short-run equilibrium GDP is above potential GDPIndicate whether the sentence or statement is true or false.____ 1. If short-run equilibrium GDP is above potential GDP, prices will eventually rise.____ 2. A tax reduction shifts the consumption schedule downward.____ 3. A superior level of technology is an important reason the productivity of workers in rich countries is high.____ 4. A nation?s capital consists mainly of stocks, bonds, and other financial assets.____ 5. Technological change was a major contributor to the productivity speed-up since 1995.____ 6. A decrease in disposable income causes a shift in the consumption function.____ 7. If firms are experiencing falling inventories, one can expect that firms will cut production.____ 8. President Bush in 2001 wanted a tax cut to stimulate consumer spending.Multiple Choice Identify the letter of the choice that best completes the statement or answers the question.____ 9. The creation of new technology is labeled a. imitation. b. investment. c. innovation. d. education.____ 10. A nation?s capital stock in increased by increases in a. consumption spending. b. government spending. c. investment spending. d. net exportFigure 7-2____ 11. In Figure 7-2, which of the following moves can be explained by a decrease in the price level? a. A to B b. A to C c. A to D d. A to E____ 12. In Figure 7-2, which of the following moves can be explained by a decrease in the prices of stock on the NASDAQ? a. A to B b. A to C c. A to D d. A to E____ 13. In Figure 7-2, which of the following moves can be explained by a tax cut? a. A to B b. A to C c. A to D d. A to E____ 14. We should expect the consumption function to shift downward if a. real interest rates rise. b. price levels fall. c. consumers become more optimistic about future incomes. d. consumers become more pessimistic about future incomes.____ 15. By definition, total GDP must always equal total a. net sales. b. aggregate demand. c. gross purchases. d. national income.____ 16. The amount by which equilibrium real GDP exceeds full-employment GDP is known as a. stagflation. b. employment. c. a recessionary gap. d. an inflationary gap.____ 17. Recessionary gaps are most likely to be accompanied by a. inflation. b. inventory reductions. c. unemployment. d. expanding output.____ 18. Stagflation refers to the unwelcome combination of a. inflation and rising prices. b. deflation and unemployment. c. inflation and unemployment. d. inflation and expansion.Figure 9-5____ 19. In Figure 9-5, which graph best illustrates an autonomous increase in consumption spending? a. (1) b. (2) c. (3) d. (4)____ 20. If Congress votes to increase government purchases and at the same time decrease personal income taxes, they a. have decided to balance the federal budget. b. have voted for the proper policy to counteract a recessionary gap. c. have voted for the proper policy to counteract an inflationary gap. d. are trying to achieve a federal budget surplus.____ 21. A liberal would most likely argue in favor of a. tax increases when fiscal stimulus is necessary, and spending cuts when fiscal restraint is necessary. b. tax cuts when fiscal restraint is necessary, and spending cuts when fiscal stimulus is necessary. c. tax cuts when fiscal stimulus is necessary, and spending cuts when fiscal restraint is necessary. d. spending increases when fiscal expansion is necessary, and tax increases when fiscal restraint is necessary.Figure 10-3____ 22. Which graph in Figure 10-3 best reflects a supply-sider?s view of the impact of an increase in the personal income tax rate? a. 1 b. 2 c. 3 d. 4____ 23. Workforce quality can be improved by a. years of education. b. on-the-job training. c. workplace learning. d. all of the above.____ 24. In 1997, in order to stimulate capital investment, President Clinton and Congress a. reduced real interest rates. b. increased the money supply. c. reduced the tax on corporate profits. d. reduced the tax on capital gains.____ 25. Getting more output from a given amount of inputs is usually the result of increases in a. the labor force. b. technology. c. the capital stock. d. investment.____ 26. An explanation for the slowdown in U.S. productivity growth in the 1973-1995 period was higher oil prices caused by a. the CIA. b. the WTO. c. the IMF. d. OPEC.____ 27. The nation?s disposable income increases by $400 billion and, as a result, consumer spending increases by $320 billion. Therefore, the MPC equals a. .16. b. .20. c. .60. d. .80.____ 28. A major employer in a small town announces upcoming major layoffs of employees. What should we expect to happen to the consumption functions of the affected employees? a. the consumption functions will shift upward b. most employees will move upward along their consumption functions c. the consumption functions will shift downward d. most employees will move downward along their consumption functions____ 29. Goods produced that go into inventories are a. not counted in GDP. b. only counted in GDP when they are ultimately sold. c. counted in GDP even though they are not sold. d. counted if they completely depreciate within the calendar yearFigure 8-1____ 30. In Figure 8-1, the economy is a. experiencing an inflationary gap, shown by the horizontal distance EB. b. at full employment without inflation. c. experiencing a recessionary gap, shown by the horizontal distance EB. d. experiencing a recessionary gap, shown by the distance between EF.____ 31. Assume that the MPC is .9 and investment falls by $30 billion. What is the change in real GDP? a. -$300 billion b. -$270 billion c. -$93 billion d. -$39 billion____ 32. If the multiplier is 4, a decrease in spending equal to $80 billion will be accompanied by a decrease in GDP of a. $480 billion. b. $320 billion. c. $240 billion. d. $84 billion.____ 33. An inflationary gap will exist when the full employment level of GDP is a. equal to equilibrium GDP. b. greater than equilibrium GDP. c. less than equilibrium GDP. d. greater than disposable income.Figure 9-2____ 34. In Figure 9-2, we would expect the aggregate supply curve in graph (b) to a. shift to the right, eliminating the recessionary gap. b. shift to the left, eliminating the inflationary gap. c. become steeper in the upper portion, eliminating the inflationary gap. d. become flatter in the upper portion, eliminating the recessionary gap.____ 35. A recession can be expected to reduce inflation in the economy if the recession is caused by a(n) a. increase in aggregate demand. b. increase in aggregate supply. c. decrease in aggregate demand. d. decrease in aggregate supply.____ 36. Which of the following events will lead to an inward shift of the aggregate supply curve? a. an increase in the price level b. an increase in consumer spending c. an increase in labor productivity d. an increase in wage rates____ 37. Which of the following will shift the aggregate demand curve outward? a. tax cuts and government spending cuts b. tax increases and government spending increases c. tax cuts and government spending increases d. tax increases and government spending decreaseTable 8-1Output Consumption Investment Net Exports 1000 800 500 100 1500 1200 500 100 2000 1600 500 100 2500 2000 500 100 3000 2400 500 100 3500 2800 500 100 4000 3200 500 100____ 38. In Table 8-1, the equilibrium level of output is a. 2,500. b. 3,000. c. 3,500. d. 4,000.____ 39. In Table 8-1, at output of 4,000, inventories are a. decreasing by 200. b. increasing by 200. c. increasing by 300. d. decreasing by 300.____ 40. In Table 8-1, inventories are being depleted as long as output is below a. 2,000. b. 2,500. c. 3,000. d. 3,500.____ 41. In Table 8-1, inventories will be increasing as long as output is above a. 1,000. b. 1,500. c. 2,000. d. 3,000.____ 42. Consumer spending represents about what fraction of total spending in the economy? a. one-fifth b. two-thirds c. one-third d. two-fifths e. three-fourths____ 43. Aggregate demand is the sum of a. C + I + G + (X ? IM). b. C + I + X. c. C + I + X ? IM. d. C + I + G.Figure 7-1____ 44. Given the scatter diagram in Figure 7-1, what is the MPC (your best estimate)? a. 1/2 b. 1/3 c. 2/5 d. 3/4____ 45. Based on the scatter diagram in Figure 7-1, how much will consumption increase after a permanent tax cut of $400 billion? a. $100 billion b. $150 billion c. $250 billion d. $300 billion____ 46. Based on the scatter diagram in Figure 7-1, if real disposable income is $800 billion, the consumption spending would be a. $800 billion. b. $600 billion. c. $500 billion. d. $400 billion.____ 47. If the MPC is .80, then a change in disposable income of $60 billion will lead to a change in consumption of a. $30 billion. b. $42 billion. c. $48 billion. d. $60 billion. e. $70 billion.____ 48. Consumption functions would shift downward if a. disposable incomes fall. b. disposable incomes rise. c. price levels fall. d. price levels rise.____ 49. Which of the following will most likely cause movement along the consumption function? a. a change in disposable income b. a change in interest rates c. a change in tastes d. a change in consumers? expectations____ 50. Among the following, which would not be considered part of the investment component of GDP? a. manufacturers? equipment b. buying corporate stock c. new houses d. business structuresBONUS PROBLEMThe national income and expenditure components for each level of the economy of Lala Land are given below.What is the total expenditure at each level of income?What is the equilibrium level of GDP?What is the marginal propensity to consume?Using the multiplier, if consumer spending autonomously increases by $200, what is the new equilibrium level of GDP?Y C I G X IM$9600 6400 1600 2200 800 1200 10000 6700 1600 2200 800 1200 10400 7000 1600 2200 800 1200 10800 7300 1600 2200 800 1200 11200 7600 1600 2200 800 1200 11600 7900 1600 2200 800 1200:
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