Sample Questions and Answers
The marginal propensity to save (MPS) is:
A) The change in savings divided by the change in income
B) The change in consumption divided by the change in income
C) The total savings in the economy divided by income
D) The total consumption in the economy divided by income
Answer: A
In the IS-LM model, a decrease in government spending will:
A) Shift the IS curve to the right
B) Shift the IS curve to the left
C) Shift the LM curve to the right
D) Shift the LM curve to the left
Answer: B
The Phillips curve shows the relationship between:
A) Inflation and government spending
B) Unemployment and inflation
C) Interest rates and investment
D) The money supply and the price level
Answer: B
The aggregate supply curve is upward sloping in the:
A) Short run
B) Long run
C) Very short run
D) Very long run
Answer: A
According to the Keynesian cross model, an increase in autonomous spending leads to:
A) A decrease in national income
B) No change in national income
C) An increase in national income
D) A decrease in output
Answer: C
The long-run Phillips curve is:
A) Vertical
B) Horizontal
C) Upward sloping
D) Downward sloping
Answer: A
A negative supply shock, such as an increase in oil prices, will likely:
A) Increase output and lower prices
B) Increase output and increase prices
C) Decrease output and increase prices
D) Decrease output and decrease prices
Answer: C
The Keynesian multiplier is larger when:
A) The marginal propensity to consume is smaller
B) The marginal propensity to consume is larger
C) The interest rate is high
D) The interest rate is low
Answer: B
A decrease in interest rates will likely:
A) Reduce consumption and investment
B) Increase consumption and investment
C) Increase taxes
D) Increase the price level
Answer: B
The central bank can affect aggregate demand by changing:
A) The money supply
B) The level of government spending
C) The level of taxation
D) The budget deficit
Answer: A
The classical dichotomy suggests that:
A) Monetary policy affects both real and nominal variables in the short run
B) In the long run, monetary policy affects only nominal variables
C) Fiscal policy is the most effective tool for stabilizing the economy
D) Government spending has no effect on output
Answer: B
If the government increases spending by $500 billion and the marginal propensity to consume is 0.8, the total increase in GDP will be:
A) $2,500 billion
B) $2,000 billion
C) $500 billion
D) $400 billion
Answer: A
The aggregate demand curve is downward sloping because:
A) Higher price levels reduce the purchasing power of money
B) A higher price level leads to higher interest rates
C) An increase in government spending shifts the demand curve to the left
D) Lower price levels lead to increased output
Answer: A
In the long run, the economy will tend to:
A) Reach full employment
B) Experience higher inflation
C) Have a fixed level of output
D) Continue to experience fluctuations
Answer: A
According to the Solow growth model, the long-run economic growth rate is determined by:
A) Capital accumulation alone
B) The money supply
C) Technological progress
D) Government spending
Answer: C
The main limitation of fiscal policy in stabilizing the economy is:
A) The slow response time due to delays in legislative action
B) The effect of changes in the money supply on aggregate demand
C) The short-term nature of changes in the interest rate
D) The permanent increase in government debt
Answer: A
The effect of an increase in the money supply on the interest rate is:
A) Interest rates decrease because there is more money in circulation
B) Interest rates increase because of higher demand for loans
C) The money supply does not affect interest rates
D) Interest rates remain unchanged due to a perfect market
Answer: A
If the economy is at full employment and the government increases spending, it will most likely lead to:
A) A rightward shift of the short-run aggregate supply curve
B) An increase in both output and prices
C) A decrease in prices and an increase in output
D) A decrease in output and an increase in inflation
Answer: B
Which of the following is a characteristic of a Keynesian economics view?
A) The economy will always self-correct
B) Aggregate demand can be influenced by government policy
C) Prices and wages are flexible in the short run
D) The government should avoid intervening in the market
Answer: B
An increase in the price of oil will likely lead to:
A) A shift in the aggregate supply curve to the right
B) A shift in the aggregate supply curve to the left
C) An increase in aggregate demand
D) A decrease in the price level
Answer: B
The Taylor Rule is used to:
A) Predict the inflation rate
B) Guide monetary policy based on inflation and output deviations
C) Set tax rates
D) Determine government spending levels
Answer: B
According to the IS-LM model, an increase in taxes shifts the IS curve:
A) To the right
B) To the left
C) Downward
D) Upward
Answer: B
The long-run aggregate supply curve is vertical because:
A) Prices are fixed in the long run
B) Wages and prices are flexible in the long run
C) The economy will always return to full employment
D) The level of output does not depend on the price level
Answer: D
If the economy is operating below full employment, the central bank might:
A) Increase the money supply to stimulate aggregate demand
B) Decrease the money supply to reduce inflation
C) Increase taxes to reduce the deficit
D) Cut government spending to reduce inflation
Answer: A
The spending multiplier is greater when:
A) The marginal propensity to consume is higher
B) The interest rate is higher
C) Government spending is low
D) Investment is low
Answer: A
If the central bank buys government bonds in the open market, this will:
A) Increase the money supply and lower interest rates
B) Decrease the money supply and raise interest rates
C) Raise the money supply and raise interest rates
D) Decrease the money supply and lower interest rates
Answer: A
In the long run, fiscal policy is likely to:
A) Be effective in influencing aggregate demand
B) Have no impact on output
C) Affect the price level but not output
D) Change the natural rate of output
Answer: B
The classical view of the economy suggests that:
A) Prices are sticky in the short run
B) The economy is self-adjusting and can reach full employment without government intervention
C) Aggregate demand is always the most important determinant of output
D) Fiscal policy is essential for long-run growth
Answer: B
The quantity theory of money suggests that:
A) Money supply does not affect inflation
B) An increase in the money supply will increase the price level
C) Interest rates are unrelated to the money supply
D) The central bank has no influence on the economy
Answer: B
A decrease in the marginal propensity to consume will lead to:
A) A larger multiplier effect
B) A smaller multiplier effect
C) An increase in government spending
D) An increase in aggregate demand
Answer: B
In the short run, a decrease in government spending will:
A) Increase national income
B) Decrease national income
C) Increase the price level
D) Decrease the money supply
Answer: B
The IS curve represents the relationship between:
A) The interest rate and the level of investment
B) The interest rate and the level of output in the goods market
C) Aggregate demand and supply
D) The money supply and the price level
Answer: B
A recessionary gap occurs when:
A) Actual output exceeds potential output
B) Aggregate demand is greater than aggregate supply
C) The economy is in a period of inflation
D) Actual output is less than potential output
Answer: D
According to the real business cycle theory, economic fluctuations are primarily caused by:
A) Changes in consumer confidence
B) Changes in monetary policy
C) Technological shocks
D) Changes in government spending
Answer: C
If a country’s currency depreciates, this will likely:
A) Increase exports and decrease imports
B) Decrease exports and increase imports
C) Increase the price level
D) Have no effect on the economy
Answer: A
In the Solow model, the steady-state level of output is determined by:
A) Capital, labor, and technology
B) The level of government spending
C) The price level
D) The money supply
Answer: A
According to the liquidity preference theory, the demand for money depends on:
A) The level of output and interest rates
B) The price level only
C) The level of government spending
D) The supply of money
Answer: A
A decrease in the price level is likely to:
A) Increase the demand for money
B) Lower interest rates and increase investment
C) Decrease aggregate demand
D) Increase the money supply
Answer: B
In the long run, the economy will return to its natural level of output due to:
A) Changes in the money supply
B) The self-correcting nature of wages and prices
C) Government intervention
D) Changes in aggregate demand
Answer: B
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