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Chapter 08
The Business Cycle
Multiple Choice Questions
1. Which of the following was not characteristic of the U.S. economy during the
Great Depression?
A. Families lost their farms.
B. Automobile production fell.
C. The stock market crashed.
D. Unemployment reached 50 percent.
2. The study of aggregate economic activity for the economy as a whole is
A. Opportunity cost.
B. Scarcity.
C. Macroeconomics.
D. Microeconomics.
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3. Alternating periods of economic growth and contraction in real GDP define
A. Capitalism.
B. The business cycle.
C. Macro equilibrium.
D. Say's Law.
4. According to classical theory,
A. Keynes had "neglected to take account of the drag on prosperity which can
be exercised by an insufficiency of effective demand."
B. Macro equilibrium might start out badly and get worse in the absence of
government intervention.
C. Flexible wages and prices allow a laissez faire economy to adjust wages
and prices to shifts in aggregate demand.
D. Business cycles are not relevant and do not occur.
5. According to the classical view, if consumer demand slowed down,
A. Prices would decrease, and the economy would return to its long-term
growth trend.
B. Prices would increase, and the economy would return to its long-term
growth trend.
C. Wages would increase, and the economy would return to its long-term
growth trend.
D. Investment and government demand would increase, and the economy

would return to its long-term growth trend.
6. Based on the classical view,
A. Unemployment never occurs.
B. Cyclical unemployment might occur temporarily.
C. All goods produced are always purchased at an unchanging price.
D. Persistent unemployment might be a problem.
7. If wages and prices are flexible, then a recession is best eliminated when
prices
A. And wages both rise.
B. And wages both fall.
C. Rise and wages drop.
D. Drop and wages rise.
8. According to classical economists, market-driven economies
A. Are typically self-adjusting.
B. Are inherently unstable.
C. Require government intervention.
D. Are always in long-run equilibrium.
9. Say's Law states that
A. Supply creates its own demand.
B. Shifts of either supply or demand can achieve a given market equilibrium.
C. Wages and prices are inflexible, which prevents the achievement of market
equilibrium.
D. Increased prices lead to increased supply.
10. In the early 1900s, which of the following was not true?
A. Falling price levels appeared to limit an increase in unemployment.
B. Periods of high unemployment tended to be brief.
C. Say's Law seemed to work.
D. Government intervention was commonly used to stimulate the economy.
11. Unlike the classical economists, Keynes asserted that
A. The economy was inherently unstable.
B. Laissez faire policies would lead to macro equilibrium.
C. Prices and wages were flexible.
D. Markets would naturally self-adjust.
12. Who believed that small disturbances in output, prices, or unemployment were
likely to be magnified by the invisible hand of the marketplace?
A. President Herbert Hoover.
B. Adam Smith.
C. John Maynard Keynes.
D. Jean-Baptiste Say.
13. The government can "prime the pump" by doing all of the following except
A. Buying more output.
B. Employing more people.
C. Making more money available.
D. Raising taxes.
14. According to Keynes, when the economy falters, the government should do
any of the following except
A. Practice a laissez faire policy approach.
B. Provide more dollars for unemployment benefits.
C. Make more money available.
D. Buy more output.
15. According to Keynes, which of the following should the government do when
the economy overheats?
A. Employ more people.
B. Increase spending.
C. Raise taxes.
D. Practice laissez faire policies.
16. According to Keynes, which of the following can be used to slow down an
overheated economy?
A. Decrease government purchases.
B. Decrease taxes.
D. Employ more people.
17. Which of the following is true about business cycles in the United States?
A. They are remarkably similar in length but vary greatly in intensity.
B. They vary greatly in length, frequency, and intensity.
C. They are similar in frequency and intensity but not in length.
D. They are similar in length, frequency, and intensity.
18. Which of the following is characteristic of a downturn in the business cycle?
A. Lower unemployment rates.
B. Lower real output.
C. Higher interest rates.
D. None of the choices are correct.
19. The inflation-adjusted value of all goods and services produced is
A. The GDP deflator.
B. Nominal GDP.
C. GDP per capita.
D. Real GDP.
20. Real GDP is better than nominal GDP for measuring growth because real GDP
has been adjusted for changes in
A. The price level.
B. Unemployment.
C. The business cycle.
D. Productivity.
21. Changes in real GDP are used to measure
A. Inflation.
B. Price level changes.
C. Business cycles.
D. Population growth.
22. The Great Depression did not
A. Follow a period of apparent prosperity.
B. Lead to an unemployment rate that reached 25 percent.
C. Cause President Roosevelt to declare a "bank holiday" in 1933.
D. Lead to a high rate of inflation.
23. Before the year 2000, the most prolonged departure from the long-term
growth path for the United States occurred during
A. The 1980s.
B. The Great Depression.
C. World War II.
D. The years following World War II.
24. A decline in total real output for two or more consecutive quarters is referred
to as
A. Laissez faire.
B. A recession.
C. A growth recession.
D. Say's Law.
25. A recession can be represented by a point
A. Inside the production possibilities curve.
B. Outside the production possibilities curve.
C. On the production possibilities curve.
D. At either end of the production possibilities curve.
26. In which of the following situations is the percentage change in real GDP
always positive?
A. Depression.
B. Inflation.
C. Recession.
D. Growth recession.
27. A growth recession is said to occur when the economy grows at a
A. Rate less than that of population.
B. Rate less than the long-term average.
C. Slower rate in the current year than the preceding year.
D. Negative rate.
28. Which of the following caused a recession in the years immediately following
World War II?
A. A surge in investment spending.
B. Pent-up demand for consumer goods.
C. Cutbacks in defense production.
D. Technological advances.
29. Which of the following was not true for the U.S. economy during the period
from the late 1990s to 2000?
A. Economic expansion set a record for longevity.
B. The unemployment rate was low.
C. Millions of new jobs were created.
D. Real GDP declined.
30. Which of the following is not considered a macro outcome?
A. The level of unemployment.
B. External shocks such as weather.
C. The average price of goods and services.
D. The year-to-year expansion in overall productive capacity.
31. Which of the following is generally considered a desirable outcome of

government intervention?
A. More jobs.
B. A higher price level.
C. Higher unemployment rates.
D. Greater deficits.
32. All of the following can be used to measure macroeconomic performance
except for the
A. Total real value of goods and services produced.
B. Average price level of goods and services.
C. International value of the dollar.
D. Growth rate of the population.
33. External shocks include all of the following except
A. Population growth.
B. Natural disasters.
C. Terrorist attacks.
D. Wars.
34. Internal market forces include
A. Wars, natural disasters, and trade disruptions.
B. Tax policy, government spending, and availability of money.
C. Population growth, spending behavior, and invention.
D. External shocks and policy levers.
35. In the absence of external shocks or government policy, an economy would
A. Still experience business cycle fluctuations because of internal market

forces.
B. Not experience business cycle fluctuations.
C. Not be able to expand production and output.
36. Determinants of macro performance work on macro outcomes through
A. Aggregate supply and demand.
B. International balances.
C. External shocks.
D. Internal market forces.
37. Which of the following is illustrated by the aggregate demand curve?
A. How real personal income varies with the inflation rate.
B. How total quantity of output demanded varies with the average price level.
C. How real output varies with the inflation rate.
D. How real personal income varies with the price level.
38. The aggregate demand curve is downward-sloping because, other things
being equal,
A. People buy fewer goods and services at lower average incomes.
B. People buy more goods and services at lower average prices.
C. A higher average price level will induce producers to offer more output than
otherwise.
D. People buy more goods and services at higher average prices.
39. The real balances effect says that an increase in the price level
A. Increases the price of U.S. produced goods, causing Americans to buy more
imported goods.
B. Increases the price of U.S. produced goods, causing foreign consumers to

buy fewer U.S. goods.
C. Increases the need to borrow, which drives up interest rates and reduces
loan-financed purchases.
D. Reduces the real value of a fixed amount of savings, which reduces the
purchase of goods and services.
40. Assume you have $2,000 in a savings account at the beginning of the year and
the price level is equal to 100. If the price level is equal to 120 at the end of
the year, the real value of your savings is closest to
A. $1,667.
B. $1,880.
C. $2,120.
D. $2,400.
A. $870.
B. $885.
C. $1,115.
D. $1,150.
A. $4,000.
B. $4,875.
C. $5,125.
D. $6,250.
the price level is equal to 100. If the price level is equal to 95 at the end of the
year, the real value of your savings is closest to
A. $1,900.
B. $1,905.
C. $2,095.
D. $2,105.
the price level is equal to 100. If the price level is equal to 92 at the end of the
year, the real value of your savings is closest to
A. $908.
B. $920.
C. $1,087.
D. $1,092.
45. Ceteris paribus, if average prices in the U.S. economy fall, then the
A. Real balances effect will lead to a lower quantity of U.S. output demanded.
B. Foreign trade effect will lead to a higher quantity of U.S. output demanded.
C. Interest rate effect will lead to a lower quantity of U.S. output demanded.
D. Profit effect will lead to a higher quantity of U.S. output demanded.
A. Real balances effect will lead to a lower quantity of U.S. output demanded.
B. Foreign trade effect will lead to a lower quantity of U.S. output demanded.
C. Interest rate effect will lead to a higher quantity of U.S. output demanded.
D. Cost effect will lead to a higher quantity of U.S. output demanded.
47. Which of the following is used to explain why the AD curve slopes downward?
A. The interest rate effect.
B. The cost effect.
C. The profit effect.
D. The laissez faire effect.
48. Which of the following is not associated with the aggregate supply curve?
A. Factors of production.
B. The interest rate effect.
D. The cost effect.
49. According to the profit effect,
A. Some costs do not rise when average prices rise.
B. The aggregate supply curve is vertical in the short run.
C. The aggregate supply curve has a negative slope.
D. All costs rise when average prices rise.
50. As output rises, the profit effect results from
A. Lower opportunity costs.
B. Tight supplies of factors of production.
C. The law of demand.
D. Constant costs that do not rise when prices rise.
51. A positively sloped aggregate supply curve reflects
A. The idea that greater production lowers profit margins, which raises
quantity demanded.
B. The decrease in the real value of money as the price level rises.
C. The rising costs associated with increased capacity utilization.
D. None or the other choices.
52. The cost effect implies that
A. Higher costs are reflected in higher average prices.
B. The aggregate supply curve is linear.
C. Lower average prices result in greater quantity supplied.
D. The aggregate demand curve is downward-sloping.
53. Macro equilibrium always occurs when
A. Aggregate supply is greater than aggregate demand.
B. The labor force is fully employed.
C. Aggregate demand equals aggregate supply at a given average price level.
D. The level of output is expanding.
54. The unique situation in which the behavior of buyers and sellers is compatible
is referred to as
A. Full-employment GDP.
B. Macro equilibrium.
C. Micro equilibrium.
D. Labor market balance.
55. Which of the following is a potential problem at macro equilibrium?
A. It is inconsistent with the macroeconomic goals.
B. A surplus of goods exists.
C. A shortage of goods exists.
D. The economy is permanently stuck there.
56. If aggregate demand decreases and aggregate supply decreases, the level of
real output will
A. Decrease, and the price level will definitely decrease.
B. Decrease, and the price level will definitely increase.
C. Either increase or decrease, but the price level will stay the same.
D. Decrease, but the price level is indeterminate.
57. Which of the following results if at a particular price level, the aggregate
quantity supplied exceeds the aggregate quantity demanded?
A. Aggregate demand shifts to the right.
B. Aggregate supply shifts to the left.
C. A surplus causes the price level to rise.
D. A surplus causes the price level to fall.
58. Which of the following would result if the price level were below the
equilibrium level?
A. Aggregate demand would increase.
B. Aggregate supply would decrease.
C. Consumers would bid prices up by competing for goods currently in

shortage.
D. Shortages would force sellers to lower prices in order to increase aggregate

quantity demanded.
59. Alternating periods of economic growth and contraction are
A. The result of government intervention according to Keynes.
B. The result of recurrent shifts of aggregate demand and aggregate supply.
C. Indicative of an unstable economy and require government intervention

according to classical economists.
D. Not typical of the U.S. economy.
60. Ceteris paribus, the price level will decrease if the aggregate
A. Supply curve shifts to the left.
B. Demand curve shifts to the left.
C. Demand curve shifts to the right.
D. Supply and demand curves both shift to the right.
61. If full employment is associated with an output that is greater than the current
macro equilibrium, which of the following best describes the impact of a
rightward shift of the aggregate supply curve, ceteris paribus?
A. A higher price level and a higher level of output.
B. A higher price level and a lower level of output.
C. A recession or depression.
D. A lower price level and a higher level of output.
62. Which combination of shifts of aggregate demand and supply would definitely
cause an increase in real GDP?
A. Demand shifts to the left and supply shifts to the right.
B. Demand shifts to the left and supply shifts to the left.
C. Demand shifts to the right and supply shifts to the right.
D. Demand shifts to the right and supply shifts to the left.
63. Controversies between Keynesian, monetarist, and supply-side theories focus

on the
A. Shape and sensitivity of aggregate demand and aggregate supply curves.
B. Existence or nonexistence of the aggregate supply curve.
C. Importance of international balances to the economy.
D. Usefulness of aggregate demand and supply to analyze adjustment of the

macro equilibrium.
64. Which of the following is true if equilibrium exceeds full employment?
A. The economy is inside the production possibilities curve.
B. The economy is experiencing low inflation.
C. Growth rates are unacceptably low.
D. The economy is working beyond normal capacity.
65. Which of the following economic perspectives focuses on the need for
government to use spending and taxes to shift aggregate demand and thus
correct problems of unemployment and inflation?
A. Supply-side.
B. Keynesian.
C. Classical.
D. Monetarists.
government to shift aggregate supply to correct problems of unemployment
and inflation?
A. Supply-side.
B. Keynesian.
C. Classical.
D. Monetary.
67. According to Keynesian theory, the correct fiscal policy to stimulate the
economy would be to
A. Raise taxes to increase aggregate demand.
B. Increase the money supply to increase aggregate supply.
C. Increase government expenditures to increase aggregate demand.
D. Lower taxes to increase aggregate supply.
68. According to Keynes, unemployment results from
A. Increased business investment that reduces consumer spending.
B. Flexible wages and price.
C. Insufficient spending on the part of consumers, business, and government.
D. Increased government spending that reduces consumer spending.
69. Keynesian levers include
A. Deregulation.
B. Fiscal policy.
C. Monetary policy.
D. Aggregate supply.
70. A tax cut can best be characterized as
A. Monetary policy only.
B. Fiscal policy only.
C. Supply-side policy only.
D. Either fiscal or supply-side policy.
71. From the supply-side perspective, the economy may fail to reach full
employment because of
A. Production incentives.
B. Declining costs.
C. Lack of government regulation.
D. Taxes that are too high.
72. Individual employment and training programs are levers most likely to be
advocated by
A. Classical economists.
B. Monetarists.
C. Keynesians.
D. Supply-side economists.
73. Which of the following is the best example of supply-side policy?
A. The government response to the Great Depression.
B. Inflation during the 1970s.
C. The Reagan tax cuts in 1981.
D. Government policy before 1930.
74. The emphasis by some economists on long-term outcomes is reminiscent of
A. Keynesian theory.
B. Classical theory.
C. Supply-side theory.
75. Which group of economists believes that there is a natural rate of output that
is relatively immune to short-run fluctuations in aggregate demand?
A. Supply-siders.
B. Keynesians.
C. Monetarists.
D. Fiscal economists.
76. A vertical aggregate supply curve
A. Implies that supply-side policies will have no effect on the macro

equilibrium.
B. Implies that aggregate demand shifts have no impact on output.
C. Is likely in the short run.
D. Reflects the inflexibility of prices and wages.
77. For the aggregate supply curve, the profit effect
A. Provides an incentive for producers to decrease output when prices rise.
B. Dominates in the long run and causes the curve to be upward-sloping.
C. Along with the cost effect causes the curve to be downward-sloping in the
long run.
D. Is temporary in the short run, while in the long run it is canceled out
because the cost effect dominates.
78. When the AS curve is vertical, increases in AD will
A. Increase the average price level but have no impact on unemployment.
B. Increase the average price level and decrease unemployment.
C. Increase both the average price level and unemployment.
D. Have no impact on either the average price level or unemployment.
79. In the long run, an increase in aggregate demand will lead to
A. A higher price level and an increase in real GDP.
B. A higher price level only.
C. An increase in real GDP only.
D. A decrease in real GDP.
80. In the long run, which of the following is true?
A. Profit effects are equal to cost effects.
B. Profit effects are larger than cost effects.
C. Cost effects are larger than profit effects.
81. When the AS curve is vertical, fiscal policy will be
A. Ineffective against both inflation and unemployment.
B. Effective against inflation but not unemployment.
C. Effective against unemployment but not inflation.
D. Effective against both inflation and unemployment.
82. The only policy lever that is effective against unemployment when the AS
curve is vertical is
A. Fiscal policy.
B. Monetary policy.
C. Supply-side policy.
D. Laissez faire policy.
83. Which of the following is a basic macro policy strategy?
A. A laissez faire approach.
B. Shifting the aggregate supply curve.
C. Shifting the aggregate demand curve.
D. All of the choices are correct.
84. A laissez faire policy approach during a recession would advocate
A. Noninterference by the government.
B. Increasing AS by funding programs that improve worker skills.
C. Increasing AD by increasing government spending.
D. Increasing both AD and AS.
85. Fiscal policy is the use of
A. Government spending and taxes to alter macroeconomic outcomes.
B. Money and credit controls to alter macroeconomic outcomes.
C. Tax incentives, deregulation, and other mechanisms to increase the ability

and willingness to produce goods and services.
D. Trade policy to alter macroeconomic outcomes.
86. International trade and money flows can increase aggregate supply and
aggregate demand if
A. Trade barriers are increased.
B. Trade barriers are reduced.
C. Tariffs are increased.
D. Quotas are increased.
87.
Using Figure 8.1, a decrease in the quantity of aggregate demand resulting

from the interest rate effect would be depicted as a movement from point
A. B to point A.
B. A to point C.
C. B to point C.
D. C to point A.
88.
In Figure 8.1, an increase in government spending, ceteris paribus, is best

represented as a movement from point
A. A to point B.
B. C to point A.
C. B to point C.
D. A to point C.
89.
Using Figure 8.2, a decrease in real output resulting from the profit effect
would be depicted as a movement from point
A. A to point C.
B. B to point A.
C. B to point C.
D. C to point B.
90.
In Figure 8.2, an improvement in technology is best represented as a

movement from point
A. A to point B.
B. C to point A.
C. C to point B.
D. B to point A.
91.
In Figure 8.2, an increase in the cost of an input in the production process is

best represented as a movement from point
A. A to point B.
B. A to point C.
C. C to point B.
D. B to point A.
92.
Assume the economy is initially in equilibrium on AD1 and AS1. Which curve
would have shifted, and in what direction would it have shifted, if a new
equilibrium were to occur at an output level of $300 billion and a price level of
P3 in Figure 8.3?
A. Aggregate supply would have shifted to the left.
B. Aggregate supply would have shifted to the right.
C. Aggregate demand would have shifted to the left.
D. Aggregate demand would have shifted to the right.
93.
equilibrium were to occur at an output level of $300 billion and a price level of
P3 in Figure 8.3?
94.
Macro equilibrium is established at which level of real output, given AD1 and
AS2 in Figure 8.3?
A. $100 billion.
B. $200 billion.
C. $300 billion.
D. $400 billion.
95.
Macro equilibrium is established at which price level, given AD1 and AS1 in
Figure 8.3?
A. P1.
B. P2.
C. P3.
D. P4.
96.
Given AD2 and AS1, the equilibrium price level in Figure 8.3 is
A. P1.
B. P2.
C. P3.
D. P4.
97.
Given AD1 and AS1, if the average price level in Figure 8.3 were at P3,
A. A surplus would exist initially.
B. The aggregate quantity demanded would exceed the aggregate quantity

supplied.
C. The average price level would rise.
D. The equilibrium price level would be P3.
98.
Given AD1 and AS1 in Figure 8.3, the classical approach to achieving full
employment at an output of $300 billion would be to
A. Increase taxes and increase government spending to shift AD1 to AD2.
B. Increase the growth of the money supply to shift AD1 to AD2.
C. Do nothing and wait for "natural" market forces to achieve full employment.
D. Use all available supply-side options.
99.
Given AD1 and AS1 in Figure 8.3, the Keynesian approach to achieving a higher
level of output would be to
A. Impose price controls.
B. Increase the growth of the money supply to shift AS1 to AS2.
C. Do nothing.
D. Employ an expansionary fiscal policy.
100.
A supply-side policy approach in Figure 8.3, given AD1 and AS1, to achieve
both lower prices and more output would be to
A. Increase the growth of the money supply.
B. Reduce marginal tax rates and government regulation in an effort to move

AS1 to AS2.
C. Wait until natural market forces establish full employment.
D. Increase aggregate spending.
101.
At what price level does equilibrium occur in Figure 8.4?
A. P1.
B. P2.
C. P3.
D. P4.
102.
At which of the following price levels would a shortage occur in Figure 8.4?
A. P1.
B. P2.
C. P3.
D. P4.
103.
Using Figure 8.5, if the equilibrium real output is Q2 then
A. Aggregate demand must be AD1.
B. Aggregate demand could be either AD1 or AD2 depending on the level of

aggregate supply.
C. The equilibrium price level is P2.
D. Aggregate supply must be AS1 and the equilibrium price level must be P1.
104.
In Figure 8.5, according to Keynesians, if equilibrium real output is Q1 and

full-employment real output is Q2, an appropriate fiscal policy lever would be
to
A. Increase AD by increasing income taxes.
B. Increase AD by increasing government spending.
C. Increase AS by reducing government regulations.
D. Reduce AS by tightening air pollution standards to improve air quality.
105.
In Figure 8.5, if equilibrium real output is Q1 and full-employment real output

is Q2, an appropriate monetarist policy lever would be to increase
A. AD by decreasing income taxes.
B. AS by increasing the money supply.
C. AD by reducing interest rates.
D. AD by reducing government regulations.
106.
107.
In Figure 8.5, if this economy's inflation goal is a price level of P2 but the
equilibrium price level is P3, an appropriate monetary policy lever would be to
A. Decrease AS by increasing the money supply.
B. Decrease AD by increasing interest rates.
C. Decrease AD by increasing income taxes.
D. Increase AS by increasing the money supply.
108.
Using Figure 8.5, if the equilibrium price level is P1, then aggregate demand
is
A. AD2, and the equilibrium output level is Q2.
B. AD2, and the equilibrium output level is Q1.
C. AD1, and the equilibrium output level is Q3.
D. AD1, and the equilibrium output level is Q2.
109.
Choose the letter below that best represents the type of shift that would
occur in each situation in the United States: OPEC raises the price of its oil
significantly. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
110.
occur in each situation in the United States: A technological breakthrough
significantly reduces the cost of computerizing production lines. (See Figure
8.6.)
A. A.
B. B.
C. C.
D. D.
111.
occur in each situation in the United States: Between 1995 and 2000, the
stock market's value increased significantly, adding billions of dollars to the
wealth of U.S. households and businesses. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
112.
occur in each situation in the United States: On October 24, 1929, the U.S.
stock market crashed. By the end of the year, over $40 billion of wealth had
vanished. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
113.
occur in each situation in the United States: Between 1930 and 1935,
millions of U.S. farm families lost their farms, and less output was produced
by the remaining farms. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
114.
occur in each situation in the United States: During the Great Depression,
most other countries suffered similarly long and deep losses of output and
employment, which in turn meant fewer purchases of U.S. goods and
services. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
115.
occur in each situation in the United States: During World War II, the U.S.
government spent huge amounts of money to fund the war effort. (See
Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
116.
occur in each situation in the United States: When the economy overheated,
the U.S. government cooled it down with higher taxes, spending reductions,
and less money. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
117.
occur in each situation in the United States: In 2001 interest rates dropped
to 40-year lows, which decreased the cost of borrowing for consumers. (See
Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
118.
occur in each situation in the United States: During the late 1990s,
productivity in many U.S. industries increased because of technological
advances. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
119.
occur in each situation in the United States: The value of the dollar
plummeted in international currency markets, causing foreigners to buy more
American goods. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
120.
Using Figure 8.7, a shift in aggregate demand from AD1 to AD2 is most likely
to cause
A. An increase in real output and an increase in the price level.
B. An increase in real output but no change in the price level.
C. An increase in price level but no change in real output.
D. A decrease in price level but no change in real output.
121.
to cause
122.
Assuming full employment is at the intersection of AD3 with the aggregate

supply curve for the economy depicted in Figure 8.7, the worst unemployment
problem would exist when AD is located at
A. AD1.
B. AD2.
C. AD3.
D. AD5.
123.One World View article titled "Global Depression" states, "The Great
Depression wasn't confined to the U.S. economy." This implies that many
other countries
A. Were producing inside their production possibilities curves.
B. Were producing on their production possibilities curves.
C. Experienced an increase in real GDP.
124.One World View article is titled "Global Depression." The countries that
experienced the Depression
A. Experienced GDP growth but at a rate below the long-term trend.
B. Experienced higher employment levels than previously recorded.
C. Suffered substantial losses of output and employment.
D. Experienced high unemployment but an increase in output.
125.One In the News article titled "Economy: Sharpest Decline in 26 Years" states
that
A. Real GDP fell by 6.8 percent in the last quarter of 2007.
B. Real GDP fell by 3.8 percent in the last quarter of 2008.
C. The drop in real GDP in 2008 was the greatest in 50 years.
D. The drop in real GDP in 2008 was the greatest since the Great Depression.
126.The laissez faire view of government involvement in the economy is most
consistent with the
A. Classical theory.
B. Keynesian theory.
C. Monetary theory.
D. Supply-side theory.
127.During the Great Depression, this group of economists assured everyone that
the setbacks in production and employment were temporary and would soon
vanish:
A. Supply-side economists.
B. Classical economists.
C. Keynesian economists.
D. Monetarist economists.
128.The determinants of macro outcomes include all of the following except
A. Internal market forces.
B. External shocks.
C. Prices.
D. Policy levers.
129.Internal market forces include all of the following except
B. Spending behavior.
C. Innovation.
D. Trade disruptions.
130.Two potential problems with macro equilibrium are
A. Undesirability and instability.
B. The profit effect and the real balance effect.
C. External shocks and policy levers.
D. Multiple shifts to AS and AD.
131.The growth path of the US economy is considered to be
A. Smooth and predictable.
B. Consistent and reliable.
C. Old and steady.
D. Stumbles and setbacks.
132.Cost pressures are most intense
A. At low rates of output.
B. When unemployment falls.
C. As the economy approaches capacity.
133.Current buyers' and sellers' behaviors are correctly expressed by
A. One set of aggregate supply and demand curves.
B. Multiple sets of aggregate supply and demand curves.
C. Many sets of aggregate supply and demand curves.
True / False Questions
134.According to the classical view, the economy will not self-adjust to deviations
from its long-term growth trend.
True False
135.Keynes believed that a market-driven economy was inherently unstable.
True False
136.An economic expansion refers to an increase in the volume of goods and

services produced.
True False
137.During a recession, real output actually falls.
True False
138.Changes in the availability of money have little impact on the macro

performance of the economy.
True False
139.Keynes argued that policy levers were both effective and necessary.
True False
140.Business cycles result from recurrent shifts of the aggregate supply and
demand curves.
True False
141.The quantity of real output supplied rises as the price level rises, ceteris
paribus.
True False
142.The profit effect occurs because, in the short run, resource costs typically do
not increase as rapidly as the price of goods and services.
True False
143.Equilibrium is unique; it is the only price-output combination that is mutually

compatible with aggregate supply and demand.
True False
144.If the level of prices and output are compatible with both buyers' and sellers'
intentions, then the policy goals are satisfied.
True False
145.Both Keynesian and monetarist theories emphasize the potential of

aggregate demand shifts to alter macro outcomes.
True False
146.Supply-side theories of the business cycle focus on how improper incentives
lead to the unwillingness of producers to supply more goods and services at
existing prices.
True False
147.The short-run aggregate supply curve is upward-sloping, while the long-run

aggregate supply curve tends to be vertical.
True False
148.In the long run, shifts in the aggregate demand curve affect the price level
but not the level of output.
True False
Essay Questions
149.What are the differences between classical theory and what Keynes
believed?
150.What are the different phases of the business cycle, and how are production
and employment affected in each phase?
151.What is the real balances effect, and how does it explain the shape of the
aggregate demand curve?
152.What is the foreign trade effect, and how does it explain the shape of the
153.Is equilibrium always at an optimal level of output? Explain your answer.
154.Why does the slope of the aggregate supply curve change from the short run
to the long run?
Chapter 08 The Business Cycle Answer Key
Multiple Choice Questions
1. Which of the following was not characteristic of the U.S. economy during
the Great Depression?
A. Families lost their farms.
B. Automobile production fell.
C. The stock market crashed.
D. Unemployment reached 50 percent.
Unemployment peaked at around 25 percent in the United States during the

Great Depression.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-01 The major macro outcomes and their determinants.
Topic: STABLE OR UNSTABLE?
2. The study of aggregate economic activity for the economy as a whole is
A. Opportunity cost.
B. Scarcity.
C. Macroeconomics.
D. Microeconomics.
In macroeconomics, the focus is on the big picture—how the economy is

affected by various events.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
3. Alternating periods of economic growth and contraction in real GDP define
A. Capitalism.
B. The business cycle.
C. Macro equilibrium.
D. Say's Law.
The business cycle is a repetition of expansion followed by contraction,

then expansion again.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
4. According to classical theory,
A. Keynes had "neglected to take account of the drag on prosperity which

can be exercised by an insufficiency of effective demand."
B. Macro equilibrium might start out badly and get worse in the absence of
government intervention.
C. Flexible wages and prices allow a laissez faire economy to adjust wages
and prices to shifts in aggregate demand.
D. Business cycles are not relevant and do not occur.
A key principle of classical theory is flexible prices and wages along with its
focus on the economy's self-correcting tendencies.
AACSB: Analytic
Blooms: Understand
Learning Objective: 08-02 Why the debate over macro stability is important.
5. According to the classical view, if consumer demand slowed down,
A. Prices would decrease, and the economy would return to its long-term
growth trend.
B. Prices would increase, and the economy would return to its long-term
growth trend.
C. Wages would increase, and the economy would return to its long-term
growth trend.
D. Investment and government demand would increase, and the economy

would return to its long-term growth trend.
Through the adjustment of prices, the economy quickly rebounds to its

potential.
AACSB: Reflective Thinking

Blooms: Analyze
Difficulty: 1 Easy
6. Based on the classical view,
A. Unemployment never occurs.
B. Cyclical unemployment might occur temporarily.
C. All goods produced are always purchased at an unchanging price.
D. Persistent unemployment might be a problem.
Unemployment will exist, but cyclical unemployment will not last long
because employers take advantage of cheaper wages and readily available
labor when demand falls.

Blooms: Analyze
Difficulty: 1 Easy
7. If wages and prices are flexible, then a recession is best eliminated when
prices
A. And wages both rise.
B. And wages both fall.
C. Rise and wages drop.
D. Drop and wages rise.
After the price and wage adjustment, quantity demanded increases and
production increases again, and the economy returns to its potential.

Blooms: Evaluate
8. According to classical economists, market-driven economies
A. Are typically self-adjusting.
B. Are inherently unstable.
C. Require government intervention.
D. Are always in long-run equilibrium.
The classical theory does not emphasize the need for government action.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
9. Say's Law states that
A. Supply creates its own demand.
B. Shifts of either supply or demand can achieve a given market equilibrium.
C. Wages and prices are inflexible, which prevents the achievement of

market equilibrium.
D. Increased prices lead to increased supply.
There will not be a large unsold portion of goods because prices and wages
will fall to ensure that everything is sold.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
10. In the early 1900s, which of the following was not true?
A. Falling price levels appeared to limit an increase in unemployment.
B. Periods of high unemployment tended to be brief.
C. Say's Law seemed to work.
D. Government intervention was commonly used to stimulate the economy.
Prior to the Great Depression, the classical model was widely accepted,
and, as such, there was little government involvement in the economy.

Blooms: Analyze
11. Unlike the classical economists, Keynes asserted that
A. The economy was inherently unstable.
B. Laissez faire policies would lead to macro equilibrium.
C. Prices and wages were flexible.
D. Markets would naturally self-adjust.
The Keynesian model holds that the government should intervene to ensure
stability.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
12. Who believed that small disturbances in output, prices, or unemployment

were likely to be magnified by the invisible hand of the marketplace?
A. President Herbert Hoover.
B. Adam Smith.
C. John Maynard Keynes.
D. Jean-Baptiste Say.
The Keynesian model held that the economy is inherently unstable.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
13. The government can "prime the pump" by doing all of the following except
A. Buying more output.
B. Employing more people.
C. Making more money available.
D. Raising taxes.
Raising taxes would actually decrease aggregate demand and therefore

lead to greater unemployment and less production.

Blooms: Apply
14. According to Keynes, when the economy falters, the government should do
any of the following except
A. Practice a laissez faire policy approach.
B. Provide more dollars for unemployment benefits.
D. Buy more output.
Keynes argued for more, not less, government intervention during an

economic downturn.
Blooms: Analyze
15. According to Keynes, which of the following should the government do

when the economy overheats?
A. Employ more people.
B. Increase spending.
C. Raise taxes.
D. Practice laissez faire policies.
By raising taxes, the aggregate demand will decrease, which should ease
inflationary pressures.

Blooms: Analyze
Difficulty: 1 Easy
16. According to Keynes, which of the following can be used to slow down an
overheated economy?
A. Decrease government purchases.
B. Decrease taxes.
D. Employ more people.
By decreasing government purchases, aggregate demand will decrease, so

inflationary pressures should ease.

Blooms: Analyze
Difficulty: 1 Easy
17. Which of the following is true about business cycles in the United States?
A. They are remarkably similar in length but vary greatly in intensity.
B. They vary greatly in length, frequency, and intensity.
C. They are similar in frequency and intensity but not in length.
D. They are similar in length, frequency, and intensity.
The only thing that is certain is that there is a business cycle; how long the
cycle lasts and when it turns is unknown.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Topic: HISTORICAL CYCLES
18. Which of the following is characteristic of a downturn in the business

cycle?
A. Lower unemployment rates.
B. Lower real output.
C. Higher interest rates.
During an economic downturn, production falls and unemployment rises,

leading to underutilization of resources.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
19. The inflation-adjusted value of all goods and services produced is
A. The GDP deflator.
B. Nominal GDP.
C. GDP per capita.
D. Real GDP.
Real GDP is designed to measure production only and not changes in the
price level.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
20. Real GDP is better than nominal GDP for measuring growth because real
GDP has been adjusted for changes in
A. The price level.
B. Unemployment.
C. The business cycle.
D. Productivity.
Real GDP is designed to measure production only and not changes in the
price level, while nominal GDP reflects changes in both.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
21. Changes in real GDP are used to measure
A. Inflation.
B. Price level changes.
C. Business cycles.
D. Population growth.
For example, during recessions, real GDP falls.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
22. The Great Depression did not
A. Follow a period of apparent prosperity.
B. Lead to an unemployment rate that reached 25 percent.
C. Cause President Roosevelt to declare a "bank holiday" in 1933.
D. Lead to a high rate of inflation.
In fact, one of the greatest periods of deflation was during the Great
Depression.
AACSB: Analytic
Blooms: Remember
23. Before the year 2000, the most prolonged departure from the long-term
growth path for the United States occurred during
A. The 1980s.
B. The Great Depression.
C. World War II.
D. The years following World War II.
Since the economy contracted so much during the Great Depression, the
economy was operating far below its production possibilities curve.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
24. A decline in total real output for two or more consecutive quarters is
referred to as
A. Laissez faire.
B. A recession.
C. A growth recession.
D. Say's Law.
While a recession means a contraction in the economy, the strict textbook

definition is two quarters of declining real GDP.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
25. A recession can be represented by a point
A. Inside the production possibilities curve.
B. Outside the production possibilities curve.
C. On the production possibilities curve.
D. At either end of the production possibilities curve.
During a recession, the underutilized resources cause the economy to be

operating below its production possibilities curve.

Blooms: Evaluate
Difficulty: 1 Easy
26. In which of the following situations is the percentage change in real GDP
always positive?
A. Depression.
B. Inflation.
C. Recession.
D. Growth recession.
A growth recession means very little growth, but some positive growth
nonetheless.
Blooms: Analyze
27. A growth recession is said to occur when the economy grows at a
A. Rate less than that of population.
B. Rate less than the long-term average.
C. Slower rate in the current year than the preceding year.
D. Negative rate.
If the economy is growing at 1 percent but the long-term trend is 3 percent,

the economy is experiencing a growth recession.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
28. Which of the following caused a recession in the years immediately
following World War II?
A. A surge in investment spending.
B. Pent-up demand for consumer goods.
C. Cutbacks in defense production.
D. Technological advances.
Large decreases in defense spending reduced aggregate demand and led to

a recession.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
29. Which of the following was not true for the U.S. economy during the period
from the late 1990s to 2000?
A. Economic expansion set a record for longevity.
B. The unemployment rate was low.
C. Millions of new jobs were created.
D. Real GDP declined.
Real GDP expanded for a record number of months during the 1990s to
2000.
AACSB: Analytic
Blooms: Understand
30. Which of the following is not considered a macro outcome?
A. The level of unemployment.
B. External shocks such as weather.
C. The average price of goods and services.
D. The year-to-year expansion in overall productive capacity.
External shocks often determine macro outcomes. But the shocks are not
macro outcomes themselves.
AACSB: Analytic
Blooms: Remember
Topic: A MODEL OF THE MACRO ECONOMY
31. Which of the following is generally considered a desirable outcome of

government intervention?
A. More jobs.
B. A higher price level.
C. Higher unemployment rates.
D. Greater deficits.
Job growth is an important macro outcome that is an important result of

economic growth.

Blooms: Analyze
Difficulty: 1 Easy
32. All of the following can be used to measure macroeconomic performance
except for the
A. Total real value of goods and services produced.
B. Average price level of goods and services.
C. International value of the dollar.
D. Growth rate of the population.
The growth rate of the population is an internal market force that is a

determinant of macro outcomes.

Blooms: Analyze
33. External shocks include all of the following except
B. Natural disasters.
C. Terrorist attacks.
D. Wars.
Population growth is an internal market force that is a determinant of macro

outcomes.
AACSB: Analytic
Blooms: Remember
34. Internal market forces include
A. Wars, natural disasters, and trade disruptions.
B. Tax policy, government spending, and availability of money.
C. Population growth, spending behavior, and invention.
D. External shocks and policy levers.
Internal market forces are important determinants of macro outcomes.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
35. In the absence of external shocks or government policy, an economy would
A. Still experience business cycle fluctuations because of internal market

forces.
B. Not experience business cycle fluctuations.
C. Not be able to expand production and output.
Internal forces such as population growth, innovation, and spending

patterns lead to business cycle fluctuations.

Blooms: Analyze
36. Determinants of macro performance work on macro outcomes through
A. Aggregate supply and demand.
B. International balances.
C. External shocks.
D. Internal market forces.
Any influence on macro outcomes must be transmitted through either

aggregate supply or aggregate demand.
Blooms: Apply
Learning Objective: 08-03 The nature of aggregate demand (AD) and aggregate supply (AS).
Topic: AGGREGATE DEMAND AND SUPPLY
37. Which of the following is illustrated by the aggregate demand curve?
A. How real personal income varies with the inflation rate.
B. How total quantity of output demanded varies with the average price
level.
C. How real output varies with the inflation rate.
D. How real personal income varies with the price level.
The aggregate demand curve shows the relationship between the price level
and the total amount of real output demanded in the economy.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
38. The aggregate demand curve is downward-sloping because, other things
being equal,
A. People buy fewer goods and services at lower average incomes.
B. People buy more goods and services at lower average prices.
C. A higher average price level will induce producers to offer more output
than otherwise.
D. People buy more goods and services at higher average prices.
As the price level falls, buyers are willing and able to purchase more goods
and services.
AACSB: Analytic
Blooms: Understand
39. The real balances effect says that an increase in the price level
A. Increases the price of U.S. produced goods, causing Americans to buy

more imported goods.
B. Increases the price of U.S. produced goods, causing foreign consumers

to buy fewer U.S. goods.
C. Increases the need to borrow, which drives up interest rates and reduces
loan-financed purchases.
D. Reduces the real value of a fixed amount of savings, which reduces the
purchase of goods and services.
If the price level rises, your real savings will not be able to purchase as
many goods and services as before the price increase, and, for this reason,
the quantity of output demanded will be less.

Blooms: Apply
40. Assume you have $2,000 in a savings account at the beginning of the year
and the price level is equal to 100. If the price level is equal to 120 at the
end of the year, the real value of your savings is closest to
A. $1,667.
B. $1,880.
C. $2,120.
D. $2,400.
Take the nominal savings balance of $2,000 and divide it by the new price
level over the old price level; this results in an answer close to $1,667. The
real value of the money will be worth $2,000 ÷ (120 ÷ 100) or
approximately $1,667.

Blooms: Evaluate
Difficulty: 3 Hard
A. $870.
B. $885.
C. $1,115.
D. $1,150.
level over the old price level; this results in an answer close to $870. The
approximately $870.

Blooms: Evaluate
Difficulty: 3 Hard
A. $4,000.
B. $4,875.
C. $5,125.
D. $6,250.
level over the old price level; this results in an answer close to $870. The
approximately $4,000.

Blooms: Evaluate
Difficulty: 3 Hard
and the price level is equal to 100. If the price level is equal to 95 at the end
of the year, the real value of your savings is closest to
A. $1,900.
B. $1,905.
C. $2,095.
D. $2,105.
real value of the money will be worth $2,000 ÷ (95 ÷ 100) or approximately
$2,105.

Blooms: Evaluate
Difficulty: 3 Hard
and the price level is equal to 100. If the price level is equal to 92 at the end
of the year, the real value of your savings is closest to
A. $908.
B. $920.
C. $1,087.
D. $1,092.
real value of the money will be worth $1,000 ÷ (92 ÷ 100) or approximately
$1,087.

Blooms: Evaluate
Difficulty: 3 Hard
A. Real balances effect will lead to a lower quantity of U.S. output

demanded.
B. Foreign trade effect will lead to a higher quantity of U.S. output

demanded.
C. Interest rate effect will lead to a lower quantity of U.S. output demanded.
D. Profit effect will lead to a higher quantity of U.S. output demanded.
As the domestic price level falls, consumers (domestic and international)

will buy more U.S.-made products and exports will rise. In essence, exports
will rise, and imports will fall.

Blooms: Analyze
A. Real balances effect will lead to a lower quantity of U.S. output

demanded.
B. Foreign trade effect will lead to a lower quantity of U.S. output

demanded.
C. Interest rate effect will lead to a higher quantity of U.S. output

demanded.
D. Cost effect will lead to a higher quantity of U.S. output demanded.
As the price level falls, interest rates fall, so spending on interest-sensitive

items such as cars and plasma TVs increases. Even with a constant
quantity of nominal money, interest rates fall because a decrease in the
price level causes an increase in the supply of real money in a lending
institution.

Blooms: Analyze
47. Which of the following is used to explain why the AD curve slopes
downward?
A. The interest rate effect.
B. The cost effect.
D. The laissez faire effect.
The interest rate effect holds that spending rises as the price level falls due
to an increase in purchases of interest-sensitive items.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
48. Which of the following is not associated with the aggregate supply curve?
A. Factors of production.
B. The interest rate effect.
D. The cost effect.
The interest rate effect is one factor that explains the downward-sloping
aggregate demand curve.
AACSB: Analytic
Blooms: Remember
49. According to the profit effect,
A. Some costs do not rise when average prices rise.
B. The aggregate supply curve is vertical in the short run.
C. The aggregate supply curve has a negative slope.
D. All costs rise when average prices rise.
Things like rent and negotiated wage contracts remain constant in the short
run.

Blooms: Apply
50. As output rises, the profit effect results from
A. Lower opportunity costs.
B. Tight supplies of factors of production.
C. The law of demand.
D. Constant costs that do not rise when prices rise.
When the price level rises, not all costs rise at the same time, but may be
constant for a short period of time, which leads to higher profit and
therefore greater output in the short run.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
51. A positively sloped aggregate supply curve reflects
A. The idea that greater production lowers profit margins, which raises
quantity demanded.
B. The decrease in the real value of money as the price level rises.
C. The rising costs associated with increased capacity utilization.
D. None or the other choices.
As resources become fully utilized, inflationary pressures develop as

competition for the resources ensues; this leads to a higher price level
being required for firms to produce higher levels of output.

Blooms: Analyze
52. The cost effect implies that
A. Higher costs are reflected in higher average prices.
B. The aggregate supply curve is linear.
C. Lower average prices result in greater quantity supplied.
D. The aggregate demand curve is downward-sloping.
This is because competition for resources that are being fully utilized
creates inflationary pressure.

Blooms: Analyze
53. Macro equilibrium always occurs when
A. Aggregate supply is greater than aggregate demand.
B. The labor force is fully employed.
C. Aggregate demand equals aggregate supply at a given average price

level.
D. The level of output is expanding.
This occurs at the intersection of the aggregate demand and aggregate

supply curves.
Blooms: Understand
Difficulty: 1 Easy
54. The unique situation in which the behavior of buyers and sellers is
compatible is referred to as
A. Full-employment GDP.
B. Macro equilibrium.
C. Micro equilibrium.
D. Labor market balance.
In macro equilibrium, the price level perfectly coordinates production and

consumption of goods and services.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
55. Which of the following is a potential problem at macro equilibrium?
A. It is inconsistent with the macroeconomic goals.
B. A surplus of goods exists.
C. A shortage of goods exists.
D. The economy is permanently stuck there.
It is possible that the macro equilibrium may occur at an output level below
full employment or with a lot of externalities, which is undesirable.

Blooms: Analyze
56. If aggregate demand decreases and aggregate supply decreases, the level
of real output will
A. Decrease, and the price level will definitely decrease.
B. Decrease, and the price level will definitely increase.
C. Either increase or decrease, but the price level will stay the same.
D. Decrease, but the price level is indeterminate.
Since both the aggregate demand and aggregate supply curves shift to the
left, the output, which is on the horizontal axis, must be lower; but the price
level could rise, fall, or stay the same depending on the relative changes in
aggregate demand and aggregate supply.

Blooms: Evaluate
Learning Objective: 08-04 How changes in AD and AS affect macro outcomes.
57. Which of the following results if at a particular price level, the aggregate
quantity supplied exceeds the aggregate quantity demanded?
A. Aggregate demand shifts to the right.
B. Aggregate supply shifts to the left.
C. A surplus causes the price level to rise.
D. A surplus causes the price level to fall.
Overproduction of goods and services will result in falling prices in order to

eliminate the excess inventory or surpluses.

Blooms: Analyze
Difficulty: 1 Easy
58. Which of the following would result if the price level were below the
equilibrium level?
A. Aggregate demand would increase.
B. Aggregate supply would decrease.
C. Consumers would bid prices up by competing for goods currently in

shortage.
D. Shortages would force sellers to lower prices in order to increase

aggregate quantity demanded.
Shortages would develop across the economy, which would cause prices to
rise and thus encourage more production.

Blooms: Analyze
Difficulty: 1 Easy
59. Alternating periods of economic growth and contraction are
A. The result of government intervention according to Keynes.
B. The result of recurrent shifts of aggregate demand and aggregate supply.
C. Indicative of an unstable economy and require government intervention

according to classical economists.
D. Not typical of the U.S. economy.
A shift in either aggregate demand or aggregate supply could put the new
macro equilibrium below the level of full employment.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
60. Ceteris paribus, the price level will decrease if the aggregate
A. Supply curve shifts to the left.
B. Demand curve shifts to the left.
C. Demand curve shifts to the right.
D. Supply and demand curves both shift to the right.
If aggregate demand decreases, people are purchasing less. So surpluses

build up, thereby leading to a falling price level.
Blooms: Analyze
61. If full employment is associated with an output that is greater than the
current macro equilibrium, which of the following best describes the impact
of a rightward shift of the aggregate supply curve, ceteris paribus?
A. A higher price level and a higher level of output.
B. A higher price level and a lower level of output.
C. A recession or depression.
D. A lower price level and a higher level of output.
In this case, an increase in aggregate supply causes output to increase,

which moves the economy closer to full employment and causes the price
level to drop.

Blooms: Analyze
62. Which combination of shifts of aggregate demand and supply would
definitely cause an increase in real GDP?
A. Demand shifts to the left and supply shifts to the right.
B. Demand shifts to the left and supply shifts to the left.
C. Demand shifts to the right and supply shifts to the right.
D. Demand shifts to the right and supply shifts to the left.
When both curves shift to the right, output must rise because output is the
variable on the horizontal axis.

Blooms: Analyze
63. Controversies between Keynesian, monetarist, and supply-side theories
focus on the
A. Shape and sensitivity of aggregate demand and aggregate supply curves.
B. Existence or nonexistence of the aggregate supply curve.
C. Importance of international balances to the economy.
D. Usefulness of aggregate demand and supply to analyze adjustment of

the macro equilibrium.
Any desired equilibrium can be attained, but how it happens depends on the
shape of the aggregate demand and aggregate supply curves and what
causes them to shift; that is where the controversy comes in.
AACSB: Analytic
Blooms: Understand
Topic: COMPETING THEORIES OF SHORT-RUN INSTABILITY
64. Which of the following is true if equilibrium exceeds full employment?
A. The economy is inside the production possibilities curve.
B. The economy is experiencing low inflation.
C. Growth rates are unacceptably low.
D. The economy is working beyond normal capacity.
When equilibrium temporarily exceeds full employment, inflationary

pressures will build in the economy, forcing up the price level; after workers
get increases in wages and input prices rise, aggregate supply will start
shifting left, thereby restoring equilibrium closer to full employment.

Blooms: Analyze
Difficulty: 1 Easy
government to use spending and taxes to shift aggregate demand and thus
correct problems of unemployment and inflation?
A. Supply-side.
B. Keynesian.
C. Classical.
D. Monetarists.
Keynesian theory holds government intervention in the economy to be

critical to maintain economic stability.

Blooms: Analyze
Difficulty: 1 Easy
government to shift aggregate supply to correct problems of unemployment
and inflation?
A. Supply-side.
B. Keynesian.
C. Classical.
D. Monetary.
If aggregate supply intersects aggregate demand at a level below full

employment, tax cuts could shift the aggregate supply curve to the right and
restore full employment. Supply-side economists prefer using levers that
impact aggregate supply, versus Keynesian economists, who prefer policies
that impact aggregate demand. Classical economists prefer to allow the
economy to fix itself.

Blooms: Analyze
Difficulty: 1 Easy
67. According to Keynesian theory, the correct fiscal policy to stimulate the
economy would be to
A. Raise taxes to increase aggregate demand.
B. Increase the money supply to increase aggregate supply.
C. Increase government expenditures to increase aggregate demand.
D. Lower taxes to increase aggregate supply.
Increasing government expenditures would move the aggregate demand

curve to the right and move the macro equilibrium closer to the full-
employment level of output.

Blooms: Analyze
Difficulty: 1 Easy
68. According to Keynes, unemployment results from
A. Increased business investment that reduces consumer spending.
B. Flexible wages and price.
C. Insufficient spending on the part of consumers, business, and

government.
D. Increased government spending that reduces consumer spending.
The Keynesian theory calls for government spending to pick up the slack in
the economy by stimulating aggregate demand.

Blooms: Analyze
Difficulty: 1 Easy
69. Keynesian levers include
A. Deregulation.
B. Fiscal policy.
C. Monetary policy.
D. Aggregate supply.
Changes in taxation and government spending are the hallmarks of

Keynesian theory.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
70. A tax cut can best be characterized as
A. Monetary policy only.
B. Fiscal policy only.
C. Supply-side policy only.
D. Either fiscal or supply-side policy.
Changing taxes affects macro equilibrium through either a change in

aggregate demand or aggregate supply, depending on the nature of the tax
cut.

Blooms: Analyze
Difficulty: 1 Easy
71. From the supply-side perspective, the economy may fail to reach full
employment because of
A. Production incentives.
B. Declining costs.
C. Lack of government regulation.
D. Taxes that are too high.
High taxes discourage work, saving, and investment.

Blooms: Analyze
Difficulty: 1 Easy
72. Individual employment and training programs are levers most likely to be
advocated by
A. Classical economists.
B. Monetarists.
C. Keynesians.
D. Supply-side economists.
Workforce training causes the productivity of workers to rise, and thus

increases supply.
Blooms: Analyze
Difficulty: 1 Easy
73. Which of the following is the best example of supply-side policy?
A. The government response to the Great Depression.
B. Inflation during the 1970s.
C. The Reagan tax cuts in 1981.
D. Government policy before 1930.
The Reagan tax cuts in 1981 reduced income and corporate taxes to
encourage more production.

Blooms: Analyze
74. The emphasis by some economists on long-term outcomes is reminiscent
of
A. Keynesian theory.
B. Classical theory.
C. Supply-side theory.
The belief that the economy is self-adjusting implies that short-run

irregularities may happen, but that the economy will right itself in the long
run.

Blooms: Analyze
Difficulty: 1 Easy
Topic: LONG-RUN SELF-ADJUSTMENT
75. Which group of economists believes that there is a natural rate of output
that is relatively immune to short-run fluctuations in aggregate demand?
A. Supply-siders.
B. Keynesians.
C. Monetarists.
D. Fiscal economists.
Monetarists believe the money supply can be manipulated to maintain an

output level close to full employment, but that in the longer term, increasing
the money supply leads to an increase in the price level.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
76. A vertical aggregate supply curve
A. Implies that supply-side policies will have no effect on the macro

equilibrium.
B. Implies that aggregate demand shifts have no impact on output.
C. Is likely in the short run.
D. Reflects the inflexibility of prices and wages.
If aggregate demand shifts along a vertical aggregate supply curve, the

price level may rise or fall, but the level of output will remain constant.

Blooms: Evaluate
77. For the aggregate supply curve, the profit effect
A. Provides an incentive for producers to decrease output when prices rise.
B. Dominates in the long run and causes the curve to be upward-sloping.
C. Along with the cost effect causes the curve to be downward-sloping in

the long run.
D. Is temporary in the short run, while in the long run it is canceled out
because the cost effect dominates.
Since costs will tend to rise when the price level rises, any short-term profit
effect will wear off as time goes by and costs adjust.

Blooms: Analyze
78. When the AS curve is vertical, increases in AD will
A. Increase the average price level but have no impact on unemployment.
B. Increase the average price level and decrease unemployment.
C. Increase both the average price level and unemployment.
D. Have no impact on either the average price level or unemployment.
Since the AS curve is vertical, it will be positioned at a fixed point on the

horizontal axis exactly at the full-employment level of output.

Blooms: Evaluate
79. In the long run, an increase in aggregate demand will lead to
A. A higher price level and an increase in real GDP.
B. A higher price level only.
C. An increase in real GDP only.
D. A decrease in real GDP.
In the long run, the economy will always adjust back to full employment. So
changes in aggregate demand will have a permanent effect only on the
price level.
Blooms: Evaluate
80. In the long run, which of the following is true?
A. Profit effects are equal to cost effects.
B. Profit effects are larger than cost effects.
C. Cost effects are larger than profit effects.
In the long run, the profit effects are exactly canceled out by the cost
effects. If only the aggregate supply line or money supply changes and
nothing is done to move the production possibilities curve, we go back to
the original level of output at a different price level.

Blooms: Analyze
81. When the AS curve is vertical, fiscal policy will be
A. Ineffective against both inflation and unemployment.
B. Effective against inflation but not unemployment.
C. Effective against unemployment but not inflation.
D. Effective against both inflation and unemployment.
Along a vertical portion of the AS curve, if the AD curve adjusts, it will alter
the price level, but the level of output will remain fixed.

Blooms: Analyze
82. The only policy lever that is effective against unemployment when the AS
curve is vertical is
A. Fiscal policy.
B. Monetary policy.
C. Supply-side policy.
D. Laissez faire policy.
Supply-side policy could lead to a shift of the AS curve to the right, which
would return the economy to its potential level of output.
Blooms: Analyze
Difficulty: 1 Easy
83. Which of the following is a basic macro policy strategy?
A. A laissez faire approach.
B. Shifting the aggregate supply curve.
C. Shifting the aggregate demand curve.
D. All of the choices are correct.
Any of these policies are macro policy strategies. Even a laissez faire
approach, which is "no action," is a potential policy choice.
AACSB: Analytic
Blooms: Remember
84. A laissez faire policy approach during a recession would advocate
A. Noninterference by the government.
B. Increasing AS by funding programs that improve worker skills.
C. Increasing AD by increasing government spending.
D. Increasing both AD and AS.
This would involve a hands-off approach by the government that may or

may not make the economy better. Government failures can occur from
either too much or not enough of government action.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
85. Fiscal policy is the use of
A. Government spending and taxes to alter macroeconomic outcomes.
B. Money and credit controls to alter macroeconomic outcomes.
C. Tax incentives, deregulation, and other mechanisms to increase the

ability and willingness to produce goods and services.
D. Trade policy to alter macroeconomic outcomes.
By spending more or taxing less, the government can increase aggregate

demand to restore full employment during a recession.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
86. International trade and money flows can increase aggregate supply and
aggregate demand if
A. Trade barriers are increased.
B. Trade barriers are reduced.
C. Tariffs are increased.
D. Quotas are increased.
For example, if trade barriers are reduced, the increased imports allow
aggregate supply to increase. Another example would be if money flows
caused the value of the dollar to fall, then U.S. goods would be less
expensive relative to foreign goods, which would increase aggregate
demand.

Blooms: Analyze
87.
Using Figure 8.1, a decrease in the quantity of aggregate demand resulting

from the interest rate effect would be depicted as a movement from point
A. B to point A.
B. A to point C.
C. B to point C.
D. C to point A.
When the interest rate rises because prices have risen, some spending is
reduced since borrowing costs are higher. This is known as the interest rate
effect, which explains why the aggregate demand is downward-sloping.

Blooms: Evaluate
88.
In Figure 8.1, an increase in government spending, ceteris paribus, is best

represented as a movement from point
A. A to point B.
B. C to point A.
C. B to point C.
D. A to point C.
An increase in government spending actually increases aggregate demand,

thereby causing the curve to shift to the right.

Blooms: Evaluate
89.
Using Figure 8.2, a decrease in real output resulting from the profit effect
would be depicted as a movement from point
A. A to point C.
B. B to point A.
C. B to point C.
D. C to point B.
As the price level falls, some costs would remain fixed temporarily, such
that profit would shrink and output would fall along the aggregate supply
curve.
Blooms: Evaluate
90.
In Figure 8.2, an improvement in technology is best represented as a

movement from point
A. A to point B.
B. C to point A.
C. C to point B.
D. B to point A.
An improvement in technology leads to an increase in the AS curve, thereby

shifting the curve to the right.

Blooms: Apply
91.
In Figure 8.2, an increase in the cost of an input in the production process is

best represented as a movement from point
A. A to point B.
B. A to point C.
C. C to point B.
D. B to point A.
An increase in input costs leads to a decrease in AS, thereby causing the

curve to shift to the left.

Blooms: Apply
92.
equilibrium were to occur at an output level of $300 billion and a price level
of P3 in Figure 8.3?
If AD increases while AS remains constant, then the new macro equilibrium
will be at a higher price level and a higher level of output.

Blooms: Analyze
Difficulty: 3 Hard
93.
equilibrium were to occur at an output level of $300 billion and a price level
of P3 in Figure 8.3?
The AS curve must shift to the left, thereby leading to a higher price level
and lower level of output.

Blooms: Analyze
Difficulty: 3 Hard
94.
Macro equilibrium is established at which level of real output, given AD1 and
AS2 in Figure 8.3?
A. $100 billion.
B. $200 billion.
C. $300 billion.
D. $400 billion.
The macro equilibrium occurs at the intersection of the AD and AS curves.

Blooms: Apply
Difficulty: 3 Hard
95.
Macro equilibrium is established at which price level, given AD1 and AS1 in
Figure 8.3?
A. P1.
B. P2.
C. P3.
D. P4.
The AS1 and AD1 curves intersect at an equilibrium price level of P2.

Blooms: Apply
Difficulty: 3 Hard
96.
Given AD2 and AS1, the equilibrium price level in Figure 8.3 is
A. P1.
B. P2.
C. P3.
D. P4.
The equilibrium price level can be found along the vertical axis
corresponding to the intersection of the AD and AS curves.

Blooms: Apply
Difficulty: 3 Hard
97.
Given AD1 and AS1, if the average price level in Figure 8.3 were at P3,
A. A surplus would exist initially.
B. The aggregate quantity demanded would exceed the aggregate quantity

supplied.
C. The average price level would rise.
D. The equilibrium price level would be P3.
A surplus would exist at price level P3. The output produced exceeds the
amount purchased, thereby leading to large pileups in inventory and
eventually causing the price level to fall.
Blooms: Analyze
Difficulty: 3 Hard
98.
Given AD1 and AS1 in Figure 8.3, the classical approach to achieving full
employment at an output of $300 billion would be to
A. Increase taxes and increase government spending to shift AD1 to AD2.
B. Increase the growth of the money supply to shift AD1 to AD2.
C. Do nothing and wait for "natural" market forces to achieve full

employment.
D. Use all available supply-side options.
The idea is that the economy would self-correct and restore full-
employment output through a natural adjustment of the price level and AS
shifting to the right.

Blooms: Analyze
Difficulty: 3 Hard
99.
Given AD1 and AS1 in Figure 8.3, the Keynesian approach to achieving a
higher level of output would be to
A. Impose price controls.
B. Increase the growth of the money supply to shift AS1 to AS2.
C. Do nothing.
D. Employ an expansionary fiscal policy.
Either cutting taxes or increasing government spending would restore the

full-employment level of output.
Blooms: Analyze
Difficulty: 3 Hard
100.
A supply-side policy approach in Figure 8.3, given AD1 and AS1, to achieve
both lower prices and more output would be to
A. Increase the growth of the money supply.
B. Reduce marginal tax rates and government regulation in an effort to

move AS1 to AS2.
C. Wait until natural market forces establish full employment.
D. Increase aggregate spending.
If regulations and taxes are reduced, individuals and businesses will be

encouraged to produce more, thus increasing aggregate supply.
Blooms: Analyze
Difficulty: 3 Hard
101.
At what price level does equilibrium occur in Figure 8.4?
A. P1.
B. P2.
C. P3.
D. P4.
The equilibrium price level corresponds to the point along the vertical axis
where the AS and AD curves intersect.

Blooms: Apply
102.
At which of the following price levels would a shortage occur in Figure 8.4?
A. P1.
B. P2.
C. P3.
D. P4.
At any price level below the equilibrium price level, P2, there will be a
shortage of production in the economy.

Blooms: Analyze
103.
Using Figure 8.5, if the equilibrium real output is Q2 then
A. Aggregate demand must be AD1.
B. Aggregate demand could be either AD1 or AD2 depending on the level of

aggregate supply.
C. The equilibrium price level is P2.
D. Aggregate supply must be AS1 and the equilibrium price level must be P1.
At an output of Q2, the equilibrium price level could be either P1 or P3,

depending on AD and AS.
Blooms: Evaluate
Difficulty: 3 Hard
104.
In Figure 8.5, according to Keynesians, if equilibrium real output is Q1 and

full-employment real output is Q2, an appropriate fiscal policy lever would
be to
A. Increase AD by increasing income taxes.
B. Increase AD by increasing government spending.
C. Increase AS by reducing government regulations.
D. Reduce AS by tightening air pollution standards to improve air quality.
A shift of the AD curve to the right would restore full employment at price
level P3.
Blooms: Evaluate
Difficulty: 3 Hard
105.
In Figure 8.5, if equilibrium real output is Q1 and full-employment real

output is Q2, an appropriate monetarist policy lever would be to increase
A. AD by decreasing income taxes.
B. AS by increasing the money supply.
C. AD by reducing interest rates.
D. AD by reducing government regulations.
If interest rates are lowered, consumption spending will rise on big-ticket

items, and businesses will invest more.
Blooms: Evaluate
Difficulty: 3 Hard
106.
equilibrium price level is P3, one way to accomplish this using fiscal policy
would be to
A. Decrease AD by decreasing income taxes.
B. Decrease AS by decreasing the money supply.
C. Decrease AD by reducing transfer payments.
D. Increase AS by reducing government regulations.
If the amount of funds available to households is reduced, AD will decrease,

leading to a lower equilibrium price level.
Blooms: Evaluate
Difficulty: 3 Hard
107.
equilibrium price level is P3, an appropriate monetary policy lever would be
to
A. Decrease AS by increasing the money supply.
B. Decrease AD by increasing interest rates.
C. Decrease AD by increasing income taxes.
D. Increase AS by increasing the money supply.
If interest rates are raised, business investment will decrease and consumer
spending on big-ticket items will fall, leading to a lower price level.
Blooms: Evaluate
Difficulty: 3 Hard
108.
Using Figure 8.5, if the equilibrium price level is P1, then aggregate demand
is
A. AD2, and the equilibrium output level is Q2.
B. AD2, and the equilibrium output level is Q1.
C. AD1, and the equilibrium output level is Q3.
D. AD1, and the equilibrium output level is Q2.
At price level P1, the AD1 curve intersects the AS1 curve with an equilibrium
output of Q2.
Blooms: Evaluate
Difficulty: 3 Hard
109.
occur in each situation in the United States: OPEC raises the price of its oil
significantly. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
If the price of oil (the cost of an important input in production) rises, AS will
decrease.

Blooms: Apply
Difficulty: 3 Hard
110.
occur in each situation in the United States: A technological breakthrough
significantly reduces the cost of computerizing production lines. (See Figure
8.6.)
A. A.
B. B.
C. C.
D. D.
Any technological advance that reduces the cost of production will increase
aggregate supply, thereby shifting the curve to the right.

Blooms: Apply
Difficulty: 3 Hard
111.
occur in each situation in the United States: Between 1995 and 2000, the
stock market's value increased significantly, adding billions of dollars to the
wealth of U.S. households and businesses. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
An increase in wealth will lead to an increase in AD, thereby shifting the

curve to the right.

Blooms: Apply
Difficulty: 3 Hard
112.
occur in each situation in the United States: On October 24, 1929, the U.S.
stock market crashed. By the end of the year, over $40 billion of wealth had
vanished. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
The large drop in the value of financial assets caused households to

significantly reduce spending, thereby causing the AD curve to shift to the
left.

Blooms: Apply
Difficulty: 3 Hard
113.
occur in each situation in the United States: Between 1930 and 1935,
millions of U.S. farm families lost their farms, and less output was produced
by the remaining farms. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
With less use of available farmland, AS will decrease, thereby shifting the
curve to the left.

Blooms: Apply
Difficulty: 3 Hard
114.
occur in each situation in the United States: During the Great Depression,
most other countries suffered similarly long and deep losses of output and
employment, which in turn meant fewer purchases of U.S. goods and
services. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
The drop in overseas income resulted in foreigners purchasing fewer

American-made products, leading to a drop in U.S. exports and a decrease
in aggregate demand.

Blooms: Apply
Difficulty: 3 Hard
115.
occur in each situation in the United States: During World War II, the U.S.
government spent huge amounts of money to fund the war effort. (See
Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
An increase in government spending leads to an increase in AD, thereby

shifting the curve to the right.

Blooms: Apply
Difficulty: 3 Hard
116.
occur in each situation in the United States: When the economy overheated,
the U.S. government cooled it down with higher taxes, spending reductions,
and less money. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
Higher taxes reduce the available funds for households, thereby causing a
decrease in consumption spending and a leftward shift of the AD curve. A
decrease in government spending leads to a decrease in AD. Finally, a
tighter money supply causes interest rates to increase, which results in
business investment decreasing and consumer spending falling, which also
cause AD to decrease.

Blooms: Apply
Difficulty: 3 Hard
117.
occur in each situation in the United States: In 2001 interest rates dropped
to 40-year lows, which decreased the cost of borrowing for consumers. (See
Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
Lower interest rates lead to additional consumption and business

investment on big-ticket items, which tend to be financed, causing AD to
increase.

Blooms: Apply
Difficulty: 3 Hard
118.
occur in each situation in the United States: During the late 1990s,
productivity in many U.S. industries increased because of technological
advances. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
Improvements in technology result in a rightward shift of the AS curve.

Blooms: Apply
Difficulty: 3 Hard
119.
occur in each situation in the United States: The value of the dollar
plummeted in international currency markets, causing foreigners to buy
more American goods. (See Figure 8.6.)
A. A.
B. B.
C. C.
D. D.
A devalued dollar makes U.S. goods less expensive and foreign goods more
expensive. These changes cause exports to rise and imports to fall, thereby
shifting the AD curve to the right.

Blooms: Apply
Difficulty: 3 Hard
120.
to cause
Along the horizontal portion of the AS curve, an increase in AD leads to an

increase in output but no change in the price level.

Blooms: Apply
121.
to cause
Along the vertical portion of the AS curve, an increase in AD leads to an

increase in the price level but no change in output.

Blooms: Apply
122.
Assuming full employment is at the intersection of AD3 with the aggregate

supply curve for the economy depicted in Figure 8.7, the worst
unemployment problem would exist when AD is located at
A. AD1.
B. AD2.
C. AD3.
D. AD5.
At AD1, the output will be far below that of full employment, resulting in high
levels of unemployment.
Blooms: Analyze
123. One World View article titled "Global Depression" states, "The Great
Depression wasn't confined to the U.S. economy." This implies that many
other countries
A. Were producing inside their production possibilities curves.
B. Were producing on their production possibilities curves.
C. Experienced an increase in real GDP.
Many countries, most notably Germany, were producing far below their
production possibilities during the Great Depression.

Blooms: Apply
Topic: WORLD VIEW
124. One World View article is titled "Global Depression." The countries that
experienced the Depression
A. Experienced GDP growth but at a rate below the long-term trend.
B. Experienced higher employment levels than previously recorded.
C. Suffered substantial losses of output and employment.
D. Experienced high unemployment but an increase in output.
With output far below the production possibilities curve, countries during
the Great Depression experienced high unemployment and huge amounts of
forgone production.

Blooms: Apply
Topic: WORLD VIEW
125. One In the News article titled "Economy: Sharpest Decline in 26 Years"
states that
A. Real GDP fell by 6.8 percent in the last quarter of 2007.
B. Real GDP fell by 3.8 percent in the last quarter of 2008.
C. The drop in real GDP in 2008 was the greatest in 50 years.
D. The drop in real GDP in 2008 was the greatest since the Great
Depression.
Real GDP fell at an annual rate of 3.8 percent in the last quarter of 2008.
This was the largest drop in real GDP since the first quarter of 1982.

Blooms: Apply
Topic: IN THE NEWS
126. The laissez faire view of government involvement in the economy is most
consistent with the
A. Classical theory.
B. Keynesian theory.
C. Monetary theory.
D. Supply-side theory.
According to classical theory, there is little or no need for government

involvement in the economy; and if the market left alone, it will adjust on its
own to the optimal outcome.
AACSB: Analytic
Blooms: Understand
127. During the Great Depression, this group of economists assured everyone
that the setbacks in production and employment were temporary and would
soon vanish:
A. Supply-side economists.
B. Classical economists.
C. Keynesian economists.
D. Monetarist economists.
The idea that the economy self-adjusts in a short period of time to restore
full employment and production is a cornerstone of classical theory.
AACSB: Analytic
Blooms: Understand
128. The determinants of macro outcomes include all of the following except
A. Internal market forces.
B. External shocks.
C. Prices.
D. Policy levers.
Macro outcomes such as output, jobs, prices, growth, and international

balances are determined by internal market forces, external shocks, and
policy levers.
AACSB: Analytic
Blooms: Understand
129. Internal market forces include all of the following except
B. Spending behavior.
C. Innovation.
D. Trade disruptions.
Trade disruptions are an external shock, not an internal market force.
AACSB: Analytic
Blooms: Understand
130. Two potential problems with macro equilibrium are
A. Undesirability and instability.
B. The profit effect and the real balance effect.
C. External shocks and policy levers.
D. Multiple shifts to AS and AD.
Macro equilibrium may be short-lived and may or may not occur at full
employment and acceptable inflation levels.
AACSB: Analytic
Blooms: Understand
131. The growth path of the US economy is considered to be
A. Smooth and predictable.
B. Consistent and reliable.
C. Old and steady.
D. Stumbles and setbacks.
The growth path of the US economy is not a smooth-rising trend but a

series of steps, stumbles, and setbacks.

Blooms: Understand
Difficulty: 1 Easy
132. Cost pressures are most intense
A. At low rates of output.
B. When unemployment falls.
C. As the economy approaches capacity.
Cost pressures are minimal at low rates of output but intense as the
economy approaches capacity.

Blooms: Understand
Difficulty: 1 Easy
133. Current buyers' and sellers' behaviors are correctly expressed by
A. One set of aggregate supply and demand curves.
B. Multiple sets of aggregate supply and demand curves.
C. Many sets of aggregate supply and demand curves.
A graph will illustrate one set of aggregate supply and demand curves to
correctly express current buyers' and sellers' behaviors.

Blooms: Understand
Difficulty: 1 Easy
True / False Questions
134. According to the classical view, the economy will not self-adjust to
deviations from its long-term growth trend.
FALSE
The classical view holds that the economy will self-adjust to its long-term
trend.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
135. Keynes believed that a market-driven economy was inherently unstable.
TRUE
Keynes urged government to intervene to maintain full employment during

periods of economic downturn.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
136. An economic expansion refers to an increase in the volume of goods and
services produced.
TRUE
During an economic expansion, GDP rises and unemployment falls.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
137. During a recession, real output actually falls.
TRUE
Real GDP falls during a recession, and unemployment rises.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
138. Changes in the availability of money have little impact on the macro
performance of the economy.
FALSE
Changes in the supply of money lead to changes in interest rates that

influence aggregate demand and therefore output and the price level.
AACSB: Analytic
Blooms: Remember
139. Keynes argued that policy levers were both effective and necessary.
TRUE
Keynesian theory holds that policy levers such as taxes can be used to
maintain output close to full employment.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
140. Business cycles result from recurrent shifts of the aggregate supply and
demand curves.
TRUE
Assuming that neither the AD or AS line is vertical, if AD or AS shifts, the

economy's output will change.
AACSB: Analytic
Blooms: Understand
141. The quantity of real output supplied rises as the price level rises, ceteris
paribus.
TRUE
There is a direct and positive relationship between the price level and the
economy's output.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
142. The profit effect occurs because, in the short run, resource costs typically
do not increase as rapidly as the price of goods and services.
TRUE
Some costs, like labor contracts or rents, do not immediately increase when
the price level rises.

Blooms: Analyze
Difficulty: 1 Easy
143. Equilibrium is unique; it is the only price-output combination that is

mutually compatible with aggregate supply and demand.
TRUE
Macro equilibrium occurs at the intersection of the AS and AD curves.
AACSB: Analytic
Blooms: Understand
144. If the level of prices and output are compatible with both buyers' and
sellers' intentions, then the policy goals are satisfied.
FALSE
Ideally, macro equilibrium occurs at the full-employment level of output, but

this is not always the case.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
145. Both Keynesian and monetarist theories emphasize the potential of

aggregate demand shifts to alter macro outcomes.
TRUE
By altering spending, taxes, or the money supply, we can manipulate the AD

curve.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
146. Supply-side theories of the business cycle focus on how improper
incentives lead to the unwillingness of producers to supply more goods and
services at existing prices.
TRUE
Supply-side theory focuses on lowering taxes and improving infrastructure

to boost supply.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
147. The short-run aggregate supply curve is upward-sloping, while the long-run
aggregate supply curve tends to be vertical.
TRUE
In the long run, the output tends to be constant at the level of full
employment, whereas in the short run it may vary.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
148. In the long run, shifts in the aggregate demand curve affect the price level
but not the level of output.
TRUE
Because the AS curve is vertical in the long run, a change to AD, which
intersects the vertical AS curve at a different point, will result in a change in
the price level only.

Blooms: Analyze
Essay Questions
149. What are the differences between classical theory and what Keynes
believed?
Classical theory asserts that a market economy is inherently stable. Wages

and prices are assumed to be flexible, resulting in an automatic adjustment
to full-employment equilibrium. Thus classical economists believe in a
doctrine of laissez faire nonintervention by the government. Keynes
challenged classical theory. He said a market economy is inherently
unstable. Disturbances in the economy are likely to be magnified, and
government intervention is required to restore full-employment equilibrium.

Blooms: Analyze
Difficulty: 3 Hard
150. What are the different phases of the business cycle, and how are
production and employment affected in each phase?
The business cycle is alternating periods of economic growth and

contraction. During a period of growth the economy expands, production
increases, and unemployment declines. The growth phase reaches a peak,
and the economy then begins to contract; production decreases, and
unemployment increases. The contraction ends in a trough, and the
economy starts to expand again. The cycle looks like a roller coaster track.

Blooms: Evaluate
151. What is the real balances effect, and how does it explain the shape of the
The real balances effect has to do with the inverse relationship between the
price level and the quantity demanded of real output. As the price level falls,
the real value of cash balances increases. Each dollar actually buys more
output. As the purchasing power increases, the demand for real output
increases. This inverse relationship is one of the effects that causes the
aggregate demand curve to slope downward.

Blooms: Analyze
Difficulty: 3 Hard
152. What is the foreign trade effect, and how does it explain the shape of the
The foreign trade effect helps explain the inverse relationship between the
price level and the quantity demanded of real output. As the U.S. price level
falls, U.S. goods become cheaper for foreigners to buy. As foreigners buy
more U.S. goods, exports increase, which contributes to an increase in GDP
or real output. In addition, as the U.S. price level falls, domestic goods
become cheaper for U.S. consumers relative to imports. As U.S. consumers
buy more domestic goods, this also contributes to an increase in GDP or
real output. This inverse relationship contributes to the downward slope of
the aggregate demand curve.

Blooms: Analyze
153. Is equilibrium always at an optimal level of output? Explain your answer.
No. Equilibrium is a unique combination of output and price level at which

aggregate demand equals aggregate supply. But this equilibrium may not be
consistent with the macro goal of full employment. Equilibrium may occur at
an output level above full employment or below full employment. An
economy that is in an undesired equilibrium is like a person with an
infection that causes a high fever. Because of the infection, the body
maintains an undesirable equilibrium at a body temperature that is above
the normal 98.6 degrees. The body will not return to this desired normal
temperature until it cures itself (in a sort of laissez faire) or receives
medical help (in a sort of Keynesian approach). That is where the debate
occurs in dealing with a stable but undesired anatomy or economy.

Blooms: Analyze
Difficulty: 3 Hard
154. Why does the slope of the aggregate supply curve change from the short
run to the long run?
In the short run, the aggregate supply curve is upward-sloping because

rising prices cause profits to increase, and this induces producers to supply
more output. In the long run, costs begin to rise along with the rising prices,
and the profit incentive no longer exists. As a result, the long-run aggregate
supply curve is vertical at the full-employment level of output.

Blooms: Analyze
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L/5659 Dumbleton, A. J.
G/21495 Dumbrell, A. G.
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G/1982 Flynn, F.
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Macro Economy Today 13th Edition

Schiller Test Bank

Macro Economy Today 13th Edition Schiller Solutions

Macro Economy Today 14th Edition Schiller Test Bank

Macro Economy Today 14th Edition Schiller Solutions

Economy Today 13th Edition Schiller Test Bank

Economy Today 14th Edition Schiller Test Bank

Economy Today 15th Edition Schiller Test Bank

Micro Economy Today 14th Edition Schiller Test Bank

Economy Today 14th Edition Schiller Solutions Manual

The Business Cycle

Multiple Choice Questions

A. Families lost their farms.

B. Automobile production fell.

C. The stock market crashed.

D. Unemployment reached 50 percent.

2. The study of aggregate economic activity for the economy as a whole is

B. The business cycle.

4. According to classical theory,

D. Business cycles are not relevant and do not occur.

D. Investment and government demand would increase, and the economy

6. Based on the classical view,

A. Unemployment never occurs.

B. Cyclical unemployment might occur temporarily.

C. All goods produced are always purchased at an unchanging price.

D. Persistent unemployment might be a problem.

A. And wages both rise.

B. And wages both fall.

C. Rise and wages drop.

D. Drop and wages rise.

A. Are typically self-adjusting.

B. Are inherently unstable.

C. Require government intervention.

D. Are always in long-run equilibrium.

9. Say's Law states that

A. Supply creates its own demand.

B. Shifts of either supply or demand can achieve a given market equilibrium.

D. Increased prices lead to increased supply.

A. Falling price levels appeared to limit an increase in unemployment.

B. Periods of high unemployment tended to be brief.

C. Say's Law seemed to work.

D. Government intervention was commonly used to stimulate the economy.

A. The economy was inherently unstable.

B. Laissez faire policies would lead to macro equilibrium.

C. Prices and wages were flexible.

D. Markets would naturally self-adjust.

A. President Herbert Hoover.

C. John Maynard Keynes.

A. Buying more output.

B. Employing more people.

C. Making more money available.

A. Practice a laissez faire policy approach.

B. Provide more dollars for unemployment benefits.

C. Make more money available.

D. Buy more output.

A. Employ more people.

D. Practice laissez faire policies.

A. Decrease government purchases.

C. Make more money available.

D. Employ more people.

A. They are remarkably similar in length but vary greatly in intensity.

B. They vary greatly in length, frequency, and intensity.

C. They are similar in frequency and intensity but not in length.

D. They are similar in length, frequency, and intensity.