Deck 12: Policy Effects and Cost Shocks in the Asad Model

Question 1

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. Suppose the economy is at Point A, an increase in the price level can cause a movement to Point

A) E.
B) B.
C) C.
D) D.

Answer 1

A

Question 2

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. An aggregate demand shift from AD¹ to AD⁰ can be caused by

A) a decrease in government spending.
B) an increase in money supply.
C) a decrease in the price level.
D) an increase in the price level.

Answer 2

A

Question 3

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. Suppose the economy is at Point A, a decrease in the price level can cause a movement to Point

A) E.
B) B.
C) C.
D) D.

Answer 3

D

Question 4

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. Suppose the economy is at Point A. An increase in taxes can cause a movement to Point

A) E.
B) B.
C) C.
D) D.

Question 5

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. An aggregate demand shift from AD² to AD⁰ can be caused by

A) a decrease in the price level.
B) an increase in the price level.
C) a decrease in taxes.
D) a decrease in money supply.

Question 6

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. Suppose the economy is at Point A an increase in government purchases can cause a movement to Point

A) E.
B) B.
C) C.
D) D.

Question 7

Aggregate demand increases if

A) the government decreases spending.
B) the Fed sells government bonds.
C) the government decreases taxes.
D) the Fed increases the required reserve ratio.

Question 8

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. Suppose the economy is at Point A, a decrease in taxes can cause a movement to Point

A) E.
B) B.
C) C.
D) D.

Question 9

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. An aggregate demand shift from AD² to AD¹ can be caused by

A) a decrease in the price level.
B) an increase in the price level.
C) a decrease in taxes.
D) a decrease in money supply.

Question 10

Which of the following is an example of an expansionary fiscal policy?

A) the Fed selling government securities in the open market
B) the federal government increasing the marginal tax rate on incomes above $200,000
C) the federal government increasing the amount of money spent on public health programs
D) the federal government reducing pollution standards to allow firms to produce more output

Question 11

Aggregate demand increases if

A) the government increases spending.
B) the Fed sells government bonds.
C) the government increases taxes.
D) the Fed raises the discount rate.

Question 12

Fiscal policy affects the goods market through

A) changes in money supply.
B) changes in taxes and money supply.
C) changes in government spending and money supply.
D) changes in taxes and government spending.

Question 13

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. Suppose the economy is at Point A. A(n) ________ can cause a movement to Point E.

A) increase in the price level
B) decrease in the price level
C) decrease in aggregate demand
D) increase in aggregate demand

Question 14

The aggregate demand curve would shift to the left if

A) government spending were increased.
B) net taxes were increased.
C) the money supply were increased.
D) the cost of energy were to decrease.

Question 15

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. Suppose the economy is at Point A. A(n) ________ can cause a movement to Point B.

A) increase in government purchases
B) decrease in government purchases
C) decrease in aggregate demand
D) increase in aggregate demand

Question 16

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. An aggregate demand shift from AD¹ to AD² can be caused by

A) an increase in government spending.
B) a decrease in money supply.
C) an increase in the price level.
D) a decrease in the price level.

Question 17

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. Suppose the economy is at Point A. A(n) ________ can cause a movement to Point D.

A) increase in the price level
B) decrease in the price level
C) decrease in aggregate demand
D) increase in aggregate demand

Question 18

A decrease in net taxes at a given price level leads to

A) no change in aggregate demand.
B) an increase in aggregate demand.
C) a decrease in aggregate demand.
D) a decrease in aggregate supply.

Question 19

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. Suppose the economy is at Point A, a decrease in government purchases can cause a movement to Point

A) E.
B) B.
C) C.
D) D.

Question 20

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. Suppose the economy is at Point A a(n) ________ can cause a movement to Point C.

A) increase in government purchases
B) decrease in government purchases
C) decrease in aggregate demand
D) increase in aggregate demand

Question 21

If a decrease in net taxes in the United States resulted in a very large increase in aggregate output and a very small increase in the price level, then the U.S. economy must have been

A) on the very steep part of the short-run aggregate supply curve.
B) on the very flat part of the short-run aggregate supply curve.
C) on the very steep part of the short-run aggregate demand curve.
D) on the very flat part of the short-run aggregate demand curve.

Question 22

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. Firms respond to a decrease in net taxes by mostly raising their prices when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) AD₆ to AD₁.

Question 23

The objective of an expansionary fiscal policy is to

A) reduce unemployment.
B) reduce inflation.
C) reduce growth in output.
D) reduce growth in international trade.

Question 24

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. In response to a decrease in net taxes, the Fed would increase the interest rate by the least amount when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) AD₁ to AD₆.

Question 25

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. An expansionary fiscal policy would be least effective in raising output with little or no inflation when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) AD₁ to AD₆.

Question 26

An increase in government spending will completely crowd out investment if

A) money supply is increased at the same time.
B) money demand is not sensitive to the interest rate.
C) the economy is operating at capacity.
D) the economy is operating well below capacity.

Question 27

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. Planned investment would experience the greatest amount of crowding out when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) The amount of crowding out is the same for all AD curve shifts shown in the figure.

Question 28

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. The tax multiplier is largest (in absolute value) when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) The output multiplier is the same for all AD curve shifts shown in the figure.

Question 29

The objective of a contractionary fiscal policy is to

A) reduce unemployment.
B) increase growth in output.
C) reduce inflation.
D) increase stagflation.

Question 30

The Fed will raise the interest rate by the greatest amount when the economy is on the ________ part of the AS curve and there is ________.

A) flat; a decrease in taxes
B) flat; an increase in taxes
C) steep; a decrease in taxes
D) steep; an increase in taxes

Question 31

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. An expansionary fiscal policy would be most effective in raising output with little or no inflation when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) AD₁ to AD₆.

Question 32

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. Firms respond to an increase in government spending by mostly increasing output when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) AD₆ to AD₁.

Question 33

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. The tax multiplier is smallest (in absolute value) when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) The output multiplier is the same for all AD curve shifts shown in the figure.

Question 34

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. Firms respond to an increase in government spending by mostly raising their prices when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) AD₆ to AD₁.

Question 35

If the economy is on the steep portion of the AS curve and taxes decrease, ________ crowds out ________.

A) consumption; planned investment
B) government spending; planned investment
C) planned investment; consumption
D) planned investment; government spending

Question 36

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. The output multiplier is smallest when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) The output multiplier is the same for all AD curve shifts shown in the figure.

Question 37

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. Firms respond to a decrease in net taxes by mostly increasing output when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) AD₆ to AD₁.

Question 38

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. In response to an increase in government spending, the Fed would increase the interest rate by the greatest amount when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) AD₆ to AD₁.

Question 39

If the economy is on the flat portion of the AS curve,

A) there is little crowding out of planned investment.
B) there is almost complete crowding out of planned investment.
C) consumption, but not government spending, crowds out planned investment.
D) government spending, but not consumption, crowds out planned investment.

Question 40

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. The output multiplier is largest when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) The output multiplier is the same for all AD curve shifts shown in the figure.

Question 41

If the economy is operating at capacity, an increase in government spending will ________ investment.

A) minimally crowd out
B) partially crowd out
C) completely crowd out
D) have no crowding-out effect on

Question 42

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. In response to a decrease in net taxes, the Fed would increase the interest rate by the greatest amount when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) AD₆ to AD₁.

Question 43

If the economy is on the steep portion of the AS curve,

A) there is little crowding out of planned investment.
B) there is almost complete crowding out of planned investment.
C) consumption, but not government spending, crowds out planned investment.
D) government spending, but not consumption, crowds out planned investment.

Question 44

When aggregate supply is vertical, economic policies concerning output are

A) largely effective.
B) marginally effective.
C) ineffective.
D) completely effective.

Question 45

If the government increases taxes, the

A) aggregate demand increases.
B) aggregate demand decreases.
C) aggregate supply increases.
D) aggregate supply decreases.

Question 46

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

A) an increase in the money supply
B) an increase in government spending
C) an increase in taxes
D) an increase in exports

Question 47

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. Planned investment would experience the least amount of crowding out when the aggregate demand curve shifts from

A) AD₁ to AD₂.
B) AD₃ to AD₄.
C) AD₅ to AD₆.
D) The amount of crowding out is the same for all AD curve shifts shown in the figure.

Question 48

When the economy is not producing at capacity, economic policies are

A) effective at changing output.
B) ineffective at changing output.
C) unrelated to output.
D) none of the above

Question 49

The Fed will raise the interest rate by the greatest amount when the economy is on the ________ part of the AS curve and there is ________.

A) flat; a decrease in government spending
B) flat; an increase in government spending
C) steep; a decrease in government spending
D) steep; an increase in government spending

Question 50

Economic policies are ineffective concerning quantities of output directly when

A) the aggregate supply curve is flat.
B) the aggregate demand is flat.
C) the aggregate supply is vertical.
D) the economy is not producing at capacity.

Question 51

If an increase in net taxes in the United States resulted in a very large decrease in aggregate output and a very small decrease in the price level, then the U.S. economy must have been

A) on the very steep part of the short-run aggregate supply curve.
B) on the very flat part of the short-run aggregate supply curve.
C) on the very steep part of the short-run aggregate demand curve.
D) on the very flat part of the short-run aggregate demand curve.

Question 52

Which of the following is an example of a contractionary fiscal policy?

A) the Fed buying government securities in the open market
B) the federal government decreasing the marginal tax rate on incomes below $200,000
C) the federal government decreasing the amount of money spent on public health programs
D) the federal government reducing pollution standards to allow firms to produce more output

Question 53

If the economy is on the steep portion of the AS curve and government spending increases, ________ crowds out ________.

A) consumption; planned investment
B) government spending; planned investment
C) planned investment; consumption
D) planned investment; government spending

Question 54

An increase in net taxes at a given price level leads to

A) no change in aggregate demand.
B) an increase in aggregate demand.
C) a decrease in aggregate demand.
D) an increase in aggregate supply.

Question 55

If wages adjust fully to price increases in the long run, the full effect of fiscal policy is on

A) output.
B) the price level.
C) both output and the price level.
D) neither output nor the price level.

Question 56

The aggregate demand curve would shift to the right if

A) government spending were decreased.
B) net taxes were decreased.
C) the money supply were decreased.
D) the cost of energy were to increase.

Question 57

Economic policies are effective at changing output when

A) the economy is not producing at capacity.
B) the economy is producing at its potential output.
C) the unemployment rate is at the natural rate.
D) the aggregate supply curve is vertical.

Question 58

Fiscal policy affects the ________ market through changes in taxes and government spending.

A) money
B) goods
C) federal funds
D) bond

Question 59

If wages adjust fully to price increases in the long run, fiscal policy will

A) have no affect on the price level.
B) have no affect on output.
C) have no affect on either output or the price level.
D) affect both output and the price level.

Question 60

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

A) depends on the price level.
B) is one.
C) is zero.
D) is infinitely large.

Question 61

If the economy is on the flat part of the aggregate supply curve, expansionary fiscal policy works well to increase output with little increase in the price level.

Question 62

If the long-run aggregate supply curve is vertical, fiscal policy will have no effect on the price level.

Question 63

The views of the new classical economists are consistent with a vertical aggregate supply curve in both the short run and the long run.

Question 64

If wages adjust fully to price increases, fiscal policy will have no effect on output in the long run.

Question 65

A decrease in net taxes will result in consumption crowding out planned investment when the economy is on the steep part of the AS curve.

Question 66

An intended goal of contractionary fiscal policy and a tightening of monetary policy is

A) an increase in interest rates.
B) an increase in the price level.
C) a decrease in the unemployment rate.
D) a decrease in the level of aggregate output.

Question 67

An increase in AD will primarily increase the price level when the economy is on the steep part of the AS curve.

Question 68

If the economy is on the flat part of the aggregate supply curve, contractionary fiscal policy works well to decrease the price level with little decrease output.

Question 69

A decrease in net taxation increases aggregate demand.

Question 70

If the long-run aggregate supply curve is vertical, the ________ a change in net taxes on aggregate output in the long run is zero.

A) absolute value of
B) additional tax revenue resulting from
C) multiplier effect of
D) change in government spending based on

Question 71

Expansionary economic policies are things the government can do to decrease aggregate demand or aggregate supply.

Question 72

If wages quickly adjust to price changes, the aggregate supply curve quickly becomes vertical.

Question 73

If the long-run aggregate supply curve is vertical, fiscal policy will have no effect on output.

Question 74

If the economy is on the steep part of the aggregate supply curve, the output multiplier is close to zero.

Question 75

An increase in net taxation increases aggregate supply.

Question 76

When the economy is on the flat part of the AS curve, there is very little crowding out of planned investment.

Question 77

If equilibria below potential output are self-correcting, the economy will spend a great deal of time on the horizontal part of the aggregate supply curve.

Question 78

When the economy is near capacity, the Fed would lower the interest rate in response to an increase in government spending.

Question 79

An increase in AD will primarily increase output when the economy is on the flat part of the AS curve.

Question 80

If the economy is on the steep part of its aggregate supply curve, expansionary policy will mostly increase the price level.