Q: Suppose the government increases its spending (G) by $100 billion. If the marginal propensity to consume (MPC) is 0.6 and there are no taxes, what is the total increase in GDP according to the simple multiplier formula?

$$ \100$$ \text{ billion} \times \frac{1}{1-0.6} = \$$250 \text{ billion} $$

Q: Which of the following is the correct formula for the output gap?

$$ \frac{\text{actual GDP} - \text{potential GDP}}{\text{potential GDP}} \times 100 $$

Q: If the marginal propensity to consume (MPC) is 0.75 and the tax rate is 0.2, what is the value of the multiplier?

$$ \frac{1}{1 - [0.75 \times (1 - 0.2)]} = \frac{1}{1 - 0.6} = 2.5 $$

Question 1

Which of the following best explains why the Aggregate Demand (AD) curve is downward sloping?

Accepted Answer

Because as the general price level rises, the purchasing power of money falls, reducing the quantity of goods and services demanded.

Question 2

Suppose the government increases its spending (G) by $100 billion. If the marginal propensity to consume (MPC) is 0.6 and there are no taxes, what is the total increase in GDP according to the simple multiplier formula?

Accepted Answer

$$ \100$$ 	ext{ billion} 	imes \frac{1}{1-0.6} = \$$250 	ext{ billion} $$

Question 3

A leftward shift of the Aggregate Supply (AS) curve is most likely caused by:

Accepted Answer

An increase in input costs, such as a rise in oil prices

Question 4

If the economy is operating above potential output (Y \u003e YPOT), what is the likely long-run adjustment according to the AD-AS model?

Accepted Answer

Nominal wages will rise, shifting AS to the left

Question 5

Which of the following is the correct formula for the output gap?

Accepted Answer

$$ \frac{	ext{actual GDP} - 	ext{potential GDP}}{	ext{potential GDP}} 	imes 100 $$

Question 6

Which of the following best describes the effect of a negative supply shock?

Accepted Answer

It causes GDP to fall and the price level to rise.

Question 7

If the marginal propensity to consume (MPC) is 0.75 and the tax rate is 0.2, what is the value of the multiplier?

Accepted Answer

$$ \frac{1}{1 - [0.75 	imes (1 - 0.2)]} = \frac{1}{1 - 0.6} = 2.5 $$

Question 8

Which of the following is a valid criticism of using expansionary fiscal policy during a boom (inflationary gap)?

Accepted Answer

It may crowd out private investment by increasing interest rates.

Question 9

Ricardian Equivalence suggests that:

Accepted Answer

Government borrowing has no effect on aggregate demand because households anticipate future taxes and increase their savings.

Question 10

If the Central Bank wants to decrease the money supply, which of the following actions should it take?

Accepted Answer

Sell government bonds to commercial banks

Question 11

Suppose the reserve requirement (RR) is 0.2. If a bank receives a new deposit of $10,000, what is the maximum possible increase in the money supply?

Accepted Answer

$$ \frac{10,000}{0.2} = 50,000 $$

Question 12

Which of the following is NOT a function of money?

Accepted Answer

Source of government revenue

Question 13

If the Central Bank increases the policy interest rate, what is the likely effect on aggregate demand?

Accepted Answer

Aggregate demand will decrease due to more expensive credit.

Question 14

Which of the following best describes the long-run aggregate supply (LRAS) curve?

Accepted Answer

It is vertical because, in the long run, output is determined by potential output, not the price level.

Question 15

A country is running a current account surplus. What does this imply about its financial account?

Accepted Answer

It is running a financial account deficit.

Question 16

If the government wants to use fiscal policy to close a recessionary gap, which of the following actions is most appropriate?

Accepted Answer

Increase government spending or decrease taxes

Question 17

Which of the following scenarios best illustrates the concept of opportunity cost?

Accepted Answer

A student chooses to attend a lecture instead of working a part-time job, giving up the wage they could have earned.

Question 18

If the price level in an economy falls, what is the likely effect on the demand for money?

Accepted Answer

The demand for money decreases because people need less cash for transactions.

Question 19

Which of the following best describes the effect of an expansionary monetary policy on the exchange rate?

Accepted Answer

It tends to depreciate the domestic currency.

Aggregate Demand and Aggregate Supply: Core Concepts and Policy Implications

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