UNIT 5 Macroeconomics SAMPLE QUESTIONS …

1 advanced placement Economics Macroeconomics : Student Activities National Council on economic Education, New York, the letter of each correct Which of the following monetary and fiscal pol-icy combinations would definitely cause adecrease in aggregate demand in the short run?DiscountGovernmentOpen MarketRateSpendingOperations(A) DecreaseDecreaseBuy bonds(B) DecreaseIncreaseBuy bonds(C) Decrease IncreaseSell bonds(D) Increase DecreaseSell bonds(E) Increase DecreaseBuy bonds2. Which of the following monetary and fiscal pol-icy combinations would definitely cause anincrease in aggregate demand?

2 ReserveGovernment RequirementsTaxesSpending(A) DecreaseDecreaseDecrease(B) DecreaseDecreaseIncrease(C) IncreaseDecreaseIncrease(D) IncreaseIncreaseDecrease(E) IncreaseDecreaseDecrease3. Assume that the economy has a low unemploy-ment rate and a high rate of inflation. Which ofthe following sets of monetary and fiscal poli-cies would be consistent and designed to reducethe rate of inflation?Discount Government Open MarketRateSpendingOperations(A) IncreaseIncreaseBuy bonds(B) IncreaseIncreaseSell bonds(C) Increase DecreaseSell bonds(D) Increase DecreaseBuy bonds(E) Decrease DecreaseBuy bonds4.

3 To counter the crowding-out effect on interestrates caused by the government s deficit spend-ing, the Federal Reserve can(A) cut tax rates.(B) increase tax rates.(C) increase the discount rate.(D) increase the reserve requirement.(E) buy bonds through open Which of the following would best portraylong-run economic growth?(A) A leftward shift of the aggregate demandcurve(B) A rightward shift of the aggregate demandcurve(C) A leftward shift of the production possibili-ties curve(D) A leftward shift of the long-run aggregatesupply curve(E) A rightward shift of the long-run aggregatesupply curve6. An increase in which of the following would bemost likely to increase long-run economicgrowth?

4 (A) Taxes(B) Interest rates(C) Consumer spending(D) Productivity(E) Value of domestic currency5 MacroeconomicsSAMPLE QUESTIONS MULTIPLE-CHOICEUNITS ample Multiple-Choice Questions268 advanced placement Economics Macroeconomics : Student Activities National Council on economic Education, New York, An expansionary fiscal policy will result in anincrease in the interest rate unless which of thefollowing occurs?(A) Taxes are cut instead of government expen-ditures being increased.(B) The money supply is increased.(C) Wage and price controls are imposed.(D) The exchange rate is fixed.(E) The Federal Reserve sells An expansionary monetary policy may promotelong-run growth if it leads to(A) an increase in consumption.

5 (B) an increase in investment.(C) an increase in government spending.(D) a constant level of government spending.(E) a decrease in net If the government increases spending without atax increase and simultaneously no monetary-policy changes are made, which of the followingwould most likely occur?(A) Income would not rise at all because nonew money is available for increased con-sumer spending.(B) The rise in income may be greater than themultiplier would predict because the higherinterest rates will stimulate investmentspending.(C) The rise in income may be smaller than themultiplier would predict because the higherinterest rates will crowd-out private invest-ment spending.

6 (D) Income will go up by exactly the amount ofthe new government spending since thisacts as a direct injection to the incomestream.(E) Income will not go up unless taxes are cutas If Congress and the Federal Reserve bothwished to encourage growth of productivecapacity in an economy already close to fullemployment, it would be most appropriate to(A) increase interest rates by buying bonds onthe open market.(B) use a tight money policy to decrease gov-ernment spending.(C) reduce taxes on consumption, increaseincome taxes and increase governmenttransfer payments.(D) reduce interest rates by engaging in open-market operations and raise taxes on per-sonal income.

7 (E) increase capital gains taxes and decreasethe money Sales of durable goods last month were surpris-ingly high. Recent price increases have pushedthe CPI to more than a 7 percent increase for thepast year. On average, the producer price indexhas gained 1 percent each month during the lastyear. Wage rates have increased throughout theeconomy, but productivity gains are unemployment rate, however, is steady at 6 percent. Which of the following changes in thetax rate, government spending and the federalfunds rate are most appropriate given the state ofthe economy?GovernmentFederalTax RateSpendingFunds Rate(A) IncreaseIncreaseIncrease(B) IncreaseDecreaseIncrease(C) IncreaseDecreaseDecrease(D) DecreaseIncreaseDecrease(E) DecreaseDecreaseDecrease5 MacroeconomicsSAMPLE QUESTIONS MULTIPLE-CHOICEUNIT(continued) advanced placement Economics Macroeconomics : Student Activities National Council on economic Education, New York, When the unemployment rate is 10 percentand the CPI is rising at 2 percent, the federalgovernment cuts taxes and increases govern-ment spending.

8 If the Federal Reserve buysbonds on the open market, interest rates,investment, real gross domestic product (GDP)and the price level are most likely to change inwhich of the following ways?InterestInvest-RealPriceRatesmentGD PL evel(A) Decrease Decrease IncreaseIncrease(B) Decrease IncreaseIncreaseIncrease(C) Increase Decrease Decrease Decrease(D) Increase Decrease IncreaseIncrease(E) Increase IncreaseIncreaseIncrease13. When the unemployment rate is percentand the CPI is rising at a 12 percent rate, thefederal government raises taxes and cuts gov-ernment spending. If the Federal Reserve sellsbonds on the open market, interest rates, in-vestment, real gross domestic product (GDP)and the price level are most likely to change inwhich of the following ways?

9 InterestInvest-RealPriceRatesmentGDPL evel(A) Decrease Decrease IncreaseIncrease(B) Increase Decrease IncreaseIncrease(C) Increase Decrease Decrease Decrease(D) Decrease IncreaseIncreaseIncrease(E) Decrease Decrease IncreaseIncrease14. The statement that the cost of reducing therate of inflation is that people must lose theirjobs indicates that the speaker believes in arelationship that is usually depicted by whichof the following?(A) The short-run Phillips curve(B) The liquidity trap(C) The production function(D) The quantity theory of money(E) The spending multiplier15. In the short run, combining an expansionaryfiscal policy with a tight money policy is mostlikely to cause(A) real GDP to increase.

10 (B) real GDP to decrease.(C) interest rates to fall.(D) interest rates to rise.(E) the federal budget deficit to QUESTIONS MULTIPLE-CHOICEUNIT(continued)270 advanced placement Economics Macroeconomics : Student Activities National Council on economic Education, New York, the following graph to answer QUESTIONS 16 and If the production possibilities curve of aneconomy shifts from AB to CD, it most likely iscaused by(A) full employment of resources.(B) technology advances.(C) allocative efficiency.(D) a decrease in the price level.(E) productive If the production possibilities curve of aneconomy is CD and the economy is producingat Point X, which of the following is true?