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ECO201: Macroeconomics (Practice 1)

The consumption schedule shows:
A) that the MPC increases in proportion to GDP.
B) that households consume more when interest rates are low
C) that consumption depends primarily on the level of business investment
D)the amounts households plan or intend to consume at various possible levels of aggregate income
D) the amounts households plan or intend to consume at various possible levels of aggregate income
Which of the following will not tend to shift the consumption schedule upward?
A) a currently small stock of durable goods in possession of consumers
B)the expectation of a future decline in the consumer price index
C) a currently low level of household debt
D)the expectation of future shortages of essential consumer goods
B) the expectation of a future decline in the consumer price index
The MPC can be defined as that fraction of a:
A) change in income that is not spent
B)change in income that is spent
C)given total income that is not consumed
D)given total income that is consumed
B) change in income that is spent
In the late 1990s the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the:
A) Keynes effect
B)interest-rate effect
C)wealth effect
D)multiplier effect
C) wealth effect
In comparison with the consumption schedule, the investment schedule is:
A) relatively stable
B) relatively unstable
C) upsloping
D) independent of the price level
B) relatively unstable
Given the expected rate of return on all possible investment opportunities in the economy:
A) an increase in the real rate of interest will reduce the level of investment
B) a decrease in the real rate of interest will reduce the level of investment
C) a change in the real interest rate will have no impact on the level of investment
D) an increase in the real interest rate will increase the level of investment
A) an increase in the real rate of interest will reduce the level of investment
Expected rate Amount of
of investment with this
return rate of return or
higher (billions)
12% $10
10 20
8 30
6 40
4 50
2 60

The above schedule indicates that if the real interest rate is 8 percent, then:
A) we cannot tell what volume of investment will be profitable
B) $30 billion will be both saved and invested
C) $30 billion of investment will be undertaken
D) $60 billion of investment will be undertaken

C) $30 billion of investment will be undertaken
The multiplier effect means that:
A) consumption is typically several times as large as saving.
B) a small change in consumption can cause a much larger increase in investment
C) a small increase in investment can cause GDP to change by a larger amount
D) a small decline in the MPC can cause equilibrium GDP to rise by several times that amount.
C) a small increase in investment can cause GDP to change by a larger amount
If the MPC is .70 and gross investment increases by $3 billion, the equilibrium GDP will:
A) increase by $10 billion
B) increase by $2.10 billion
C) decrease by $4.29 billion.
D) increase by $4.29 billion
A) increase by $10 billion
If the dollar appreciates relative to foreign currencies, we would expect:
A) the multiplier to decrease
B) a country’s exports and imports to both fall.
C) a country’s net export to rise
D) a country’s net export to fall
C) a country’s net export to rise
The determinants of aggregate supply:
A) are consumption, investment, government, and net export spending
B) explain why real domestic output and the price level are directly related
C)explain the three distinct ranges of the aggregate supply curve.
D) include input prices and resource productivity
D) include input prices and resource productivity
Fiscal policy refers to the:
A) manipulation of government spending and taxes to stabilize domestic output, employment, and the price level
B) manipulation of government spending and taxes to achieve greater equality in the distribution of income
C) altering of the interest rate to change aggregate demand
D) fact that equal increases in government spending and taxation will be contractionary
A) manipulation of government spending and taxes to stabilize domestic output, employment, and the price level
Expansionary fiscal policy is so named because of it:
A) involves an expansion of the nation’s money supply.
B) necessarily expands the size of government.
C) is aimed at achieving greater price stability
D) is designed to expand real GDP
D) is designed to expand real GDP
Suppose that the economy is in the midst of a recession. Which of the following policies would be consistent with active fiscal policy?
A) a congressional proposal to incur a Federal surplus to be used for the retirement of public debt
B) a reduction in agricultural subsidies and veteran’s benefits
C) a postponement of a highway construction program
D) a reduction in Federal tax rates on personal and corporate income
D) a reduction Federal tax rates on personal and corporate income
Assume that aggregate demand in the economy is excessive, causing demand-pull inflation. Which of the following would be most in accord with appropriate government fiscal policy?
A) an increase in Federal income tax rates
B) an increase in the size of income tax exemptions for each dependent
C) passage of legislation providing for the construction of 8,000 new school buildings
D) an increase in soil conservation subsidies to farmers
A) an increase in Federal income tax rates
Which of the following represents the most expansionary fiscal policy?
A) a $10 billion tax cut
B) a $10 billion increase in government spending
C) a $10 billion tax increase
D) a $10 billion decrease in government spending
B) a $10 billion increase in government spending
Which of the following fiscal actions would be the most effective in curbing inflation?
A) incurring a budget deficit by borrowing from the public
B) incurring a budget surplus which is used to retire debt held by commercial banks
C) incurring a budget surplus and impounding that surplus
D) incurring a budget surplus which is used to retire debt held by the public
C) incurring a budget surplus and impounding that surplus
When current government expenditures exceed current tax revenues and the economy is achieving full employment:
A) the full-employment budget has neither a deficit nor a surplus.
B) the full-employment budget has a deficit
C) fiscal policy is contractionary.
D) nominal GDP and real are equal
B) the full-employment budget has a deficit
The crowding-out effect suggests that:
A) tax increases are paid primarily out of saving and therefore are not an effective fiscal device
B) increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment
C) it is very difficult to have excessive aggregate spending in the U.S. economy.
D) consumer and investment spending always vary inversely.
B) increase in government spending financed through borrowing will increase the interest rate and thereby reduce investment
The political business cycle refers to the possibility that:
A) incumbent politicians will be re-elected regardless of the state of the economy.
B) politicians will manipulate the economy to enhance their chances of being re-elected
C) there is more inflation during Democratic administrations than during Republican administrations
D) recessions coincide with election years.
B) politicians will manipulate the economy to enhance their chances of being re-elected
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