1. Investment spending a. is a remarkably stable function of the level of real GDP. b. cannot be stimulated by lowering the real interest rate. c. is often the cause of business fluctuations in the United States and elsewhere. d. is the primary solution to recessions and depressions, according to John Maynard Keynes. 2. An autonomous increase in spending a. leads to a horizontal shift of the aggregate demand curve by an amount equal to the increase in spending. b. leads to a horizontal shift of the aggregate demand curve by an amount equal to the increase in spending times the oversimplified multiplier. c. leads to a horizontal shift of the aggregate demand curve by an amount equal to the increase in spending times the marginal propensity to consume. d. does not shift the aggregate demand curve since it is drawn to reflect only the negative relationship between the price level and real GDP. 3. The reason for the multiplier effect is that a. one person's additional expenditure constitutes a new source of income for another person, and this additional income leads to still more spending, and so on. b. changes in government spending typically deepen recessions or exacerbate inflationary conditions in the economy. c. businesses make decisions about investment projects based on anticipated profits. d. additional spending lowers the real interest rate and leads to further borrowing and spending by businesses. 4. The possibility that thriftiness, a virtue for the individual, may be disastrous for a nation is called a. the paradox of the marginal propensity to save. b. the paradox of thrift. c. the paradox of the consumption function. d. the paradox of wealth. e. the paradox of composition. 5. An autonomous increase in consumption is a. an increase in consumer spending that stems from an increase in consumer income. b. an increase in consumer spending without any increase in consumer income. c. an increase in consumer spending from outside countries. d. an increase in consumer spending due to an increase in government spending. 6. The multiplier explains how a. any effect in the economy will be magnified. b. $1 invested will increase GDP by more than $1. c. real expenditures increase as investment increases. d. All of the above are correct. 7. The economy's aggregate supply curve a. slopes downward to the right. b. shows the relationship between the price level and the quantity of real GDP supplied. c. shows that as prices rise, less output is produced, other things held constant. d. All of the above are correct. 8. The major element of cost in the aggregate economy is a. capital goods. b. interest rates. c. wages. d. profits. e. rents. 9. Which of the following statements is correct? a. The aggregate supply curve is shifted outward by an increase in the price of any input, and it is shifted inward by a decrease. b. The aggregate supply curve is shifted inward by an increase in the price of any input, and it is shifted outward by a decrease. c. The aggregate supply curve is shifted inward by an increase in the price of any input, but it cannot be shifted outward unless the nation's labor supply and capital stock also increase. d. The aggregate supply curve is shifted inward by a technological breakthrough that increases the productivity of the labor force. 10. The aggregate supply curve a. is generally flatter as the degree of resource utilization rises. b. is never vertical regardless of the degree of resource utilization. c. is relatively steep at low levels of output and gets flatter at high levels of output. d. is relatively flat at low levels of output and gets steeper at high levels of output. 11. In Figure 27-2, both graphs (a) and (b) indicate that the economy is experiencing a(n) a. inflationary gap equal to RG. b. inflationary gap equal to RE. c. recessionary gap equal to RG. d. recessionary gap equal to RE. 12. The economy's self-correcting mechanism a. is more efficient at curing inflationary gaps through inflation than at curing recessionary gaps through deflation. b. can be relied on to cure an inflationary gap even given strong inflationary forces, such as rapid increases in aggregate demand. c. works quickly to cure recessionary gaps but is very slow in curing inflationary gaps. d. None of the above is correct. 13. What does inflation do to the multiplier as determined by the oversimplified formula? a. Inflation increases the multiplier above that suggested by the oversimplified formula. b. Inflation reduces the multiplier below that suggested by the oversimplified formula. c. Inflation does not change the multiplier as determined by the oversimplified formula. d. Inflation increases the multiplier unless unemployment levels also rise. 14. If the economy is experiencing an inflationary gap, a. wages typically rise and shift the aggregate supply curve to the right, reducing the gap. b. wages typically rise and shift the aggregate supply curve to the left, reducing the gap. c. wages usually fall and shift the aggregate supply curve to the right, reducing the gap. d. wages usually stay the same, but the costs of other inputs rise and shift the aggregate supply curve to the left, reducing the gap. 15. Most economists agree that a recessionary gap a. may not be self-correcting except in the long run, because prices and wages fall only reluctantly when demand is weak. b. is self-correcting even in the short run, because workers will quickly accept lower wages after they lose their current jobs. c. is not self-correcting because deficits in the balance of trade prevent the aggregate supply curve from shifting to the left. d. will not persist more than a few months because the aggregate supply curve will shift to the left and eliminate the recessionary gap. 16. The aggregate supply curve is a. a schedule showing the relationship between the price level and the quantity of real GDP supplied. b. typically upward sloping. c. relatively flat at low levels of output. d. derived from business costs. e. All of the above are correct. 17. For any given price level, equilibrium GDP on the demand side of the economy occurs when ________________. a. Y = C + I - G - (X - IM) b. Y = C + I + G + (X - IM) c. Y = C + I + G d. Y = C + I + G - (X + IM) 18. In Figure 28-1, which line best represents the change in the consumption schedule following a cut in the income tax rate? a. C1 in graph (a) b. C2 in graph (a) c. C1 in graph (b) d. C2 in graph (b) 19. You are a member of Congress when the economy is in a recessionary gap. If your goal is to achieve a fully employed labor force, you should vote to a. balance the federal budget. b. raise government purchases, reduce taxes, and increase transfer payments. c. decrease government purchases, increase taxes, and/or cut transfer payments. d. raise government purchases, raise taxes by more than the increase in government purchases, and decrease transfer payments. 20. The central idea of supply-side economics is that a. certain types of tax cuts can be expected to increase aggregate supply. b. the rich are rich and the poor are poor because of differences in productivity. c. marginal tax rates are not important to the average person in the labor force. d. All of the above are correct. 21. Supply-side policies have a. redistributed the nation's income toward greater equality. b. resulted in lower budget deficits. c. had a greater effect on aggregate supply in the short run, with effects on aggregate demand coming later. d. made only a small dent in inflation. e. All of the above are correct. 22. Government purchases of goods and services a. have a different multiplier from autonomous changes in consumption, investment, or net exports. b. are a direct component of total spending and, therefore, have the same multiplier as do autonomous changes in consumption, investment, or net exports. c. are an indirect component of total spending and have the same multiplier as changes in taxes. d. do not impact the level of real GDP if matched by an equal level of taxes. Table 28-1 GDP Taxes DI C I G (X-IM) $420 $200 $220 $165 $70 $200 $15 480 200 280 210 70 200 15 540 200 340 255 70 200 15 600 200 400 300 70 200 15 660 200 460 345 70 200 15 720 200 520 390 70 200 15 23. Refer to Table 28-1 and assume that taxes and government purchases both increase $60. What is the new equilibrium real GDP? Assume that the original MPC does not change. a. $420 b. $480 c. $540 d. $600 e. $660 24. Individuals favoring a smaller public sector a. can advocate an active fiscal policy just as well as those who favor a larger public sector. b. should argue against the use of fiscal policy for economic stabilization because fiscal policy is associated with a large and growing public sector. c. believe we should increase G when the economy needs to be stimulated. d. believe we should increase taxes when the economy needs restraint. 25. The equilibrium level of real GDP needs to be increased $1,000 billion to boost the economy to the full-employment level. If the government purchases multiplier is 2.5 and the taxes multiplier 2.25, which of the following fiscal policy actions would be most appropriate? a. increase G $400 billion and decrease taxes $444.4 billion b. increase G $1,000 billion or decrease taxes $1,000 billion c. increase G $400 billion or decrease taxes $444.4 billion d. increase G $1,000 billion and raise taxes $444.4 billion 26. The oversimplified multiplier formula is wrong for all of the following reasons except a. it ignores income taxes, which reduces the size of the multiplier. b. it ignores price-level changes, which also reduces the multiplier. c. it ignores variable imports, which reduces the size of the multiplier. d. it ignores government spending changes, which reduces the size of the multiplier. 27. Prior to the 1980s, the banking industry was heavily regulated because a. banking is monopolized. b. bank managers do what is best for their stockholders, but that may not be best for the whole economy. c. the typical bank manager makes very risky loans. d. All of the above are correct. 28. Bank regulators are concerned for the safety of depositors because a. in the absence of federal insurance, depositors would lose their money if the bank failed. b. jittery depositors may rush to cash in their accounts and produce a "run" that even a sound bank could not survive. c. bank failures were common throughout most of American history and have become distressingly common again in recent years. d. All of the above are correct. 29. If Bill Jones is in the car dealer's showroom looking at the sticker price on a 1993 car, that sticker price serves as a a. store of value. b. standard for deferred payment. c. standard for a loan. d. unit of account. 30. Which of the following is not a common characteristic of commodity money? a. divisible b. storable c. durable d. compact e. fiat paper 31. The major contribution of the "goldsmith's principle" to modern banking is a. paper money that is fully backed by gold. b. fractional reserve banking. c. universal standards for the purity and weight of gold coins. d. neighborhood banking. 32. The art of bank management is to a. maximize stockholders' profits by making risky investments and by giving loans to those borrowers who will pay the highest interest rates. b. refuse to make risky investments and to make loans only for the safest projects. c. strike the appropriate balance between the lure of bank profits and the need for safety. d. invest the bank's funds in U.S. bonds and make loans to local business people with whom the bank is acquainted. 33. The basic equation for a bank balance sheet is _______________. a. liabilities = assets + net worth b. net worth = liabilities + assets c. assets = liabilities + net worth d. assets = liabilities - net worth 34. During the downswing of the economy and around the bottom of a business contraction, banks tend to a. hold excess reserves and turn the money creation process into one of money destruction. b. make the money supply expand, which adds the necessary momentum to bring the economy out of the recession. c. make riskier loans to boost profit margins. d. invest in the stock market with the banks' excess reserves. 35. The Macro-Easy National Bank has $2 million in reserves and $8.5 million in other assets. Its checking deposits are $6 million, other liabilities and net worth $4.5 million. The Macro-Easy National Bank wants to expand its loans. With a required reserve ratio of 10 percent, what is the maximum level of new loans this bank can safely create? a. $10.4 million b. $1.4 million c. $1.2 million d. $.6 million e. zero 36. The government banking regulation that places an upper limit on the money supply is a. reserve requirements on checking deposits. b. deposit insurance by the FDIC. c. periodic bank examinations and audits. d. limitations on the kinds and quantities of assets in which banks may invest. e. All of the above are correct. 37. The Federal Reserve Board a. is independent of the rest of the government. b. serves at the pleasure of the President of the United States. c. reports directly to Congress and is responsible solely to that branch of the government. d. consists of 12 members, one from each Federal Reserve District. 38. Recent proposals for modifying the power of the Federal Reserve Board include a. putting the secretary of the Treasury on the board. b. shifting the term of the chairman of the Board of Governors to make it coincide with that of the President of the United States. c. requiring the Fed to announce its ultimate targets for unemployment and inflation and then explaining how it expects to achieve those goals. d. forcing the Fed to announce its policy decisions as soon as they are made. e. All of the above are correct. 39. If the Federal Open Market Committee (FOMC) decides to expand the money supply, then a. it will issue directions to sell U.S. government securities, thus increasing the velocity of circulation of the money supply. b. it will issue directions to purchase U.S. government securities, thus putting more reserves in the hands of the banks. c. it will order new Federal Reserve notes delivered to member banks. d. it will raise the discount rate to member banks. 40. You purchased a bond in 1985 for $1,000 that pays $60 per year interest. If you sell the bond for $500, the purchaser will earn an effective interest rate of ___________. a. 3 percent b. 6 percent c. 10 percent d. 12 percent e. 15 percent 41. If the Federal Reserve lowers the required reserve ratio, a. total bank reserves will increase. b. total bank reserves will decrease. c. excess reserves will increase. d. excess reserves will decrease. 42. If the Fed wants to give banks more reserves, it can a. sell securities in the open market. b. raise the required reserve ratio. c. lower the discount rate. d. raise the federal funds rate. e. All of the above are correct. 43. The tool most relied on by the Fed in conducting monetary policy is a. open market operations. b. changing the discount rate. c. changing the required reserve ratio. d. moral suasion. 44. The demand for money a. will fall if the price level rises. b. will rise as real GDP rises. c. will fall as real GDP rises. d. does not depend on real GDP or the price level. 45. The interest rate a. is the opportunity cost of holding money balances. b. does not influence the quantity of money that people demand. c. falls when bond prices fall. d. increases when the money supply increases. 46. An increase in the money supply a. will definitely result in inflation if unemployment is high and there is much unused industrial capacity. b. shifts the aggregate demand curve to the left. c. will probably result in inflation if the economy is fully employed. d. causes interest rates to rise.