14. E.Whenever there is a contractionary supply shock, aggregate supply decreases. Whether it is a natural disaster
or the result of human activity, supply shocks hurt the economy because they limit the quantity of units firms can
produce. When a firm’s production is limited, it is forced to cut back on labor. As a result, the unemployment rate
rises because of a contractionary supply shock.
15. B.If the nominal rate of GDP is increasing while real GDP is decreasing, one possible effect could be inflation.
Remember that nominal GDP is not inflation adjusted; therefore, any increases in inflation may distort nominal
GDP relative to real GDP.
16. D. The official unemployment rate is understated because people who are able but not willing to work are not
counted as unemployed. Discouraged workers—workers who have given up on looking for a job for one reason
or another—are not counted in the unemployment rate. Remember that the definition of an unemployedperson is
someone who is willing and able to work but does not have a job.- B.To help an economy that is underachieving, the Federal Reserve can buy open-market securities to increase
the money supply. This is an example of expansionary, or “loose,” monetary policy. - D. A recession is defined as two consecutive quarters of declining GDP. However, some economists believe that
this definition is too cut-and-dried. The economy tends to bounce back and forth from declining GDP, making it
difficult at times to gauge a recession. - E.When the marginal propensity to save increases, it causes the spending multiplier to decrease because less
money is being spent and more money is being saved. In order for the multiplier to gain strength, individuals have
to increase consumption relative to savings. - C.The largest portion of the money supply is M1, and checkable deposits are a part of M1. Paper money, coins,
checkable deposits, and travelers checks are all a part of M1. - B.When interest rates are high, more people keep their money in interest-bearing accounts. This reduces the
impact of the spending multiplier because more money is being saved than spent. As consumption increases, the
multiplier increases. - B.High levels of inflation require attention from the Federal Reserve. The Fed can implement a contractionary
monetary policy that will reduce the money supply. The most common way the Fed can go about this is by selling
open-market securities. The selling of open-market securities helps reduce the money supply, thereby decreasing
the rate at which the price level is rising. - B.Automatic stabilizers or built-in stabilizers help balance the government’s budget because they are designed to
increase tax revenue at a point where government spending is creating debt. They can either increase tax revenue
(to help reduce debt) or decrease tax revenue (to help control surpluses). - A.Negative net investment reduces GDP. Investment (the purchase of capital) is a key component of GDP. When
investment decreases, firms begin to lose revenue, and the amount of goods and services produced in a year
declines. - D. Unexpected rises in inventories come before a decrease in production. When firms realize their inventories are
increasing in size, they cut back on production. When production is curtailed, the next step is to reduce a firm’s
labor force. The rise in inventories means that producers are supplying more than what is being demanded. - B.When productivity becomes more expensive, firms have no choice but to cut back on production. A decline in
production translates to a decrease in aggregate supply. - B.Economists believe that the unemployment rate is understated because it does not include such factors as
discouraged workers. Unemployed individuals who have given up looking for a job (for one reason or another)
are not accounted for in the unemployment rate. - D. Corporate income taxes do not cause a shift in aggregate demand; shifts results from changes in consumption,
government spending, exports, and investment. Corporate income taxes are designed to affect aggregate supply
through the costs of production.
Macroeconomics Full-Length Practice Test 1Macroeconomics Full-Length
Practice Test 1