28 ❯ Step 2. Determine Your Test Readiness
- A—Nominal values must be adjusted to take into
account rising prices. To deflate nominal values
to real values, divide the nominal value by the
price index (in hundredths).
Questions from Chapter 8
- D—A strong stock market increases consumer
wealth and optimism, shifting the consumption
function upward. Since aggregate demand includes
consumption, aggregate demand increases. - E—In the market for loanable funds, investment
(I) represents demand and saving represents
supply. More $I increases the demand for loan-
able funds and increases the interest rate. - B—The spending multiplier is larger than the
tax multiplier, which is larger than the balanced
budget multiplier (equals 1). Of the available
choices, you want the largest increase in real GDP,
you should increase government spending and
leave taxes unchanged. An even larger impact
would be seen if we increased spending and
decreased taxes, but this is not one of your options.
Questions from Chapter 9
- D—If the economy is beyond full employment,
the short-run AS curve is nearly vertical. At
this point, increasing aggregate demand cannot
increase output and will only increase prices. - E—The full multiplier is only felt if short-run
aggregate supply is horizontal. Any increase in the
price level decreases the impact of the spending
multiplier. - D—Higher resource prices shift the short-run
aggregate supply (SRAS) curve to the left. All
other choices either do not impact the SRAS curve
or they would act as positive shocks to the SRAS
curve. - D—The Phillips curve shows the short-run inverse
relationship between the inflation rate and the
unemployment rate. In the long run, this curve is
vertical at the natural rate of unemployment.
Questions from Chapter 10
- C—In the aggregate demand (AD) and aggregate
supply (AS) model, lower taxes and more gov-
ernment spending increases AD. This rightward
shift increases real GDP and begins to increase
the price level.
17. E—Supply-side economists advocate increased
aggregate supply through incentives for investment
and productivity. These would likely come in the
form of lower taxes on interest income from sav-
ings or tax credits for investment.
18. E—As a recession deepens, a progressive tax system
and transfer programs like welfare assistance kick
in and shorten the downturn in the business cycle.
These automatic stabilizers produce recessionary
deficits and inflationary surpluses.
19. B—Expansionary fiscal policy, intended to
boost aggregate demand, that requires borrow-
ing increases interest rates and lessens private
investment spending. The decrease in investment
spending weakens the impact of expansionary
fiscal policy.
Questions from Chapter 11
20. B—Increasing the money supply lowers interest
rates and increases investment spending (I), aggre-
gate demand (AD), real GDP, and employment.
21. D—A contractionary money supply increases
nominal interest rates, decreases aggregate demand
and real GDP, and decreases the price level.
22. A—A lower discount rate increases excess reserves
by making it less costly for commercial banks to
borrow from the Fed. This is one of the Fed’s
tools of monetary policy. Remember that the Fed
does not impact taxes, as taxes are fiscal policy
made by the executive and legislative branches.
23. C—Selling securities would draw down excess
reserves in the banks, decrease the money supply,
and increase the interest rate. This would work
counter to expansionary fiscal policy.
24. E—Nearest to cash, M1 is the most liquid of
monetary measures. The U.S. dollar is not backed
by gold. Our fiat money has value because the Fed
ensures stable prices.
25. B—When more deposits are made, the bank
increases required reserves by the fraction of the
reserve ratio, and increased excess reserves are lent
to borrowers to create more money.
26. C—The reserve ratio is required reserves divided
by deposits, so rr = 0.25. With $250 in required
reserves, excess reserves are $750. The money
multiplier is equal to 1/rr = 4.