Q: If the government increases its purchases by $100 million and the marginal propensity to consume (MPC) is 0.8, what is the total change in real GDP according to the simple multiplier formula?

$100\text{ million} \times \frac{1}{1-0.8} = 500\text{ million}$

Question 1

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

Accepted Answer

Because higher price levels decrease net exports by making domestic goods more expensive relative to foreign goods (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 will shift to the left because investment and consumption spending will fall.

Question 3

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

Accepted Answer

A change in the price level not caused by other factors affecting SRAS.

Question 4

In the long-run aggregate supply (LRAS) model, what determines the level of real GDP supplied?

Accepted Answer

The number of workers, the level of technology, and the capital stock.

Question 5

If workers and firms expect the price level to increase in the future, what is the likely effect on the SRAS curve?

Accepted Answer

SRAS will shift to the left.

Question 6

Which of the following is NOT included in the M1 measure of the money supply in the United States?

Accepted Answer

Small-denomination time deposits.

Question 7

A bank receives a $1,000 deposit and keeps 10% as reserves. What is the maximum amount it can lend out?

Accepted Answer

$900

Question 8

Which monetary policy tool is most commonly used by the Federal Reserve to control the money supply?

Accepted Answer

Open market operations.

Question 9

According to the quantity theory of money, if the money supply grows at 5% per year and real GDP grows at 2% per year, what is the predicted inflation rate?

Accepted Answer

$5\% - 2\% = 3\%$

Question 10

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

Accepted Answer

Unemployment insurance payments that rise during a recession.

Question 11

If the government increases its purchases by $100 million and the marginal propensity to consume (MPC) is 0.8, what is the total change in real GDP according to the simple multiplier formula?

Accepted Answer

$100	ext{ million} 	imes \frac{1}{1-0.8} = 500	ext{ million}$

Question 12

Which of the following best describes the effect of a government budget deficit on investment and net exports?

Accepted Answer

It decreases national saving, which can reduce investment and/or net exports.

Question 13

In the dynamic aggregate demand and aggregate supply model, what typically causes inflation?

Accepted Answer

Aggregate demand increases more than long-run aggregate supply.

Question 14

Which of the following is NOT a goal of monetary policy pursued by the Federal Reserve?

Accepted Answer

Maximizing government revenue.

Question 15

Suppose the Federal Reserve wants to pursue expansionary monetary policy. Which action would it most likely take?

Accepted Answer

Buy Treasury securities in open market operations.

Question 16

If the exchange rate (value of the US dollar) rises, what is the likely effect on US net exports?

Accepted Answer

Net exports will decrease because US goods become more expensive for foreigners.

Question 17

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

Accepted Answer

A decrease in personal income taxes.

Question 18

In an open economy, why is expansionary monetary policy generally more effective than in a closed economy?

Accepted Answer

Because lower interest rates increase net exports by depreciating the currency.

Question 19

Which of the following best describes the process of 'crowding out' in fiscal policy?

Accepted Answer

Government spending reduces private investment by raising interest rates.

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

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