Economics 252 – Revised Review Question Chapter 11

(1) The interest-rate effect suggests that:

(a) a decrease in the price level increases the household’s level of real wealth and buying power.

(b) an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.

(c) an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

(d) an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.

(2) The real-balances effect indicates that:

(a) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending.

(b) a lower price level will decrease the household’s level of real wealth and buying power.

(c) a higher price level will decrease the household’s level of real wealth and buying power.

(d) a higher price level will increase the household’s level of real wealth and buying power.

(3) The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will:

(a) increase the amount of U.S. real output purchased.

(b) increase U.S. imports and decrease U.S. exports.

(c) increase both U.S. imports and U.S. exports.

(d) decrease both U.S. imports and U.S. exports.

(4) Other things being equal, if the national incomes of the major trading partners of the U.S. were to rise, the U.S.:

(a) aggregate demand curve would shift to the right.

(b) aggregate supply curve would shift to the right.

(c) aggregate supply curve would shift to the left.

(d) aggregate demand curve would shift to the left.

(5) Which of the following would not shift the aggregate demand curve?

(a) a change in the price level.

(b) depreciation of the dollar versus other currencies.

(c) an improved outlook for the economy leads to an increased level of investment by the business community.

(d) an increase in personal income tax rates.

(6) If investment increases by $10 billion and the economy’s MPC is 0.8, the aggregate demand curve will shift:

(a) leftward by $40 billion at each price level.

(b) rightward by $10 billion at each price level.

(c) rightward by $50 billion at each price level.

(d) leftward by $20 billion at each price level.

(7) The aggregate supply curve (short-run):

(a) graphs a horizontal line.

(b) is steeper above full employment than below it.

(c) slopes downward to the right.

(d) graphs consumer expenditure against the price level.

(8) A rightward shift in the aggregate supply curve is best explained by an increase:

(a) in business taxes.

(b) in productivity.

(c) in wages and salaries.

(d) in the price of imported resources.

Utilize the following information to answer Questions (9) and (10). An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10, each unit of raw materials $4, and each unit of labor $3.

(9) The per unit cost of production in this economy is:

(a) $0.05.

(b) $0.10

(c) $0.50.

(d) $1.00.

(10) If the per unit cost of raw materials rises from $4 to $8 ans all else remains constant, the per unit cost of production will rise by about:

(a) 100 percent.

(b) 50 percent.

(c) 40 percent.

(d) 30 percent.

(11) Other things being equal, appreciation of the U.S. dollar:

(a) increases aggregate demand in the U.S., and may increase aggregate supply by reducing the prices of imported resources.

(b) increases aggregate demand in the U.S., and may decrease aggregate supply by reducing the prices of imported resources.

(c) decreases aggregate demand in the U.S., and may increase aggregate supply by reducing the prices of imported resources.

(d) decreases aggregate demand in the U.S. and may reduce aggregate supply by increasing the prices of imported resources.

Utilize Figure 1 in answering Questions (12) and (13). Figure 1

(12) In Figure 1, a shift from Aggregate Supply AS(1) to AS(3) might be caused by a(n):

(a) increase in productivity.

(b) increase in the price of imported resources.

(c) decrease in consumer confidence.

(d) decrease in business taxes.

(13) In Figure 1, a shift from Aggregate Supply AS(3) to AS(2) might be caused by an increase in:

(a) business taxes and government regulation.

(b) productivity.

(c) the prices of imported resources.

(d) an increase in consumer confidence.

(14) Other things being equal, a reduction in personal and business taxes can be expected to:

(a) increase aggregate demand and decrease aggregate supply.

(b) increase both aggregate demand and aggregate supply.

(c) decrease both aggregate demand and aggregate supply.

(d) decrease aggregate demand and increase aggregate supply.

(15) Prices and wages tend to be:

(a) flexible both upward and downward.

(b) inflexible both upward and downward.

(c) flexible downward, but inflexible upward.

(d) flexible upward, but inflexible downward.

Utilize the diagrams of Figure 2 to answer Questions (16) to (20).

Figure 2

D

AD

AS(1)

(16) Which of the diagrams in Figure 2 best portrays the effects of an increase in productivity in the economy?

(a) A (b) B (c) C (d) D

(17) Which of the diagrams in Figure 2 best portrays the effects of an increase in income in foreign countries and increased sales to these export markets?

(a) A (b) B (c) C (d) D

(18) Which of the diagrams in Figure 2 best portrays the effects of a decline in consumer confidence in the US?

(a) A (b) B (c) C (d) D

(19) Which of the diagrams in Figure 2 best portrays the effects of an increase in government regulation of the US economy?

(a) A (b) B (c) C (d) D

(20) Which of the diagrams in Figure 2 best portrays the effects of an increased preference for foreign-made products by US consumers?

(a) A (b) B (c) C (d) D