Q: Suppose the government increases its purchases by $100 billion and the marginal propensity to consume (MPC) is 0.8. What is the total change in real GDP according to the government purchases multiplier?

$$100 \text{ billion} \div (1 - 0.8) = 500 \text{ billion}$$

Question 1

Which of the following best explains why the aggregate demand (AD) curve slopes downward?

Accepted Answer

Because higher price levels reduce the purchasing power of money, leading to the wealth effect, interest rate effect, and international trade effect.

Question 2

Suppose the Federal Reserve increases interest rates. What is the most likely effect on the aggregate demand curve?

Accepted Answer

The AD curve shifts to the left because higher interest rates reduce consumption and investment spending.

Question 3

Which of the following would cause a movement along the short-run aggregate supply (SRAS) curve, rather than a shift of the curve?

Accepted Answer

An increase in the price level not caused by changes in input costs or technology.

Question 4

If workers and firms expect the price level to rise by 4% next year, what is the likely effect on the SRAS curve?

Accepted Answer

SRAS will shift to the left as firms and workers adjust wages and prices upward.

Question 5

Which of the following is NOT a component of M2, the broader definition of the money supply in the United States?

Accepted Answer

Credit card balances

Question 6

In a fractional reserve banking system, if a bank receives a $2,000 deposit and the required reserve ratio is 10%, what is the maximum amount the bank can lend out?

Accepted Answer

$1,800

Question 7

According to the quantity theory of money, if the money supply grows at 6% per year and real output grows at 2% per year, what is the predicted inflation rate?

Accepted Answer

$$6\% - 2\% = 4\%$$

Question 8

Which of the following is a primary goal of monetary policy pursued by the Federal Reserve?

Accepted Answer

Price stability

Question 9

If the Federal Reserve wants to decrease the money supply, which action should it take?

Accepted Answer

Sell Treasury securities in an open market sale

Question 10

Suppose the government increases its purchases by $100 billion and the marginal propensity to consume (MPC) is 0.8. What is the total change in real GDP according to the government purchases multiplier?

Accepted Answer

$$100 	ext{ billion} \div (1 - 0.8) = 500 	ext{ billion}$$

Question 11

Which of the following best describes the effect of a government budget deficit on national saving and investment?

Accepted Answer

A budget deficit decreases national saving, which can reduce domestic investment and/or net foreign investment.

Question 12

In the dynamic aggregate demand and aggregate supply model, what typically happens to the price level and real GDP over time?

Accepted Answer

Both the price level and real GDP typically increase each year.

Question 13

Which of the following would most likely cause the aggregate demand curve to shift to the right?

Accepted Answer

A decrease in interest rates

Question 14

If the price of oil suddenly increases due to a geopolitical event, what is the most likely effect on the short-run aggregate supply (SRAS) curve?

Accepted Answer

SRAS shifts to the left because production costs rise.

Question 15

Which of the following is an example of an automatic stabilizer in fiscal policy?

Accepted Answer

Unemployment insurance payments that increase during a recession

Question 16

In the money market, what happens to the equilibrium interest rate if the Federal Reserve increases the money supply?

Accepted Answer

The equilibrium interest rate falls.

Question 17

Which of the following is true about the long-run aggregate supply (LRAS) curve?

Accepted Answer

It is vertical because output is determined by resources and technology, not the price level.

Question 18

Suppose the U.S. government runs a budget deficit, leading to higher interest rates. What is the likely effect on net exports?

Accepted Answer

Net exports will decrease as the dollar appreciates.

Question 19

Which of the following best describes the effect of expansionary monetary policy in an open economy compared to a closed economy?

Accepted Answer

Expansionary monetary policy is more effective in an open economy because lower interest rates also increase net exports.

Macroeconomics Final Exam Study Guide: Aggregate Demand, Aggregate Supply, and Monetary Policy

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