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Social Science Test #2

Summer 07 Soc Sc 132 Exam 2 Chap 10 11

1. The aggregate demand curve shows the: A. inverse relationship between the price level and real GDP purchased. B. direct relationship between the price level and real GDP produced. C. inverse relationship between interest rates and real GDP produced. D. direct relationship between real-balances and real GDP purchased.

2. When aggregate demand decreases, product prices, wage rates, and per-unit production costs are inflexible downward because of a: A. ratchet effect. B. interest-rate effect. C. real-balances effect. D. foreign-purchases effect.

3. Menu costs will: A. increase the amount of training of workers. B. result in price wars between businesses. C. increase the legal minimum wage. D. make prices inflexible downward.

4. Refer to the above graph. Which factor will shift AD1 to AD3? A. an increase in real wages B. an increase in productivity C. a decrease in real interest rates D. a decrease in consumer wealth

5. Refer to the above table. The equilibrium price level and quantity of real domestic output will be: A. 150 and $1000. B. 150 and $1500. C. 200 and $2000. D. 250 and $2500.

6. Refer to the above diagram. If aggregate supply shifts from AS1 to AS3, then real domestic output will: A. increase and the price level will increase. B. increase and the price level will decrease. C. decrease and the price level will increase. D. decrease and the price level will decrease.

7. A decrease in government spending will cause a(n): A. increase in the quantity of real domestic output demanded. B. decrease in the quantity of real domestic output demanded. C. decrease in aggregate demand. D. increase in aggregate demand.

8. An increase in taxes on consumers will most likely cause a(n): A. decrease in aggregate supply. B. decrease in aggregate demand. C. increase in aggregate supply. D. increase in aggregate demand.

9. A decrease in business taxes will tend to: A. increase aggregate demand but not change aggregate supply. B. increase aggregate supply but not change aggregate demand. C. increase aggregate demand and increase aggregate supply. D. decrease aggregate supply and decrease aggregate demand.

10. A change in aggregate supply would be caused by a change in: A. the price level. B. aggregate demand. C. per-unit production costs. D. the quantity of real output supplied.

11. The aggregate supply curve shows the: A. level of real domestic output which will be produced at each possible price level. B. level of real domestic output which will be purchased at each possible price level. C. price level at which real domestic output will be purchased. D. price level at which real domestic output will be in equilibrium.

12. When national income in other nations increases: A. aggregate demand increases. B. aggregate demand decreases. C. the quantity of real domestic output demanded decreases. D. the quantity of real domestic output demanded increases.

13. The aggregate demand curve will be increased by: A. a decrease in the price level. . B. an increase in the price level. C. an increase in national incomes abroad D. an appreciation in the value of the U.S. dollar.

14. The labels for the axes of an aggregate supply graph should be: A. real domestic output for the vertical axis and price level for the horizontal axis. B. real domestic output for the horizontal axis and price level for the vertical axis. C. real employment for the vertical axis and price level for the horizontal axis. D. aggregate demand for the vertical axis and real national output for the horizontal axis.

15. An increase in the real value of stock prices, which is independent of a change in the price Level, would best be an example of the: A. foreign purchases effect. B. real-balances effect. C. interest-rate effect. D. wealth effect.

16. Suppose that an economy produces 500 units of output. It takes 10 units of labor at $15 a unit and 4 units of capital at $50 a unit to produce this output. The per unit cost of production is: A. $1.42. B. $1.24. C. $0.70. D. $0.40.

17. Which would most likely increase aggregate supply? A. an increase in the prices of imported products B. an increase in productivity C. a decrease in business subsidies D. a decrease in net exports

18. If the dollar depreciates in value relative to foreign currencies, aggregate: A. demand decreases. B. demand increases. C. supply and aggregate demand increase. D. supply and aggregate demand decrease.

19. Which of the following terms describes a falling rate of inflation? A. hidden inflation B. stagflation C. deflation D. disinflation

20. Refer to the above diagram. When output decreases from Q1 and the price level increases from P1, then this change will: A. be caused by a shift in the aggregate supply curve from AS1 to AS3. B. be caused by a shift in the aggregate supply curve from AS2 to AS1. C. result in a movement along the aggregate demand curve from e2 to e1. D. result in a movement along the aggregate demand curve from e1 to e2.

21. Menu costs will: A. increase the amount of training of workers. B. result in price wars between businesses. C. increase the legal minimum wage. D. make prices inflexible downward.

22. In 2004, interest payments on the public debt as a percentage of GDP were about: A. 1.4 percent. B. 4.3 percent. C. 6.2 percent. D. 8 percent.

23. Which is an example of an automatic stabilizer? As real GDP decreases, income tax revenues: A. increase and transfer payments decrease. B. decrease and transfer payments increase. C. and transfer payments decrease. D. and transfer payments increase.

24. One of the timing problems with fiscal policy is an "operational lag" that occurs between the: A. beginning of a recession and the time that it is recognized that the event is occurring. B. time the need for fiscal action is recognized and the time that action is actually taken. C. time that fiscal action is taken and the time that action has an impact on output, employment, and the price level. D. time that fiscal action has an impact on output, employment, and the price level and the time by which it can be determined if the policy is effective.

25. The set of fiscal policies that would be most contractionary would be a(n): A. increase in government spending and taxes. B. decrease in government spending and taxes. C. increase in government spending and a decrease in taxes. D. decrease in government spending and an increase in taxes.

26. One timing problem with fiscal policy to counter a recession is an "administrative lag" that occurs between the: A. start of the recession and the time it takes to recognize that the recession has started. B. end of the recession and the time it takes to recognize that the recession has ended. C. time fiscal action is taken and the time that the action has its effect on the economy. D. time the need for the fiscal action is recognized and the time that the action is taken.

27. One important reason why the United States government is not likely to go bankrupt even with a large public debt is that it has: A. the power to print money to finance the debt. B. a strong military to protect it from creditors. C. the capacity to pay off its outstanding debt with gold. D. the ability to decrease interest rates and increase investment spending.

28. Refer to the above graph. Which economic events would cause a shift from curve A to curve B that would help offset the crowding-out effect? An increase in: A. interest rate caused by a change in Federal Reserve policy. B. profit expectations resulting from an increase in government spending. C. business taxes levied by government to pay for new government programs. D. the degree of excess capacity in business stemming from a recession.

29. The crowding-out effect from government borrowing to finance the public debt is reduced when: A. the economy is experiencing a period of high inflation. B. the economy is operating at the full-employment level of output. C. public investment complements private investment. D. the distribution of income becomes more equal.

30. An expansionary fiscal policy may be: A. offset by lowering tax rates. B. reinforced by raising tax rates. C. reinforced by the crowding-out effect. D. partially offset by the crowding-out effect.

31. The Council of Economic Advisers gives economic advice to the: A. President. B. U.S. Senate. C. U.S. House of Representatives. D. Federal Reserve System.

32. If a future policy reversal is expected, it will tend to: A. weaken the effects of a fiscal policy change. B. strengthen the effects of a fiscal policy change. C. not affect the outcome of a fiscal policy change. D. worsen the crowding-out effect.

33. Refer to the above graph. The crowding-out effect would be illustrated by a: A. shift from curve A to curve B leading to a decrease in investment. B. shift from curve B to curve A leading to a decrease in interest rates. C. movement from point 1 to point 2 on curve A leading to a decrease in investment. D. movement from point 2 to point 1 on curve A leading to a decrease in investment.

The following is an investment schedule. Investment spending is in billions of dollars. 34. Refer to the above data. Assume that private investment spending is initially $78 billion. If the government finances a deficit and this action increases the interest rate by 2 percentage points, then the government financing will have potentially crowded out: A. $92 billion of investment spending. B. $78 billion of investment spending. C. $17 billion of investment spending. D. $14 billion of investment spending.

35. If the full-employment deficit as a percentage of GDP is zero one year, and 1 percent of GDP the next year, it can be concluded that: A. fiscal policy is expansionary. B. fiscal policy is contractionary. C. the federal government is borrowing money. D. the federal government is lending money.

36. The crowding-out effect suggests that: A. increases in consumption are always at the expense of saving. B. increases in government spending will close a recessionary gap. C. increases in government spending may raise the interest rate and thereby reduce investment. D. high taxes reduce both consumption and saving.

37. Between 1980 and 1995, the public debt: A. decreased as a percentage of GDP. B. increased as a percentage of GDP. C. remained relatively constant as a percentage of GDP. D. decreased absolutely in current dollars, but increased as a percentage of GDP.

38. In 2004, the public debt on a per capita basis was about: A. $8,522. B. $17,610. C. $25,200. D. $30,241.

39. The public debt of the United States, as a percentage of GDP, is: A. larger than all other industrial nations. B. smaller than all other industrial nations. C. less than all other industrial nations except Germany. D. greater than some industrial nations, but less than others.

40. One advantage of automatic fiscal policy over discretionary fiscal policy is that automatic fiscal policy: A. makes the actual budget a better reflection of the condition of the economy than the full-employment budget. B. does not produce a cyclical deficit as discretionary policy does. C. is not subject to the timing problems of discretionary policy. D. has a greater multiplier effect than discretionary policy.

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