Question 1

Which of the following best explains why the aggregate supply curve slopes upward in the short run?

Accepted Answer

Because as the price level rises, firms' profits increase if input costs remain fixed, motivating them to supply more.

Question 2

Suppose the nominal wage rate increases across the economy. What is the most likely effect on the aggregate supply curve?

Accepted Answer

The aggregate supply curve shifts inward.

Question 3

If equilibrium real GDP falls short of potential GDP, what type of gap exists in the economy?

Accepted Answer

Recessionary gap

Question 4

Which of the following is NOT a factor that shifts the aggregate supply curve?

Accepted Answer

Changes in consumer preferences

Question 5

Consider the following consumption function: $$C = 300 + 0.75D_I$$, where $$D_I is $$disposable income. If taxes are given by $$T = 0.2Y$$, what is the equation for disposable income?

Accepted Answer

$$D_I = Y - 0.2Y$$

Question 6

If government spending increases by $$1$$ and the spending multiplier is $$2.5$$, by how much does equilibrium GDP increase?

Accepted Answer

$$2.5$$

Question 7

Which of the following best describes the effect of a variable tax (such as an income tax) on the multiplier?

Accepted Answer

It lowers the multiplier because more income is taxed as GDP rises.

Question 8

Suppose the tax multiplier is $$-1.875. $$What does this mean in terms of fiscal policy?

Accepted Answer

A $$1$$ increase in taxes decreases equilibrium GDP by $$1.875.$$

Question 9

Which of the following is an example of an automatic stabilizer in the economy?

Accepted Answer

Government transfer payments such as unemployment insurance

Question 10

What is the main difference between fiscal policy and supply-side tax cuts?

Accepted Answer

Fiscal policy aims to shift aggregate demand, while supply-side tax cuts aim to increase aggregate supply.

Question 11

Which of the following is a reason why the multiplier effect may be smaller than predicted by the simple formula?

Accepted Answer

It ignores variable imports, which reduce the size of the multiplier.

Question 12

If the economy is experiencing an inflationary gap, what is the likely adjustment process in the labor market?

Accepted Answer

Firms will increase wages due to high demand for labor, raising costs and shifting aggregate supply left.

Question 13

Stagflation is most likely to occur when:

Accepted Answer

Aggregate supply decreases while the economy is growing slowly or in recession.

Question 14

Which of the following is NOT an objection to the fiscal supply-side doctrine?

Accepted Answer

The immediate increase in government revenue

Question 15

Suppose the government wants to stimulate the economy. Which combination of fiscal policies could it use?

Accepted Answer

Raise government spending, reduce taxes, and increase transfer payments

Question 16

If both government spending ($$G) $$and taxes ($$T) $$increase by the same amount, what is the net effect on equilibrium GDP?

Accepted Answer

Equilibrium GDP increases because the spending multiplier is larger than the tax multiplier.

Question 17

Which of the following best describes the self-correction mechanism in the macroeconomic model?

Accepted Answer

It tends to eliminate either gap, but works slowly and unevenly, and may be offset by opposing forces.

Question 18

In the algebraic treatment of fiscal policy, what is the general formula for equilibrium GDP ($$Y) $$when taxes are a proportion of income?

Accepted Answer

$$Y = \frac{a - bT_0$ + I + G + (X - IM)}{1 - b 	imes (1 - t)}$$

Question 19

Which of the following is a likely consequence of supply-side tax cuts according to the assessment in the study materials?

Accepted Answer

They are likely to widen income inequalities.

Aggregate Supply, Fiscal Policy, and Money: Key Concepts in Macroeconomics

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