Miami Dade College ECO Principles of Macroeconomics - Spring 2016 Practice Test #3

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1 Miami Dade College ECO Principles of Macroeconomics - Spring 2016 Practice Test #3 1. If the stock market collapses, consumption will: A) not be affected. B) increase because stocks can now be purchased cheaply. C) decrease because people feel less wealthy. D) mildly increase. 2. If AE = $7,600 and Y = $8,000, businesses will produce: A) more, raising both employment and income. B) less, lowering both employment and income. C) more, raising employment and lowering income. D) less, lowering employment and raising income. Page 1

2 Use the following to answer question 3: Figure: Savings, Investment, and Aggregate Expenditures 3. (Figure: Savings, Investment, and Aggregate Expenditures) Income and output are at equilibrium at point: A) b. B) c. C) d. D) e. Page 2

3 4. Suppose the marginal propensity to consume in Economia is People feel increasing confidence in their economy and spend $5 billion more on vacations. Equilibrium income will rise by: A) $75 billion. B) $4 billion. C) $5 billion. D) $20 billion. 5. If autonomous investment spending falls by $1,000 and the marginal propensity to consume is 0.75, the total effect on the economy is a decrease of in income or output. A) $750 B) $1,000 C) $4,000 D) $7, If government spending drops and taxes rise: A) both will lower equilibrium income, but the effects of government spending will be larger. B) both will lower equilibrium income, but the effects of taxes will be larger. C) both will raise equilibrium income, but the effects of government spending will be larger. D) both will raise equilibrium income, but the effects of taxes will be larger. 7. If the government spends $1 billion to create a wetlands preserve, taxes increase $1 billion to pay for it, and the marginal propensity to consume is 0.75, GDP: A) remains unchanged. B) increases by $1 billion. C) increases by $4 billion. D) decreases by $1 billion. 8. Assume that the MPC is 0.8. Full employment is considered to be at a GDP level of $500 billion. The current GDP is $400 billion. The government is committed to a balanced budget. To achieve full employment, the government should taxes by and increase government spending by. A) increase; $100 billion; $100 billion B) increase; $20 billion; $100 billion C) increase; $25 billion; $100 billion D) reduce; $100 billion; $100 billion Page 3

4 9. Suppose full employment real GDP is $13 trillion, current real GDP is $13.2 trillion, and the marginal propensity to consume is 0.5. The inflationary gap is: A) $0.2 trillion. B) $0.05 trillion. C) $0.2 trillion. D) $0.1 trillion. 10. Which is TRUE about differences in savings rates across groups of people? A) Older people and higher-income people tend to save less. B) Older people and lower-income people tend to save less. C) Younger people and higher-income people tend to save less. D) Younger people and lower-income people tend to save less. 11. At equilibrium in the simple Keynesian model, income is $6 million and consumption spending is $5 million. Which of the following is correct? A) Investment is $1 million. B) There is no saving in this economy. C) The economy will go into disequilibrium because consumption is not equal to income. D) The information provided is insufficient to determine the level of investment spending. 12. When home values collapsed in the period that began in 2008, it reduced many Americans': A) bank balances. B) household wealth. C) household income. D) retirement accounts. 13. in wealth and in government spending, along with a(n) of the dollar, will shift the U.S. aggregate demand curve to the left. A) Decreases; increases; appreciation B) Increases; decreases; appreciation C) Decreases; decreases; depreciation D) Decreases; decreases; appreciation Page 4

5 14. The aggregate demand curve slopes and has on the vertical axis. A) downward; output B) downward; the price level C) upward; output D) upward; the price level 15. Increased taxes will shift the aggregate demand curve to the and output demanded. A) left; decrease B) left; increase C) right; increase D) right; decrease 16. In the short run, the aggregate supply curve is: A) horizontal. B) negatively sloped. C) positively sloped. D) vertical. 17. Which of the following will shift the aggregate supply curve to the right? A) the development of a cartel in the production of soybeans B) an increase in corporate taxes C) increased investment in human capital D) an increase in the price of garbage collection 18. If oil prices decrease, the short-run aggregate supply curve shifts and output supplied will be. A) left; increased B) left; reduced C) right; increased D) right; reduced 19. In the short run, the aggregate supply curve is because input prices are. A) positively sloped; not completely flexible B) positively sloped; completely flexible C) vertical; not completely flexible D) vertical; completely flexible Page 5

6 20. Demand-pull inflation scenarios took place in the: A) 1960s for the United States and from 1985 to 1995 for Japan. B) 1930s for the United States and from 1985 to 1995 for Japan. C) 1960s for the United States and in the 1930s for Japan. D) 1930s for both the United States and Japan. 21. Suppose consumers spend more than usual. In the short run, output will ; in the long run, output will from its starting point. A) increase; remain unchanged B) increase; increase C) remain unchanged; decrease D) remain unchanged; increase 22. Suppose when John's income increased from $10,000 to $15,000, his consumption increased from $3,000 to $4,500. What is the value of his marginal propensity to save? A) 0.7 B) 0.3 C) 0.2 D) What would cause the price level to decrease and employment to increase? A) a shift to the left of the AD curve B) a shift to the right of the AD curve C) a shift to the left of the SRAS curve D) a shift to the right of the SRAS curve Page 6

7 Use the following to answer questions 24-25: Figure: Determining SRAS Shifts 24. (Figure: Determining SRAS Shifts) If there is a decrease in input prices, the short-run aggregate supply curve will shift from SRAS 0 to and the price level will become. A) SRAS 1 ; P 0 B) SRAS 1 ; P 1 C) SRAS 2 ; P 1 D) SRAS 2 ; P (Figure: Determining SRAS Shifts) Which statement is NOT correct? A) Equilibrium output is $3,000 worth of goods and services. B) An increase in aggregate demand would lead to deflation. C) Full employment occurs when the economy produces $3,000 worth of goods and services. D) In the short-run equilibrium, output can be greater than or less than $3,000. Page 7

8 26. Which of the following did classical economists believe would happen if the product markets accrued surpluses? A) Prices would rise. B) Interest rates would rise. C) Wage rates would fall. D) The government would fix things. 27. If income is $5,000 per month and consumption spending is $4,500 per month, what is the average propensity to consume? A) 0.9 B) 1.11 C) 500 D) If income grows from $3,000 per month to $3,500 per month and consumption rises from $2,800 per month to $3,200 per month, what is the marginal propensity to consume? A) 1.25 B) 0.8 C) 1.09 D) Which of the following measures is an example of an expansionary fiscal policy? A) decreasing government spending B) reducing welfare payments C) increasing unemployment compensation D) raising taxes 30. Most studies estimate the overall multiplier of the 2009 stimulus to be between: A) 0 and 1. B) 1.5 and 2. C) 3 and 3.5. D) 5 and 6. Page 8

9 31. The $787 billion stimulus package passed in the United States in 2009 focused more on spending than on taxes partly because: A) increased spending leads to a larger increase in GDP than the same reduction in taxes. B) increased spending leads to a smaller increase in GDP than the same reduction in taxes. C) the government tax multiplier is more than the government spending multiplier. D) the government revenue multiplier is about the same as the government tax multiplier. 32. Which of the following is an example of contractionary fiscal policy? A) increasing federal spending on renovating college campuses B) cutting spending on the military C) building a new interstate highway D) sending taxpayers a $600 rebate 33. Which U.S. presidents reduced marginal tax rates to promote work and business risk taking? A) Obama and Reagan B) Kennedy and Clinton C) Reagan and Kennedy D) Clinton and Obama Page 9

10 34. Figure: Laffer Curve (Figure: Laffer Curve) The graph shows a hypothetical Laffer curve. If the tax rate is 80%: A) the government should reduce the rate to about 50% to maximize tax revenue. B) the tax rate should be increased to 100% (all income taken in taxes) to maximize tax collection. C) the tax rate is at its optimal level. D) the tax rate should be reduced to zero to maximize tax revenue. 35. Which economist promoted the idea that reducing tax rates can increase tax revenue? A) Robert Solow B) Adam Smith C) James Buchanan D) Arthur Laffer Page 10

11 36. Figure: Laffer Curve 3 (Figure: Laffer Curve 3) A supply-side economist is advocating reducing income tax rates. She is probably assuming that the economy is at point in the graph. A) a B) b C) c D) d 37. As GDP increases, tax revenues, which in turn GDP growth. A) decline; restrains B) decline; expands C) increase; restrains D) increase; expands 38. An automatic stabilizer: A) injects money into the economy during booms. B) extracts money from the economy during recessions. C) is exemplified by a program such as unemployment compensation. D) is exemplified by a program such as the Corps of Engineers dam-building program. Page 11

12 39. Legislators debate for six months on which spending programs to utilize to manipulate the business cycle. This is an example of the: A) recognition lag. B) information lag. C) decision lag. D) implementation lag. 40. As GDP decreases, tax revenues, causing a to aggregate demand. A) decline; restraint B) decline; stimulus C) increase; restraint D) increase; stimulus Page 12

13 ECO Principles of Macroeconomics - Spring 2016 Practice Test #3 - Answer Key 1. C 2. B 3. C 4. D 5. C 6. A 7. B 8. A 9. D 10. D 11. A 12. B 13. D 14. B 15. A 16. C 17. C 18. C 19. A 20. A 21. A 22. A 23. D 24. B 25. B 26. C 27. A 28. B 29. C 30. B 31. A 32. B 33. C 34. A 35. D 36. D 37. C 38. C 39. C 40. B Page 13

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