrease in the rate of unemployment.

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46. Which of the following is implied by a long-run Phillips curve?

(A) Wages are sticky.
(B) There is no trade-off between unemployment and inflation.
(C) The long-run aggregate supply curve is upward-sloping.
(D) Expected inflation exceeds actual inflation.
(E) The unemployment rate falls with higher inflation.

47. The long-run Phillips curve indicates that there are no trade-offs between
(A) aggregate demand and aggregate supply
(B) imports and exports
(C) consumption and investment
(D) consumption and saving
(E) inflation and unemployment

48.

Using the graph provided of the long-run Phillips curve (LRPC), which of the following could cause the change
from to ?
(A) An increase in the price of natural resources
(B) An increase in government spending
(C) An increase in the central bank’s administered interest rates
(D) A decrease in unemployment insurance benefits
(E) A decrease in net exports

49. Which of the following is true of the long-run Phillips curve?

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(A) It shows there is a trade-off between unemployment and inflation.

(B) It is positively sloped when the inflation rate exceeds the unemployment rate.
(C) It is vertical at the natural rate of unemployment.
(D) It shifts to the right if aggregate demand increases.
(E) It is created by an adverse supply shock.

50. Assume the banking system in a country has limited reserves. If the central bank of that country wishes to maintain
a stable nominal interest rate after a decrease in consumers’ spending, taking which of the following actions will
achieve the goal?
(A) Increasing government spending
(B) Increasing income tax rates
(C) Decreasing the required reserve ratio
(D) Decreasing the discount rate
(E) Selling government bonds

51. On a short-run Phillips curve, high rates of inflation coincide with

(A) high interest rates
(B) low interest rates
(C) high unemployment rates
(D) low unemployment rates
(E) low discount rates

52.

Given the situation illustrated in the graph and holding all other influences constant, which of the following policies
will restore the macroeconomic equilibrium to full employment?
(A) A contractionary fiscal policy and an expansionary monetary policy
(B) A contractionary fiscal policy and a contractionary monetary policy
(C) An expansionary fiscal policy and a contractionary monetary policy
(D) An expansionary fiscal policy and an expansionary monetary policy
(E) An expansionary fiscal policy without monetary policy

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53. Country X’s banking system has limited reserves and its economy is in a recession. Which of the following
combinations of fiscal and monetary policy actions would necessarily move the economy toward full employment
in the short run?
(A) A decrease in government spending and an increase in the discount rate
(B) A decrease in income taxes and targeting a higher policy rate
(C) A decrease in income taxes and a sale of government bonds on the open market by the country’s central bank
(D) An increase in government spending and a decrease in the required reserve ratio
An increase in income taxes and a purchase of government bonds on the open market by the country’s central
(E)
bank

54. Which of the following policy combinations is most likely to cure a severe recession?

Monetary Policy Action Taxes Government Spending

(A)
Decrease interest on reserves Increase Decrease

Monetary Policy Action Taxes Government Spending

(B)
Decrease interest on reserves Decrease Increase

Monetary Policy Action Taxes Government Spending

(C)
Decrease interest on reserves Decrease Decrease

Monetary Policy Action Taxes Government Spending

(D)
Increase interest on reserves Decrease Decrease

Monetary Policy Action Taxes Government Spending

(E)
Increase interest on reserves Increase Increase

55. Which of the following policy combinations could reduce a government deficit without changing aggregate
demand?

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(A) An increase in taxes and an increase in administered interest rates

(B) An increase in taxes and a decrease in administered interest rates
(C) A decrease in taxes and an increase in administered interest rates
(D) A decrease in government spending and an increase in administered interest rates
(E) An increase in government spending and a decrease in administered interest rates

56. Which of the following combinations of economic policies would be most effective to correct a severe recession?

Taxes Administered Interest Rates

(A)
Increase Increase

Taxes Administered Interest Rates

(B)
Increase Decrease

Taxes Administered Interest Rates

(C)
Increase No change

Taxes Administered Interest Rates

(D)
Decrease Decrease

Taxes Administered Interest Rates

(E)
Decrease Increase

57. Which of the following combinations of policies is most effective in reducing demand-pull inflation?
(A) A decrease in personal income taxes and a decrease in administered interest rates
(B) A decrease in personal income taxes and an increase in the discount rate
(C) An increase in government spending and a decrease in the policy rate
(D) A decrease in the discount rate and a decrease in transfer payments
(E) An increase in administered interest rates and an increase in personal income taxes

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58. To stimulate investment in new plant and equipment without increasing the level of real output, the best policy mix
is to
(A) increase administered interest rates and increase government spending
(B) decrease administered interest rates and decrease government spending
(C) increase administered interest rates and increase income taxes
(D) decrease administered interest rates and decrease income taxes
(E) decrease income taxes and increase government spending

59. Suppose that the government decreases taxes and at the same time the central bank decreases its administered
interest rates. The combined actions will result in
(A) an increase in unemployment and a decrease in the interest rate
(B) an increase in unemployment and an increase in the interest rate
(C) an increase in the real gross domestic product and a decrease in the interest rate
(D) an increase in the real gross domestic product and an increase in the interest rate
(E) an increase in the real gross domestic product and an indeterminate change in the interest rate

60. An increase in input prices will result in which of the following?

(A) A rightward shift in the money supply curve
(B) A rightward shift in the aggregate demand curve
(C) A rightward shift in the short-run Phillips curve
(D) A rightward shift in the demand for loanable funds curve
(E) A rightward shift in the short-run aggregate supply curve

61. Which of the following monetary and fiscal policy combinations would most likely result in a decrease in aggregate
demand?

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Central Bank’s Administered Interest Rates Income Tax Rates Government Spending
(A)
Lower Lower Increase

Central Bank’s Administered Interest Rates Income Tax Rates Government Spending
(B)
Lower Lower Decrease

Central Bank’s Administered Interest Rates Income Tax Rates Government Spending
(C)
Raise Raise Increase

Central Bank’s Administered Interest Rates Income Tax Rates Government Spending
(D)
Raise Lower Increase

Central Bank’s Administered Interest Rates Income Tax Rates Government Spending
(E)
Raise Raise Decrease

62.

Which of the following will cause a movement from point X to point Y along the short-run Phillips curve
that is shown in the graph above?

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(A) An increase in the expected inflation rate

(B) An increase in the policy rate
(C) An increase in government spending
(D) An increase in input costs
(E) An increase in income taxes

63. Suppose that, from 1985 to 1986, unemployment fell from 7.2 to 7.0 percent and inflation fell from 3.8 to 1.1
percent. An explanation of these changes might be that the
(A) aggregate demand curve shifted to the left
(B) aggregate demand curve shifted to the right
(C) aggregate supply curve shifted to the left
(D) aggregate supply curve shifted to the right
(E) short-run Phillips curve shifted to the right

64.

Assume the economy is initially in long-run equilibrium. Which of the following describes how the short-run effect
of an increase in personal income taxes would be depicted in the Phillips curve model provided?
(A) A movement along from point A to point B
(B) A movement along from point C to point D
(C) A movement along LRPC from point C to point E
(D) A shift from to
(E) A shift from to

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65.

The diagram above shows the short-run Phillips curve and the long-run Phillips curve for an
economy. If the inflation rate is currently 6 percent, which of the following is true about the current unemployment
rate?
(A) The current unemployment rate is 1%.
(B) The current unemployment rate is 2%.
(C) The current unemployment rate is 3%.
(D) The current unemployment rate is 4%.
(E) The current unemployment rate is 5%.

66. Assume an economy is in long-run equilibrium. If there is an increase in short-run aggregate supply, how will it be
demonstrated in the Phillips curve model?
(A) A movement along the short-run Phillips curve to the left of long-run equilibrium
(B) A movement along the short-run Phillips curve to the right of long-run equilibrium
(C) A shift of the short-run Phillips curve to the left
(D) A shift of the short-run Phillips curve to the right
(E) A shift of the long-run Phillips curve to the right

67.

Which of the following is illustrated by the relationship depicted in the graph above?

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(A) Aggregate demand curve

(B) Long-run Phillips curve
(C) Short-run Phillips curve
(D) Long-run aggregate supply curve
(E) Short-run aggregate supply curve

68. The short-run Phillips curve implies there is a trade-off between

(A) rule making and discretionary policies
(B) monetary and fiscal policies
(C) inflation and unemployment
(D) budget deficits and interest rates
(E) interest rates and investment

69. The short-run Phillips curve shows that

(A) there is a trade-off between inflation and unemployment
(B) high rates of unemployment are linked to high rates of interest
(C) high rates of inflation are linked to high rates of interest
(D) high rates of interest are consistent with increases in the money supply
(E) the natural rate of unemployment is unattainable

70. The short-run Phillips curve shows

(A) a trade-off between the natural rate of unemployment and the rate of inflation
(B) a trade-off between the unemployment rate and rate of inflation
(C) a relationship between increases in the money supply and the rate of inflation
that at the natural rate of unemployment there is no trade-off between the rate of inflation and the
(D)
unemployment rate
(E) how expectations change as the rate of inflation increases and the unemployment rate decreases

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71. Use the graph below of the long-run Phillips curve and short-run Phillips curve to answer the
question.

Assume members of the Organization of the Petroleum Exporting Countries ( ) agree to a coordinated
increase in oil production. If the economy is at equilibrium at point B, what effect will this have on the Phillips
curve model in the long run?
(A) The will shift to the left.
(B) The will shift to the right.
(C) The will shift to the right.
(D) There will be a movement from point B to point C.
(E) There will be a movement from point B to point A.

72. Which of the following is true according to the short-run Phillips curve?
(A) Improvements in technology will increase the level of noncyclical unemployment.
(B) Inflation increases when unemployment increases.
(C) Inflation increases when aggregate demand increases.
(D) Changes in the composition of the labor force may cause higher price levels.
(E) There is no trade-off between unemployment and inflation.

73. In the short run, if the actual rate of inflation is higher than expected, which of the following is true?
(A) The short-run Phillips curve will shift to the left.
(B) The unemployment rate will be higher than the inflation rate.
(C) The unemployment rate will be lower than the inflation rate.
(D) The actual unemployment rate will be higher than the natural rate.
(E) The actual unemployment rate will be lower than the natural rate.

74. Which of the following is true of the Phillips curve?

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(A) It is vertical in the short run, but is upward sloping in the long run.
(B) It is upward sloping in the short run, but is downward sloping in the long run.
(C) It is downward sloping in the short run, but is vertical in the long run.
(D) It shows trade-offs between unemployment and inflation in the long run but not in the short run.
(E) It is upward sloping both in the short run and in the long run if inflation is anticipated correctly.

75. Which of the following is a cause of hyperinflation?

(A) Rapid growth of real gross domestic product
(B) Rapid growth of the money supply
(C) Unanticipated decrease in aggregate demand
(D) Unanticipated increase in aggregate supply
(E) Unanticipated rise in real interest rates

76. According to the quantity theory of money, the quantity of money is related
(A) negatively to the nominal interest rate
(B) negatively to the price level
(C) positively to the velocity of money
(D) positively to the unemployment rate
(E) positively to the nominal gross domestic product

77. A country’s government runs a budget deficit when which of the following occurs in a given year?
(A) The amount of new loans to developing nations exceeds the amount of loans paid off by developing nations.
(B) Government spending exceeds tax revenues.
(C) The debt owed to foreigners exceeds the debt owed to the country’s citizens.
(D) The amount borrowed exceeds the interest payment on the national debt.
(E) Interest payments on the national debt exceed spending on goods and services.

78. An increase in government deficit spending can crowd out private investment by
(A) decreasing the supply of money
(B) increasing the supply of money
(C) decreasing the real interest rate
(D) increasing the real interest rate
(E) decreasing the price level

79. An increase in government spending financed by increased borrowing will most likely change the real interest rate
and the gross private domestic investment in which of the following ways?

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Real Interest Rate Gross Private Domestic Investment

(A)
No change No change

Real Interest Rate Gross Private Domestic Investment

(B)
Decrease Increase

Real Interest Rate Gross Private Domestic Investment

(C)
Decrease Decrease

Real Interest Rate Gross Private Domestic Investment

(D)
Increase Decrease

Real Interest Rate Gross Private Domestic Investment

(E)
Increase Increase

80. An increase in the government budget deficit is most likely to result in an increase in which of the following?
(A) The marginal propensity to consume
(B) Exports
(C) The real interest rate
(D) The money supply
(E) The simple multiplier

81. An increase in the money supply will affect the price level and real gross domestic product (GDP) in which of the
following ways in the long run?

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Price Level Real GDP

(A)
Decrease No change

Price Level Real GDP

(B)
Increase Decrease

Price Level Real GDP

(C)
Increase No change

Price Level Real GDP

(D)
Decrease Increase

Price Level Real GDP

(E)
No change No change

82. Which of the following is true about a country’s national debt?

(A) It is the sum of the country’s trade deficit and government budget deficit.
(B) It increases when gross domestic product increases.
(C) It increases when the country’s government has a budget deficit.
(D) It decreases when the country’s exports exceed its imports.
(E) It decreases when national savings decrease.

83. Assume a country’s government has a balanced budget. If the economy goes into a recession, what will happen to
the government’s budget in the short run?
(A) It will be in surplus, because the government will increase its spending.
(B) It will be in surplus, because there will be an automatic decrease in unemployment payments.
(C) It will be in deficit, because the government will raise the tax rates.
(D) It will be in deficit, because the price level will decrease.
(E) It will be in deficit, because there will be an automatic decrease in tax receipts.

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84. Assume that with a proportional tax system, the government always sets the tax rate at a level that yields a balanced
budget at full employment. Which of the following is necessarily true?
(A) The government budget will balance every year.
(B) The government budget will be in deficit over the business cycle.
(C) The national debt will increase in any year the economy operates below full employment.
(D) Crowding out of private investment will occur whenever the economy operates at full employment.
(E) The tax system will be destabilizing.

85. When the total amount the government spends equals tax revenues in any given year, which of the following must
remain constant?
(A) The real interest rate
(B) The national debt
(C) Real gross domestic product
(D) The price level
(E) The money supply

86. Which of the following will most likely occur if a government adopts an annually balanced budget rule that requires
the government to eliminate any deficits or surpluses?
(A) Unemployment will be eliminated and prices will be stable.
(B) The national debt will increase.
(C) Business cycles will become more stable.
(D) The automatic stabilizing effect of fiscal policy will be eliminated.
(E) The government will be forced to spend less when there are surpluses.

87. Which of the following statements about the fiscal budget deficit and government debt is correct?
(A) The deficit is the accumulation of the debt over a given period.
(B) The debt is the accumulated value of government deficits and surpluses in the past.
(C) The deficit is measured at a point in time, while the debt is measured over an interval of time.
(D) A country with a large debt must also currently have a large deficit.
(E) The debt measures the difference between expenditures and receipts of the government over a year.

88. If real output is $9,000, and the price level is 2, and the velocity of money is 3, then the money supply is
(A) $3,000
(B) $4,500
(C) $6,000
(D) $18,000
(E) $27,000

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89. If the money supply is $40,000, consumer spending is $30,000, and nominal output is $50,000, what is the velocity
of money according to the quantity theory of money?
(A) 0.6
(B) 0.75
(C) 0.8
(D) 1.25
(E) 1.67

90. If nominal gross domestic product in a country is $1,600 and the money supply is $400, what is the velocity of
money?
(A) 400
(B) 10
(C) 4
(D) 2
(E) 0.5

91. Compared to expansionary monetary policies adopted to counteract a recession, expansionary fiscal policies tend to
result in
(A) less public spending
(B) higher interest rates
(C) lower prices
(D) a high rate of economic growth
(E) decreased investment by foreign countries

92. If an increase in government spending, financed by borrowing, crowded out an equal amount of private spending,
which of the following would result?
(A) Interest rates would decrease.
(B) Aggregate demand would remain unchanged.
(C) The price level would increase.
(D) Unemployment would increase.
(E) Unemployment would decrease.

93. An increase in government spending financed by borrowing will result in which of the following?
(A) Private savings will decrease in the short run.
(B) The real interest rate will decrease in the short run.
(C) Interest-sensitive private sector spending will increase in the short run.
(D) Potential real output will increase in the long run.
(E) The rate of physical capital accumulation will decrease in the long run.

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94. Crowding out due to government borrowing occurs when

(A) lower interest rates increase private sector investment
(B) lower interest rates decrease private sector investment
(C) higher interest rates decrease private sector investment
(D) a smaller money supply increases private sector investment
(E) a smaller money supply decreases private sector investment

95. Suppose that a national government increased deficit spending on goods and services, increasing its demand for
loanable funds In the long run, this policy would most likely result in which of the following changes in this
country?

Real Interest Rate Investment

(A)
Decrease Decrease

Real Interest Rate Investment

(B)
Decrease Increase

Real Interest Rate Investment

(C)
Increase Decrease

Real Interest Rate Investment

(D)
Increase No change

Real Interest Rate Investment

(E)
No change Increase

96. Crowding out is best described as which of the following?

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(A) The decrease in full-employment output caused by an increase in taxes

(B) The decrease in consumption or private investment spending caused by an increase in government spending
(C) The decrease in government spending caused by a decrease in taxes
(D) The increase in the amount of capital outflow caused by the increase in government spending
(E) The increase in the amount of capital inflow caused by the increase in government spending

97. Crowding out is most likely to occur with which of the following changes?
(A) Decrease in government spending
(B) Increase in budget surplus
(C) Increase in budget deficit
(D) Decrease in the real interest rate
(E) Decrease in trade deficit

98. Crowding out occurs when

(A) increases in government spending become ineffective because tax revenues increase as income increases
(B) government borrowing to finance its spending decreases private sector investment
(C) monetary policy actions decrease the effectiveness of fiscal policy
(D) restrictive monetary policy causes the interest rate to increase
(E) government spending and private sector spending increase by the same percentage rate

99. Crowding out occurs when investment spending by the private sector decreases as a result of
(A) decreasing interest rates caused by an increase in the supply of government bonds
(B) decreasing interest rates caused by a decrease in the demand for loanable funds
(C) decreasing interest rates caused by an increase in government borrowing
(D) increasing interest rates caused by an increase in government borrowing
(E) increasing interest rates caused by a decrease in government borrowing

100. Crowding out refers to the decrease in

(A) national output caused by higher taxes
(B) domestic production caused by increased imports
(C) private investment due to increased borrowing by the government
(D) employment caused by higher inflation
(E) exports caused by an appreciating currency of a country

101. In the long run, a decrease in the money supply will affect the price level and the level of output in which of the
following ways?

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Price Level Output

(A)
Increase Increase

Price Level Output

(B)
Increase No change

Price Level Output

(C)
Decrease Increase

Price Level Output

(D)

Decrease Decrease

Price Level Output

(E)
Decrease No change

102. A decrease in which of the following would most likely move a balanced government budget to a deficit in the short
run?
(A) Subsidies to farmers and corporations
(B) The federal funds rate target
(C) Transfer payments
(D) Income tax revenues
(E) Government purchases

103. In the short run, how would a government’s budget deficit, national debt, and real output change if government
spending increases with no change in taxes?

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Deficit Debt Real Output

(A)
Increase Increase Decrease

Deficit Debt Real Output

(B)
Increase Decrease Increase

Deficit Debt Real Output

(C)
Increase Increase Increase

Deficit Debt Real Output

(D)
Decrease Decrease Increase

Deficit Debt Real Output

(E)
Decrease Increase Decrease

104. Which of the following is true about the national debt of the United States?
(A) It is the debt owed to foreign investors.
(B) It is the accumulation of past and current budget deficits and surpluses.
(C) It increases when gross domestic product increases.
(D) It increases when exports decrease, and decreases when exports increase.
(E) It did not exist before 1980.

105. If the velocity of money is constant and the aggregate supply curve is vertical, a doubling of the money supply
would most likely result in a doubling of
(A) the unemployment rate
(B) real output
(C) the price level
(D) nominal interest rates
(E) real interest rates

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106. If government spending increases and crowds out an equal amount of private investment in physical capital, then
the increase in government spending will
(A) increase real output and the price level
(B) increase real output and leave the price level unchanged
(C) leave real output and the price level unchanged
(D) leave real output unchanged and increase the price level
(E) lower the nominal interest rate

107. Which of the following effects may result from an expansionary fiscal policy?
(A) An increase in government savings
(B) An increase in exports to other countries
(C) A decrease in the nominal interest rate
(D) A decrease in aggregate demand
(E) A decrease in funds available for private business investment

108. If wages and prices are perfectly flexible and inflation is correctly anticipated, then an expansionary monetary
policy will affect the real output and price level in which of the following ways?

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Real Output Price Level

(A)
Increase Increase

Real Output Price Level

(B)
Increase Decrease

Real Output Price Level

(C)
Increase Not change

Real Output Price Level

(D)
Not change Increase

Real Output Price Level

(E)
Not change Not change

109. In the long run, an increase in aggregate demand due to an expansion in the money supply will increase
(A) price level and real output
(B) nominal output and real output
(C) nominal output but not the price level
(D) nominal output and the price level
(E) real output but not the price level

110. The economy is currently operating at long-run equilibrium. The central bank engages in expansionary monetary
policy. How will the central bank’s action affect the economy’s real output and the price level in the short run?
(A) Real output will decrease, and the price level will increase.
(B) Real output will decrease, and the price level will not change.
(C) Real output will not change, and the price level will not change.
(D) Real output will increase, and the price level will increase.
(E) Real output will not change, and the price level will decrease.

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111. Assuming a banking system with limited reserves, an increase in the money supply will result in an increase in
(A) output in the short run and in the long run
(B) inflation in the short run and an increase in output in the long run
(C) inflation in the short run and no change in output in the long run
(D) output in the long run but not in the short run
(E) output in the long run and no change in inflation in the short run

112. In the long run, a fully anticipated expansion of the money supply will
(A) increase both the price level and real gross domestic product
(B) increase the price level and decrease the real wage
(C) increase both the price level and the real wage
(D) increase both the nominal gross domestic product and the price level
(E) increase both the nominal and real gross domestic product

113. Which of the following will occur if the federal government runs a budget deficit?
(A) The expenditure multiplier will increase.
(B) The size of the national debt will increase.
(C) The economy's output will decrease.
(D) State governments will run a budget surplus to offset the federal deficit.
(E) Interest rates will tend to decline.

114. Federal budget deficits occur when

(A) more money is being spent on entitlement programs than has been allocated
(B) the Internal Revenue Service spends more than it collects in taxes in a given year
(C) the federal government spends more than it collects in taxes in a given year
(D) high levels of unemployment use up tax collections
(E) interest payments on the national debt increase from one year to the next

115. When the United States government engages in deficit spending, that spending is primarily financed by
(A) increasing the required reserve ratio
(B) borrowing from the World Bank
(C) issuing new bonds
(D) appreciating the value of the dollar
(E) depreciating the value of the dollar

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The table below provides the values, in billions of dollars, of selected macroeconomic variables for a nation at the current
real interest rate. The nation is a closed economy with no international transactions.

Private Savings 300

Tax Revenues 200
Government Spending 200
Government Transfer Payments 100
Investment in Plant and Equipment 300

116. Based on the table above, which of the following is most likely true?
(A) The government has a budget surplus.
(B) Consumer spending exceeds disposable income.
(C) Public savings exceeds private savings.
(D) National debt is decreasing.
(E) The government is borrowing.

117. Based on the table above, what will happen to the real interest rate in the loanable funds market and private
investment spending in plant and equipment?
(A) The real interest rate will increase, and private investment spending will increase.
(B) The real interest rate will increase, and private investment spending will decrease.
(C) The real interest rate will decrease, and private investment spending will decrease.
(D) The real interest rate will decrease, and private investment spending will increase.
(E) The real interest rate will increase, and private investment spending will not change.

118. If fiscal policy is used to correct a recessionary gap, which of the following would most likely occur in the absence
of crowding out in the short run?

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Real Output Unemployment

(A)
Increase Decrease

Real Output Unemployment

(B)
Increase Increase

Real Output Unemployment

(C)
Decrease Decrease

Real Output Unemployment

(D)
Decrease Increase

Real Output Unemployment

(E)
Decrease No change

119. Given a constant velocity of money, in the short run a 5 percent increase in money supply will translate to a 5
percent increase in
(A) government budget deficit
(B) real gross domestic product
(C) nominal gross domestic product
(D) real interest rates
(E) nominal interest rates

120. Suppose that in 2017 government outlays exceeded tax revenues. An increase in government purchases in 2018,
with no other budgetary changes, would lead to which of the following from 2017 to 2018 ?
(A) An increase in the government budget surplus
(B) A decrease in the government budget surplus
(C) An increase in the government budget deficit
(D) A decrease in the government budget deficit
(E) A decrease in the national debt

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121. Country X has a budget deficit. Which of the following changes in government budget outlays and tax revenues will
result in a decrease in Country X’s government budget deficit?

Government Outlays Tax Revenues

(A)
Fall by $100 million Fall by $600 million

Government Outlays Tax Revenues

(B)
Fall by $200 million Fall by $200 million

Government Outlays Tax Revenues

(C)
Rise by $300 million Fall by $300 million

Government Outlays Tax Revenues

(D)
Rise by $400 million Rise by $600 million

Government Outlays Tax Revenues

(E)
Rise by $500 million Rise by $500 million

122. If the total of government spending plus government transfer payments is less than tax revenues, which of the
following must be true?
(A) The national debt will increase.
(B) There is a recessionary gap.
(C) The government budget is in surplus.
(D) The velocity of money will increase.
(E) The money multiplier will increase.

123. A government budget deficit exists when

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(A) the current account is in surplus

(B) the capital and financial account is in deficit
(C) government spending is greater than tax revenues
(D) the demand for money is greater than the supply of money
(E) the demand for loanable funds is greater than the supply of loanable funds

124. If a country has a balanced budget and then the country’s government increases transfer payments without
increasing taxes, which of the following will most likely occur?
(A) The government’s budget will move into surplus, and the national debt will fall.
(B) The government’s budget will move into surplus, and the national debt will rise.
(C) The government’s budget will move into deficit, and the national debt will fall.
(D) The government’s budget will move into deficit, and the national debt will rise.
(E) The government’s budget will move into surplus, and the national debt will remain unchanged.

125. Hyperinflation is typically caused by

(A) high tax rates that discourage work effort
(B) continuous expansion of the money supply to finance government budget deficits
(C) trade surpluses that are caused by strong protectionist policies
(D) bad harvests that lead to widespread shortages
(E) a large decline in corporate profits that leads to a decrease in production

126. If investment demand becomes less responsive to changes in interest rates, which of the following is true?
(A) An expansionary fiscal policy results in less crowding out.
(B) An expansionary fiscal policy results in more crowding out.
(C) An expansionary monetary policy is more effective.
(D) A contractionary monetary policy is more effective.
(E) An expansionary monetary policy results in more crowding out.

127. If crowding out only partially offsets the effects of a tax cut, which of the following changes in interest rates and
gross domestic product are most likely to occur?

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Interest Rates Gross Domestic Product

(A)
Increase Increase

Interest Rates Gross Domestic Product

(B)
Increase Remain unchanged

Interest Rates Gross Domestic Product

(C)
Increase Decrease

Interest Rates Gross Domestic Product

(D)
Remain unchanged Increase

Interest Rates Gross Domestic Product

(E)

Decrease Decrease

128. If the economy is operating at full employment and there is a substantial increase in the money supply, the quantity
theory of money predicts an increase in
(A) the velocity of money
(B) real output
(C) interest rates
(D) unemployment
(E) the price level

129. Assume a country’s banking system has limited reserves. If the government has increased the budget deficit and
interest rates have remained constant, which of the following is true?

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(A) Government spending is less than tax revenue, and the central bank increases the money supply.
(B) Government spending is greater than tax revenue, and the central bank keeps the money supply constant.
(C) Government spending is greater than tax revenue, and the central bank increases the money supply.
(D) Government spending is greater than tax revenue, and the central bank decreases the money supply.
(E) Government spending is less than tax revenue, and the central bank keeps the money supply constant.

130. If the money stock decreases but nominal gross domestic product remains constant, which of the following has
occurred?
(A) Income velocity of money has increased.
(B) Income velocity of money has decreased.
(C) Price level has increased.
(D) Price level has decreased.
(E) Real output has decreased.

131. If the velocity of money is stable, the quantity theory of money predicts that an increase in the money supply will
lead to a proportional
(A) increase in the nominal output
(B) decrease in the price level
(C) decrease in the nominal interest rate
(D) decrease in the real interest rate
(E) decrease in the unemployment rate

132. The crowding out effect of government spending will be large if

(A) investment is highly sensitive to changes in the interest rate
(B) consumption is highly sensitive to changes in wealth
(C) money demand is highly insensitive to changes in income
(D) it takes a long time for changes in government spending to cause a change in equilibrium income
(E) the long-run aggregate supply curve is horizontal

133. Which of the following describes the effect of an increase in a government’s budget deficit on the real interest rate
and private investment?

Real Interest Rate Private Investment

A Increase Decrease
B Increase Increase
C Decrease Decrease
D Decrease Increase
E Indeterminate Indeterminate

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(A) A
(B) B
(C) C
(D) D
(E) E

134. The economy is currently in long-run equilibrium. If the central bank increases the money supply, in the long run
the price level will
(A) increase, and output will remain at the full-employment level
(B) increase, and output will be above the full-employment level
(C) increase, and output will be below the full-employment level
(D) remain unchanged, and output will remain at the full-employment level
(E) remain unchanged, and output will be above the full-employment level

135. Assume that a country has limited reserves in its banking system. Which of the following would lead to inflation in
the long run according to the quantity theory of money?
(A) Sustained purchases of government bonds by the central bank
(B) Commercial banks holding more reserves
(C) Consumers spending more money as their confidence grows
(D) An increase in the federal budget surplus
(E) Business taxes decreasing and firms spending more money on capital improvements

136. An increase in the money supply would lead to which of the following in the long run?
(A) An increase in the aggregate price level
(B) A decrease in real gross domestic product
(C) A decrease in nominal gross domestic product
(D) A decrease in the real interest rate
(E) An increase in the unemployment rate

137. Which of the following is true when the velocity of money falls?
(A) An increase in the money supply will have less effect on nominal gross national product.
(B) A change in the money supply will affect output only.
(C) The Federal Reserve will decrease the money supply.
(D) Output will be greater for a given money supply.
(E) The public will increase its holdings of assets other than money.

138. The United States national debt is

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(A) the amount of money owed by the federal government to United States citizens
(B) the amount of money owed by the federal government to other United States government agencies
(C) the amount of currency in the hands of foreigners
(D) the amount of money owed by state and local governments to United States citizens
(E) the amount of money owed to holders of United States government securities

139. Country X’s economy is currently at full employment. Assume Country X’s central bank increases the money
supply by 2 percent over a prolonged period. According to the quantity theory of money, which of the following
will happen in the long run for a given velocity of money?
(A) Unemployment will increase by 2%.
(B) Real output will increase by 2%.
(C) Nominal output will increase by 2%.
(D) The price level will decrease by 2%.
(E) The natural rate of unemployment will decrease by 2%.

140. An economy is in long-run equilibrium. If the central bank reduces the growth rate of the money supply, which of
the following must occur in the long run?
(A) The rate of inflation will decrease.
(B) The unemployment rate will decrease.
(C) The long-run aggregate supply curve will shift to the left.
(D) The production possibilities curve will shift to the left.
(E) The long-run Phillips curve will shift to the left.

141. According to the quantity theory of money, if a percent increase in the money supply leads to a percent increase
in nominal , which of the following is true?
(A) Real output increases by percent.
(B) The price level decreases by percent.
(C) The velocity of money does not change.
(D) The nominal interest rate does not change.
(E) The government budget deficit increases by percent.

142. Which of the following could have caused the national debt to change from $12 trillion to $15 trillion?
(A) A household debt increase of $3 trillion
(B) A government budget deficit of $3 trillion
(C) A government budget surplus of $3 trillion
(D) A decrease of $3 trillion in financial capital inflows
(E) An increase of $3 trillion in business debt

143. Assume the banking system has limited reserves and the economy is currently in long-run equilibrium. An increase
in the money supply will affect unemployment in the short run and in the long run in which of the following ways?

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(A) Unemployment will decrease in the short run and decrease in the long run.
(B) Unemployment will increase in the short run and increase in the long run.
Unemployment will not change in the short run and remain at the natural rate of unemployment in the long
(C)
run.
Unemployment will increase above the natural rate of unemployment in the short run and decrease back to
(D)
the natural rate of unemployment in the long run.
Unemployment will decrease below the natural rate of unemployment in the short run and increase back to
(E)
the natural rate of unemployment in the long run.

144. The national debt is equal to which of the following?

(A) The value of all government bonds held by the nation’s central bank
(B) The value of all loans in the nation’s banking system
(C) The current government budget deficit
(D) The sum of all past government budget deficits and surpluses
(E) The interest payments on the previous year’s government debt

145. According to the quantity theory of money, if the money supply is $40 billion, real output is $100 billion, and the
price level is 1.2, what is the velocity of money?
(A) 1.2
(B) 2.5
(C) 3.0
(D) 3.5
(E) 4.8

146. Assuming a banking system with limited reserves, which of the following will most likely lead to a decrease in
inflationary expectations?
(A) A decrease in the marginal propensity to save
(B) A decrease in imports
(C) A decrease in the money supply
(D) An increase in the government budget deficit
(E) An increase in the prices of raw materials

147. A change in which of the following can affect the long-run economic growth of a country?

I. The quantity and quality of a country’s labor force

II. Technology

III. Spending on capital goods

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(A) I only
(B) III only
(C) I and II only
(D) II and III only
(E) I, II, and III

148. A country’s infrastructure refers to its

(A) natural resources
(B) private financial institutions
(C) proportion of population with postsecondary education
(D) public capital goods such as highways
(E) internal, as opposed to external, debt

149. A leftward shift of the long-run aggregate supply curve is most likely consistent with an improvement in a country’s
standard of living if
(A) prices fall
(B) depreciation increases
(C) population decreases
(D) taxes decrease
(E) imports decline

150. All of the following may result in increases in real gross domestic product in the long run EXCEPT
(A) technical progress
(B) investment in human capital
(C) discovery of new natural resources
(D) decrease in corporate taxes
(E) decrease in factor productivity

151. An advance in technology will cause the

(A) aggregate demand curve to shift to the right
(B) aggregate demand curve to shift to the left
(C) short-run aggregate supply curve to shift to the left
(D) long-run aggregate supply curve to shift to the left
(E) long-run aggregate supply curve to shift to the right

152. An economy’s full-employment real output will decrease when

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(A) price level increases

(B) price level decreases
(C) technological change increases labor productivity
(D) workers choose shorter weeks to enjoy more leisure time
(E) the stock of physical capital is growing at a constant rate

153. An increase in net investment leads to faster economic growth because capital per worker and output per worker
will change in which of the following ways?

Capital per Worker Output per Worker

(A)
Increase Increase

Capital per Worker Output per Worker

(B)
Increase Decrease

Capital per Worker Output per Worker

(C)
No change Increase

Capital per Worker Output per Worker

(D)
Decrease Increase

Capital per Worker Output per Worker

(E)
Decrease Decrease

154. An increase in which of the following is consistent with an outward shift of the production possibilities curve?
(A) Transfer payments
(B) Aggregate demand
(C) Long-run aggregate supply
(D) Income tax rates
(E) Exports

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155. An increase in which of the following is most likely to promote economic growth?
(A) Consumption spending
(B) Investment tax credits
(C) The natural rate of unemployment
(D) The trade deficit
(E) Real interest rates

156. An increase in which of the following is most likely to cause an improvement in the standard of living over time?
(A) Size of the population
(B) Size of the labor force
(C) Number of banks
(D) Level of taxation
(E) Productivity of labor

157. An increase in which of the following is most likely to increase long-run economic growth?
(A) Interest rate
(B) Income tax rate
(C) Marginal propensity to consume
(D) Investment in human capital
(E) Money demand

158. An increase in which of the following is most likely to increase the long-run growth rate of an economy’s real per
capita income?
(A) Population growth
(B) The proportion of gross domestic product consumed
(C) The educational attainment of the population
(D) The supply of money in circulation
(E) Personal income taxes

159. An increase in which of the following is most likely to increase the long-run growth rate of an economy's real per
capita income?
(A) Population growth
(B) The proportion of gross domestic product consumed
(C) The educational attainment of the population
(D) The supply of money in circulation
(E) Personal income taxes

160. An increase in which of the following is most likely to increase employment and promote long-run economic
growth?

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(A) Government spending on education

(B) Transfer payments
(C) Reserve requirements
(D) Income tax rates
(E) Unemployment compensation

161. An increase in which of the following leads to an increase in output per worker?
(A) Income tax rates
(B) Real interest rate
(C) The labor-force participation rate
(D) The stock of physical capital per worker
(E) The number of workers per unit of capital

162. An increase in which of the following will most likely increase productivity?
(A) Population growth rate
(B) Aggregate demand
(C) Capital stock
(D) Consumption
(E) Employment

163. An increase in which of the following would be most likely to increase long-run growth?
(A) Pension payments
(B) Unemployment compensations
(C) Subsidies to businesses for purchases of capital goods
(D) Tariffs on imported capital goods
(E) Tariffs on imported oil

164. An increase in which of the following would LEAST likely increase labor productivity?
(A) Physical capital
(B) Human capital
(C) Technological improvements
(D) Educational achievement
(E) The labor force

165. Assume that a nation’s real gross domestic product (GDP) grows at a higher rate than its population over a given
period of time. It can be concluded that

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(A) the population will grow at a faster rate in the future

(B) the price level has decreased
(C) real GDP per capita has increased
(D) real GDP will rise at a slower rate in the future
(E) real GDP will rise at a faster rate in the future

166. Assuming no change in the nominal wage and a significant increase in human capital, the output per worker will
(A) increase and the real wage will decrease
(B) increase and the real wage will increase
(C) decrease and the real wage will decrease
(D) decrease and the real wage will increase
(E) increase and the real wage will remain unchanged

167. Increases in human capital can be achieved by which of the following?

(A) Building more factories
(B) Reducing immigration of skilled workers
(C) Improving the quality of job-training programs
(D) Increasing the physical capital per worker
(E) Increasing government spending on infrastructure

168. What will be the short-run effect of a reduction in business regulations on real output and the price level?

Real Output Price Level

A Increase No change
B Increase Decrease
C Decrease Increase
D Decrease Decrease
E No change Decrease

(A) A
(B) B
(C) C
(D) D
(E) E

169. Which of the following will happen if a country’s government reduces business taxes?

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(A) The short-run Phillips curve will shift to the right.

(B) The short-run aggregate supply curve will shift to the right.
(C) The long-run aggregate supply curve will shift to the left.
(D) The aggregate demand curve will shift to the left.
(E) The demand curve for loanable funds will shift to the left.

170. Policymakers concerned about fostering long-run growth in an economy that is currently in a recession would most
likely recommend which of the following combinations of monetary and fiscal policy actions?

Monetary Policy Fiscal Policy

(A)
Increase administered interest rates Reduce taxes

Monetary Policy Fiscal Policy

(B)
Increase administered interest rates Raise taxes

Monetary Policy Fiscal Policy

(C)
No change Raise taxes

Monetary Policy Fiscal Policy

(D)
Decrease administered interest rates Reduce spending

Monetary Policy Fiscal Policy

(E)
Decrease administered interest rates No change

171. Which of the following will most likely cause an increase in real output in the long run?
(A) A decrease in the labor force participation rate
(B) An increase in the velocity of money
(C) An open-market sale of government bonds by the central bank
(D) An increase in immigration from abroad
(E) An increase in the price level

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172. Changes in which of the following factors would affect the growth of an economy?

I. Quantity and quality of human and natural resources

II. Amount of capital goods available

III. Technology
(A) I only
(B) I and II only
(C) I and III only
(D) II and III only
(E) I, II, and III

173. Country A’s growth rate in per capita real gross domestic product (GDP) has been consistently higher than that of
Country B. Which of the following factors can account for these differences in the per capita GDP growth rates?
(A) Country B’s government gives more investment tax credits.
(B) The labor force of Country A is becoming more skilled than the labor force of Country B.
(C) The natural rate of unemployment is higher in Country A.
(D) Country A’s central bank is less effective at controlling the inflation rate.
Although the populations of Countries A and B are the same, Country A has twice as many people who are
(E)
retired.

174. Economic growth is best defined as

(A) a reduction in the infant mortality rate
(B) a decrease in the unemployment rate
(C) an increase in the labor force participation rate
(D) a short-run increase in gross domestic product without inflation
(E) a sustained increase in real gross domestic product per capita

175. Human capital refers to which of the following?

(A) The skills and knowledge that enable a worker to be productive
(B) Machinery used by workers in production
(C) The accumulated financial wealth of households
(D) Physical capital owned by households rather than businesses
(E) Activities that lead to the substitution of physical capital for labor

176. Which of the following best describes human capital?

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(A) The number of workers in the labor force

(B) The physical capital used by workers
(C) The financial assets owned by workers
(D) The training and education of workers
(E) The spending by business for worker recruitment

177. Which of the following causes economic growth?

(A) A decrease in the money supply
(B) A decrease in the price level
(C) An increase in nominal output
(D) An increase in consumption spending
(E) An increase in labor productivity

178. An increase in which of the following will most likely promote economic growth?
(A) Taxes on investment
(B) The price level
(C) Human capital
(D) Consumption of nondurable goods
(E) Interest rates

179. Economic growth is shown by a rightward shift in

(A) the aggregate demand curve
(B) the long-run Phillips curve
(C) the production possibilities curve
(D) the short-run aggregate supply curve
(E) the money supply curve

180. Economic growth is best measured by a sustained increase in which of the following?
(A) Per capita real gross domestic product
(B) Government budget deficits
(C) Unemployment in unskilled labor markets
(D) Production of public goods
(E) Nominal gross domestic product

181. Economic growth refers to an increase in which of the following?

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(A) Government spending

(B) Consumption spending
(C) Nominal gross domestic product
(D) Potential real gross domestic product
(E) Household wealth

182. For a given population and a given quantity of labor employed, what will happen to aggregate production and
income per capita if there is an increase in a nation’s capital stock?
(A) Aggregate production will increase, and income per capita will decrease.
(B) Aggregate production will increase, and income per capita will increase.
(C) Aggregate production will decrease, and income per capita will be indeterminate.
(D) Aggregate production will decrease, and income per capita will increase.
(E) Aggregate production will decrease, and income per capita will be indeterminate.

183. If the government offers a tax credit to businesses, what will be the most likely effects of this action?
(A) An increase in consumption spending, an increase in aggregate demand, and an increase in real output
(B) An increase in consumption spending, a decrease in aggregate demand, and a decrease in real output
(C) An increase in investment spending, an increase in the capital stock, and an increase in real output
(D) A decrease in investment spending, a decrease in the capital stock, and an increase in real output
(E) A decrease in government spending, a decrease in aggregate demand, and a decrease in real output

184.
2015 Real Gross Domestic Product
Country Population

X 490,000 70
Y 200,000 20

Which conclusion can be supported by the data in the table above?

(A) Country X’s real growth rate is 7 percent.
(B) Country X’s real per capita is $4,000.
(C) Country X’s economy grew at a faster rate than Country Y’s economy did.
(D) Income is more equally distributed in Country X than in Country Y.
(E) Country Y’s real per capita is greater than Country X’s real per capita.

185. Government investment in human capital is likely to shift

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the aggregate demand curve to the right in the short run and the aggregate supply curve to the right in the
(A)
long run
the aggregate demand curve to the left in the short run and the aggregate supply curve to the left in the long
(B)
run
(C) the aggregate demand curve to the right in the short run and the long-run Phillips curve to the right
(D) the aggregate demand curve to the left in the long run
(E) the aggregate demand curve to the left in the short run and the long-run Phillips curve to the left

186. If subsidies for research and development on new technologies lead to an increase in the average productivity of
labor, what will most likely happen to real per capita and long-run aggregate supply for a given
population size?
(A) Real per capita will decrease, and will increase.
(B) Real per capita will decrease, and will decrease.
(C) Real per capita will increase, and will increase.
(D) Real per capita will increase, and will decrease.
(E) Real per capita will decrease, and will not change.

187. In the aggregate demand-aggregate supply model, economic growth can best be represented by a
(A) leftward shift of the long-run aggregate supply curve
(B) rightward shift of the long-run aggregate supply curve
(C) rightward shift of the short-run aggregate supply curve
(D) rightward shift of the aggregate demand curve
(E) leftward shift of the aggregate demand curve

188. Which of the following will most likely contribute to long-run economic growth?
(A) High levels of household spending
(B) High levels of government spending
(C) High levels of investment in plant and equipment
(D) Low levels of immigration to the country
(E) Low levels of foreign investment in the country

189. Which of the following best represents an investment in human capital?

(A) A clothing manufacturer purchases automated machinery.
An automobile manufacturer hires an engineer who specializes in maintaining modern robotic assembly
(B)
machines.
(C) A bank pays the tuition for one of its managers to pursue a degree in business administration.
A paper mill offers a bonus to an employee who develops a more efficient way to incentivize workers to
(D)
work more night shifts.
(E) A manufacturing firm builds a new assembly line.

190. If a country’s production possibilities curve is shifting outward, which of the following must be true?

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(A) There is cyclical unemployment.

(B) The price level is increasing.
(C) The aggregate demand curve is shifting to the right.
(D) The long-run Phillips curve is shifting to the right.
(E) The long-run aggregate supply curve is shifting to the right.

191. If marginal business tax rates are decreased, how will aggregate supply and employment change in the long run?

Aggregate Supply Employment

(A)
Increase Increase

Aggregate Supply Employment

(B)
Increase Decrease

Aggregate Supply Employment

(C)
Decrease Increase

Aggregate Supply Employment

(D)
Decrease Decrease

Aggregate Supply Employment

(E)
Not change Increase

192. Increases in government subsidies to encourage investment in research and development will affect aggregate
demand (AD) and long-run aggregate supply (LRAS) in which of the following ways?

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AD LRAS
(A)
Increase Increase

AD LRAS
(B)
Increase Decrease

AD LRAS
(C)
Increase No change

AD LRAS
(D)
Decrease Increase

AD LRAS
(E)
Decrease No change

193. Which of the following best illustrates an improvement in a country’s standard of living?
(A) An increase in real per capita gross domestic product
(B) An increase in nominal per capita gross domestic product
(C) Price stability
(D) A balanced budget
(E) An increase in the consumer price index

194. In an economy in which all prices, including wages, are completely flexible, an increase in labor productivity will
result in which of the following changes in output and real wages?

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Output Real Wages

(A)
Increase Increase

Output Real Wages

(B)
Increase Decrease

Output Real Wages

(C)
Decrease No change

Output Real Wages

(D)
Decrease Increase

Output Real Wages

(E)
Decrease Decrease

195. Which of the following combinations of changes in income taxes, real interest rate, and investment spending is most
likely to promote economic growth?

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Income taxes Interest Rate Investment

(A)
Increase Increase Increase

Income taxes Interest Rate Investment

(B)
Increase Increase Decrease

Income taxes Interest Rate Investment

(C)
Increase Decrease Decrease

Income taxes Interest Rate Investment

(D)
Decrease Decrease Decrease

Income taxes Interest Rate Investment

(E)
Decrease Decrease Increase

196. When the government invests in education and physical capital, which of the following will happen in the long run?
(A) Real output per worker will decrease.
(B) There will be upward movement along the aggregate production function.
(C) There will be downward movement along the aggregate production function.
(D) The aggregate production function will shift upward.
(E) The aggregate production function will shift downward.

197. Increased spending on which of the following contributes most to long-term economic growth?
(A) Social security and other transfer payments
(B) New automobiles and homes
(C) Education and infrastructure
(D) Imported consumer goods
(E) Interest payments on national debt

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198. Increases in the real per capita income of a country are most closely associated with increases in which of the
following?
(A) The labor force
(B) The price level
(C) The money supply
(D) Productivity
(E) Tax rates

199. An increase in which of the following is most likely to lead to long-run economic growth?
(A) The value of the domestic currency
(B) Transfer payments
(C) The money supply
(D) Labor productivity
(E) The minimum wage

200. In the long run, government subsidies that promote the development of technology with widespread business
applications will have which of the following effects?
(A) A negative supply shock and lower price level
(B) A negative supply shock and lower economic growth rate
(C) A positive supply shock and lower price level
(D) A positive supply shock and lower economic growth rate
(E) A lower aggregate demand and lower price level

201. Which of the following is LEAST likely to promote economic growth?

(A) Investment in tools and machines
(B) Investment in training of labor
(C) Increase in consumption of nondurable goods
(D) Tax credit for technology improvement
(E) Increase in the labor force participation rate

202. Which of the following best illustrates rising productivity?

(A) An expansion of the labor force
(B) An increase in the value of financial capital
(C) A decrease in the amount of physical capital per worker
(D) A decrease in the amount of labor needed to produce a unit of output
(E) An increase in the amount of resources required to produce a certain level of output

203. A change in which of the following best measures economic growth?

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(A) Nominal gross domestic product per capita

(B) Real gross domestic product per capita
(C) Government spending per capita
(D) Private-sector spending per capita
(E) Bond purchases per capita

204. Which of the following policy actions will promote long-run economic growth?
(A) Decreasing the investment tax credit
(B) Decreasing the money supply
(C) Increasing unemployment compensation
(D) Increasing investment in human capital
(E) Increasing tax rates on savings income

205. Which of the following will most likely promote long-run economic growth?
(A) Increasing taxes on interest earned from savings
(B) Increasing consumption spending on food and entertainment
(C) Increasing funding for research and development
(D) Decreasing funding for law enforcement and judicial systems
(E) Rapidly harvesting timber and mineral resources

206. Which of the following would best explain a decline in potential gross domestic product?
(A) Negative net investment
(B) The discovery of vast new oil deposits
(C) A lower price level
(D) A decrease in the infant mortality rate
(E) A decrease in wages and profits

207. Which of the following policy changes is most likely to promote economic growth?
(A) An increase in tariffs on imported consumer goods
(B) A decrease in investment tax credits for businesses
(C) An increase in taxes on foreign financial inflows
(D) A decrease in tuition fees at public colleges
(E) An increase in tax rates on savings

208. Which of the following is the best example of a policy action that will increase the rate of long-run economic
growth?

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(A) Increasing unemployment benefits

(B) Increasing investment in energy-efficient technologies
(C) Increasing subsidies to consumers for spending on nondurable goods
(D) Decreasing personal income tax rates
(E) Decreasing spending on early childhood education

209. If an economy experiences an improvement in technology, what will happen to its production possibilities curve
and its long-run aggregate supply curve?
(A) Both curves shift inward.
(B) Both curves shift outward.
(C) The shifts inward, and the curve stays the same.
(D) The shifts outward, and the curve shifts inward.
(E) The stays the same, and the curve shifts outward.

210. The shifting of a country’s production possibilities curve to the right will most likely cause
(A) net exports to decline
(B) inflation to increase
(C) the aggregate demand curve to shift to the left
(D) the long-run aggregate supply curve to shift to the left
(E) the long-run aggregate supply curve to shift to the right

211. If an economy is currently in a recessionary gap, which of the following changes would result in an increase in real
in the short run and a decrease in the price level in the long run?
(A) The government begins running a budget surplus.
(B) There is an increase in real interest rates.
(C) The government increases income tax rates.
(D) There is an increase in the prices of the economy’s productive resources.
(E) There is an increase in the productivity of the economy’s resources.

212. The long-run aggregate supply curve is likely to shift to the right when there is
(A) an increase in the cost of productive resources
(B) an increase in productivity
(C) an increase in the federal budget deficit
(D) a decrease in the money supply
(E) a decrease in the labor force

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213.

Given the aggregate demand and aggregate supply curves shown above, if policy makers want to increase real
output without causing inflation, they can pursue a policy that will
(A) increase aggregate demand and decrease aggregate supply by equal amounts
(B) decrease aggregate demand only
(C) decrease aggregate supply only
(D) increase aggregate demand only
(E) increase aggregate supply only

214. Which of the following policy changes will most likely shift the long-run aggregate supply curve to the right?
(A) An increase in income taxes
(B) An increase in the money supply
(C) An increase in the required reserve ratio
(D) An increase in the government budget deficit financed by borrowing
(E) An increase in government spending on public education

215. Supply-side economists are most likely to favor which of the following short-run policies?
(A) Increasing government spending on social welfare
(B) Increasing government spending to help promote the country’s business abroad
(C) Cutting marginal tax rates to promote savings, investment, and work
(D) Financing government spending on infrastructure by increasing sales tax rather than increasing income tax
(E) Increasing corporate profit tax rates

216. Which of the following is a supply-side fiscal policy that could stimulate economic growth?

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(A) A decrease in income tax credits

(B) A decrease in marginal income tax rates
(C) A decrease in the sales taxes imposed on household goods
(D) An increase in the discount rate
(E) An increase in the money supply

217. Which of the following is most likely to promote long-run economic growth?
(A) An increase in government transfer payments
(B) An increase in income taxes for middle-class households
(C) An increase in tax credits for business spending on research and development
(D) An increase in unemployment compensation
(E) An increase in financial capital outflow

218. Which of the following is LEAST likely to affect the long-run growth of an economy?
(A) Investment in physical capital
(B) Research and development
(C) Education and training
(D) A specific tax on luxury goods
(E) Stable and efficient institutions

219. Technological progress promotes long-run economic growth primarily by

(A) increasing the supply of financial capital
(B) increasing labor productivity
(C) decreasing national savings
(D) decreasing budget deficit
(E) decreasing nominal wages

220. Which of the following would most likely stimulate economic growth?
(A) Decreased savings
(B) Decreased wages
(C) Increased transfer payments
(D) Increased personal income taxes
(E) Technological progress

221. The long-run growth rate of an economy will be increased by an increase in all of the following EXCEPT

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(A) capital stock

(B) labor supply
(C) real interest rate
(D) rate of technological change
(E) spending on education and training

222. Which of the following is a best example of an investment in human capital?

(A) Decreasing the wage rate
(B) Training workers
(C) Hiring new workers
(D) Buying new equipment
(E) Updating technology

223. Which of the following would cause both the aggregate demand and aggregate supply curves to shift to the right?
(A) A decrease in corporate income taxes
(B) A decrease in government spending
(C) A decrease in natural resource prices
(D) A decrease in the stock market prices
(E) An increase in the international value of the domestic currency

224. Which of the following would directly increase the capital stock of an economy?
(A) An individual purchases shares of corporate stock.
(B) An individual purchases high-risk corporate bonds.
(C) A business firm expands its production facilities.
(D) A bank uses cash reserves to purchase short-and long-term government securities.
(E) The government implements a spending program to cover prescription drugs for Medicare recipients.

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