Sample Multiple Choice Questions
(Randomly Chosen)
1.
If the short-run IS-LM equilibrium occurs at a level of income above the natural rate of output, in the long run the ______ will ______ in order to return output to the natural rate.
A)price level; increase
B)interest rate; decrease
C)money supply; increase
D)consumption function; decrease
A✓
2.
Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in ______.
A)classical; both the short and long runs.
B)Keynesian; both the short and long runs.
C)classical; the short run whereas the Keynesian assumptions are most appropriate in the long run.
D)Keynesian; the short run whereas the classical assumptions are most appropriate in the long run.
D✓
3.
If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by:
A)100.
B)200.
C)300.
D)400.
C✓
4.
Those economists who believe that fiscal policy is more potent than monetary policy argue that the:
A)responsiveness of investment to the interest rate is small.
B)responsiveness of investment to the interest rate is large.
C)IS curve is nearly horizontal.
D)LM curve is nearly vertical.
A✓
5.
If investment does not depend on the interest rate, then the ______ curve is ______.
A)IS; vertical
B)IS; horizontal
C)LM; vertical
D)LM; horizontal
A✓
6.
The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending:
A)lower; raises; reduces
B)higher; lowers; increases
C)lower; lowers; increases
D)higher; raises; reduces
A✓
7.
In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.
A)decrease; decrease; decrease; decrease
B)increases; increase; increases; increase
C)decrease; decrease; increase; increase
D)increase; increase; decrease; decrease
A✓
8.
The monetary transmission mechanism works through the effects of changes in the money supply on:
A)the budget deficit.
B)investment.
C)government expenditures.
D)taxation.
B✓
9.
When adaptive expectations are used to model inflation expectations in the Phillips curve, then the natural rate of unemployment is called the ______ rate of unemployment.
A)structural
B)cyclical
C)short-run aggregate supply
D)non-accelerating inflation
D✓
10.
In the sticky-price model, if no firms have flexible prices, the short-run aggregate supply schedule will:
A)be vertical.
B)be steeper than it would be if some firms had flexible prices.
C)slope upward to the right.
D)be horizontal.
D✓
11.
Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should ______ aggregate demand at a cost of generating ______ inflation.
A)increase; higher
B)increase; lower
C)decrease; higher
D)decrease; lower
A✓
12.
The Phillips curve expresses a short-run link:
A)among nominal variables.
B)among real variables.
C)among unexpected variables.
D)between nominal and real variables.
D✓
13.
The basic aggregate supply equation implies that output exceeds natural output when the price level is:
A)low.
B)high.
C)less than the expected price level.
D)greater than the expected price level.
D✓
14.
The estimate of the sacrifice ratio from the Volcker disinflation is approximately:
A)5-6.
B)2.5-3.
C)1-1.5.
D)0-0.5.
B✓
15.
In industries not covered by formal wage contracts:
A)wages are always flexible.
B)wages are always fixed.
C)implicit agreements between workers and firms do not limit wage changes.
D)implicit agreements between workers and firms may limit wage changes.
D✓
16.
In the sticky-wage model an unexpectedly lower price level leads to a ______ in the labor demand curve, while in the sticky-price model reductions in output lead to a ____ in the labor demand curve.
A)movement along; shift in
B)movement along; movement along
C)shift in; shift in
D)shift in; movement along
A✓
17.
Arguments in favor of passive economic policy include all of the following except:
A)monetary and fiscal policies work with long and variable lags, which can produce destabilizing results.
B)economic forecasts have too large a margin of error to be useful in formulating stabilization policy.
C)recessions do not reduce economic well-being, so using monetary and fiscal policy for stabilization is unnecessary.
D)the Great Depression could have been avoided if the Federal Reserve had pursued a policy of steady money growth.
C✓
18.
Policies that stimulate or depress the economy without any deliberate policy change are called:
A)leading indicators.
B)time inconsistent policies.
C)rational expectations policies.
D)automatic stabilizers.
D✓
19.
A time-inconsistency problem in macroeconomic policy can occur when the policymaker:
A)is made to follow a strict and an inflexible rule.
B)has discretion in the short run but follows a rule in the long run.
C)has discretion to act as it seems best in each situation, based on his or her own knowledge and experience.
D)has no discretion.
C✓
20.
If people's expectations of inflation are formed rationally rather than based on adaptive expectations and if policymakers make a credible policy move to reduce inflation, then the costs of reducing inflation will be ______ traditional estimates of the sacrifice ratio.
A)much higher than
B)much lower than
C)exactly equal to
D)approximately two percent greater than
B✓
21.
Policy is conducted by rule if policymakers:
A)announce in advance how policy will respond to various situations and commit themselves to following through on this announcement.
B)are free to size up the situation case by case and choose whatever policy seems appropriate at the time.
C)set policy according to election results, i.e., set policy by rule of the ballot box.
D)manipulate policy to ensure both low inflation and unemployment on election day.
A✓
22.
According to advocates of rational expectations, traditional estimates of the sacrifice ratio are unreliable because they:
A)ignore inside lags.
B)overestimate outside lags.
C)are based on adaptive expectations.
D)are time inconsistent.
C✓
23.
Assume that there is a short-run tradeoff between inflation and unemployment, that the central bank desires both low inflation and low unemployment, and that the central bank follows a fixed rule in conducting monetary policy. Initially, households and firms expect high inflation. Following a credible announcement by the central bank of a low-inflation policy, households and firms will ______ the central bank's announcement and ______ their expectations of inflation.
A)believe; lower
B)not believe; not change
C)believe; not change
D)not believe; lower
A✓
Thankyou...
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