Question 1

Suppose the economy is operating below its potential output. Which of the following statements best describes the effectiveness of economic policies in this situation?

Accepted Answer

Economic policies are effective at changing output.

Question 2

If the long-run aggregate supply (AS) curve is vertical, what is the multiplier effect of a change in net taxes on aggregate output in the long run?

Accepted Answer

The multiplier effect of net taxes on output is zero.

Question 3

The Federal Reserve will raise the interest rate by the greatest amount when the economy is on which part of the aggregate supply (AS) curve and there is what type of fiscal action?

Accepted Answer

Steep part; an increase in government spending

Question 4

If the economy is operating at capacity, what is the likely effect of an increase in government spending on investment?

Accepted Answer

It will completely crowd out investment.

Question 5

Which of the following would shift the aggregate demand (AD) curve to the left?

Accepted Answer

An increase in taxes

Question 6

Fiscal policy primarily affects which market through changes in taxes and government spending?

Accepted Answer

The goods market

Question 7

When the aggregate demand (AD) curve is relatively flat, which policies can be used to increase output?

Accepted Answer

Both fiscal and monetary policy

Question 8

In a binding situation, what is the effect on planned investment when net taxes decrease?

Accepted Answer

No crowding out

Question 9

In a binding situation, a decrease in government spending will:

Accepted Answer

Shift the AD curve to the left

Question 10

If the Federal Reserve has a strong preference for stable output relative to prices, the aggregate demand (AD) curve will be:

Accepted Answer

AD; steep

Question 11

A decrease in the Z factors represents:

Accepted Answer

An easing of monetary policy

Question 12

Suppose the economy experiences demand-pull inflation. What happens to output and the price level?

Accepted Answer

Output increases; price level increases

Question 13

Which of the following best describes stagflation?

Accepted Answer

High unemployment and high inflation

Question 14

If the aggregate demand (AD) curve is vertical, a positive cost shock will cause:

Accepted Answer

No change in output; an increase in the price level

Question 15

A(n) ________ in inflationary expectations that causes firms to increase their prices shifts the aggregate supply curve to the ________.

Accepted Answer

Increase; left

Question 16

During the 1970s and early 1980s, the Federal Reserve generally had ________ interest rates to fight ________.

Accepted Answer

High; inflation

Question 17

Which of the following recessionary periods in the United States had the lowest inflation rate?

Accepted Answer

2008-2009

Question 18

Suppose the Fed acts aggressively in lowering the interest rate during a recession. In which of the following periods did this occur?

Accepted Answer

1990-1991, 2001, and 2008-2009

Question 19

Which of the following best describes the effect of a cost shock when the aggregate demand (AD) curve is relatively steep?

Accepted Answer

A small decrease in output relative to the increase in the price level

Question 20

When analyzing the effects of changes in Z factors, net taxes, or government spending, what primarily matters is:

Accepted Answer

The shape of the aggregate supply (AS) curve

Chapter 12 Study Guide – Aggregate Supply, Aggregate Demand, and Policy Effectiveness

Study Guide - Practice Questions

Study Guide - Flashcards