Chapter 12

1. Gross domestic product is best defined as the market value of all final goods and services produced in a
country during a period of time, typically one year.
2. What happens if we measure GDP by adding up the value of every good and service produced in
the economy?
a. GDP is overestimated because of double counting.’
3. An important conclusion to draw from the circular-flow diagram is that we can measure GDP by calculating
the total value of expenditures on final goods and services, or we can measure GDP by calculating the value
of total income.
4. In the circular-flow diagram, who supplies factors of production in exchange for income? Households
5. Which of the following is included in the economist's definition of investment?
a. the purchase of new machines, factories, or houses
6. In calculating GDP, which levels of government spending are included in government purchases?
a. spending by federal, state, and local governments
7. Consumer spending on services is greater than the sum of spending on durable and nondurable goods.
8. Purchases by state and local governments are greater than purchases by the federal government.
9. The difference between the price the firm sells a good for and the price the firm paid other firms for
intermediate goods is called value added.
10. Household production and the underground economy are not accounted for in the Bureau of
Economic Analysis' estimates of GDP.
11. According to most economists, is it a serious shortcoming of GDP that it does not count household
production or production in the underground economy?
a. Most economists would answer "no" because these types of production do not affect the most
important use of the GDP measure, which is to measure changes in total production over short
periods of time.
12. Which of the following is not a shortcoming of GDP as a measure of well-being?
a. GDP only counts final goods and services and not intermediate goods.
13. If Americans still worked 60-hour weeks, as they did in 1890, GDP would be much higher than it  is, but the
well-being of the typical person would not necessarily be higher.
14. Real GDP is the value of goods and services evaluated at base year prices.
15. Over time, prices may change relative to each other. To take this change into account, the Bureau of
Economic Analysis calculates real GDP using chain weights.
16. In an economy with rising prices, compared to the base year, nominal GDP is larger than real GDP in years
after the base year.
17. If the GDP deflator in 2012 has a value of 98.0, then prices have decreased 2 percent between the base year
and 2012.
18. When a significant fraction of domestic production takes place in foreign-owned facilities, a country's
difference between GDP and GNP is as follow – GDP will be much larger than GNP.
19. Which of the following do we subtract from GDP to obtain national income? Depreciation
20. To calculate personal income from national income, which of the following must the BEA do?
a. add government transfer payments
21. Disposable personal income is equal to personal income minus personal tax payments.
22. The largest component of gross domestic income is wages.
23. National income is GDP minus depreciation.
24. Why is GDP an imperfect measurement of total production in the economy?
a. GDP does not include household production or production from the underground economy.
25. four major categories of expenditure: Consumption, investment, government purchases, and net exports
26. Personal income is national income minus retained corporate earnings plus government transfer payments
and interest on government bonds.
27. Real GDP per Capita is often used as a measure of general well-being. While increases in real GDP often do
lead to increases in the well-being of the population, why is real GDP not a perfect measure of well-being?
a. The value of leisure is not included.
b. GDP does not include crime rates or income distribution.
c. The costs of pollution are not included.
28. Suppose the base year is 2001. Looking at GDP data from the United States from 2001 to the present, what
would be true of the relationship between nominal GDP and real GDP?
a. RGDP < NGDP because prices are rising.
29. What are the four categories of income?
a. Wages, Interest, Rent, and Profit.

30. .

31.
Chapter 13
1. Since 1948, which of the following best describes the trend in the labor force participation rate?
a. It is decreasing for men and increasing for women.
2. How does the U.S. economy create and destroy millions of jobs each year?
a. In the market system, new firms are constantly entering and exiting various industries.
b. Some businesses are expanding, while others are contracting.
3. According to Costco's CEO, Jim Sinegal: “Paying good wages and keeping your people working for you is
good business...Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good
things about Costco. It has to be a significant advantage for you." What is Costco's CEO referring to?
a. Efficiency wages
4. Your father earned $34,000 per year in 1984. To the nearest dollar, what is that equivalent to in 2014 if the
CPI in 2014 is 215 and the CPI in 1984 is 104?   $70288
5. Which of the following causes changes in the CPI to overstate the true inflation rate?
a. New product bias, Increase in quality bias, Substitution bias
6. Even perfectly anticipated inflation imposes costs. Why?
a. Some wages will fail to keep up with anticipated inflation.
b. Paper money loses its purchasing power by the rate of inflation.
c. Menu costs.
7. Suppose John Q. Worker is currently unemployed. Each day, John Q. Worker spends the entire day
searching available job openings for an appropriate position given his set of skills, abilities, and interests. If
someone asks John Q. what he does for work, he tells them that he is currently "in-between jobs." Which of
the following best classifies John Q.'s unemployment status? Frictionally unemployed
8. If a 3-month Treasury bill pays 5.5% and the change in the consumer price index (CPI) is 4.7%, what is the
real interest rate (the true return to lending)?
0.8%
9. The true cost of borrowing and lending is best measured by the real interest rate.
10. As of April 2017, which of the following demographic groups has the highest unemployment rate?
African Americans
11. What effect do Labor Unions have on the unemployment rate?
a. Since few non-government workers are unionized, there is no significant effect on the
unemployment rate.
¿ umploeyed
12. formulas that Bureau of Labor Statistics use to calculate the unemployment rate: .
¿∈labor force
13. Increases in the minimum wage will increase unemployment among teenagers.
14. When the economy is at full employment,
a. all remaining unemployment is either frictional or structural.
b. the natural rate of unemployment prevails.
c. the unemployment rate is greater than zero.
15. Which of the following can give an early warning of future increases in the price level? Producer
price index
16. Indicate whether the following statement is true or false and why. "A wage rising slower than the rate of
inflation is actually falling."
a. True. If wages are increasing slower than the average price of goods and services, purchasing power
falls.
17. Suppose that you are available to go to work but have not looked for a job for at least the last four weeks
because you believe that there aren't any jobs available. You would be counted as a discouraged worker.
18. How would it affect the unemployment rate if the Bureau of Labor Statistics counted as unemployed
both (1) discouraged workers and (2) people who work part-time but would prefer to work full-time?
a. The unemployment rate would increase.
19. high school dropouts, one of demographic groups, has a higher rate of unemployment than the
unemployment rate for the total population?
20. When the economy was expanding in early 2007, fewer than 20 percent of the unemployed had been jobless
for more than 6 months.
21. Two important trends in the labor force participation rates of adults aged 20 and over in the United States
since 1948 are the rising labor force participation rate of adult women and the falling labor force
participation rate of adult men.
22. Relative to the household survey, which of the following is a strength of the establishment survey?
a. The establishment survey is determined by actual payrolls, rather than by the unverified answers of
the household survey.
23. In 2017, the Bureau of Labor Statistics (BLS) analyzed and revised its employment data for the period
December 2007–December 2010. According to that revision, the recession of 2007–2009 was more severe
than economists and policymakers realized at the time.
24. The extent of job creation and job destruction is what we would expect in a vibrant market system.
25. The short-term unemployment that arises from the process of matching workers with jobs is called frictional
unemployment.
26. Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the
requirement of jobs is called structural unemployment.
27. Workers who lose their jobs because of a recession are experiencing cyclical unemployment.
28. When the economy is at full employment, frictional and structural unemployment will remain.
29. The "normal" underlying level of unemployment in the economy is
a. the natural rate of unemployment.
b. the sum of structural unemployment and frictional unemployment.
c. the full-employment rate of unemployment.
30. The unemployment rate in the United States is usually lower than the unemployment rates in most
other high-income countries, partly because the United States has more stringent requirements for the
unemployed to receive government payments.
31. Most economists agree that the above-market wage paid in unionized industries significantly increases the
unemployment rate in the United States. False
32. When a firm pays a wage that is higher than the market wage in order to increase worker productivity, the
wage is called an efficiency wage.
33. Of the eight categories in the CPI market basket, which three categories make up more than 75 percent of
the basket?
a. housing, transportation, and food
34. Computation of the CPI assumes that households buy the same market basket of products each month. For
this reason, the quantities of the products households purchase in the current year is a factor that is not
relevant in calculating the CPI.
35. the substitution bias is concerned with this consumer behavior.
36. The BLS collects price statistics from traditional full-price retail stores, which do not reflect the prices some
consumers pay by shopping at discount stores or on the Internet; This is a description of the outlet bias.
37. The producer price index (PPI) tracks the prices firms receive for goods and services at all stages of
production. True
38. If the CPI was 207 in 2009 and 225 in 2013, what wage would someone who earned a $50,000 income in
2009 have to earn in 2013 in order to keep her purchasing power constant? $54,348
39. If the inflation rate is 6 percent and the nominal interest rate is 4 percent, then the real interest rate is -2
percent, which is the nominal interest rate minus the inflation rate.
40. If income rises more slowly than the rate of inflation, purchasing power will rise. False
41. To avoid the cost of the purchasing power of paper money decreasing with inflation, workers and firms will
try to hold as much paper money as possible.
False
42. If inflation is unexpectedly high, borrowers will benefit and lenders will be harmed. True
43.

Chapter 14
1. During the expansion phase of the business cycle, production, employment, and income increase.
2. During the recession phase of the business cycle, production, employment, and income decrease.
3. Increasing in labor productivity is most likely to lead to sustained long-run growth.
4. Increasing in average wages does NOT lead to long-run economic growth.
5. Firms that act as match households that have excess funds with firms that want to borrow funds. What other
key services does the financial system provide to savers and lenders?
a. Provides an easy method of exchanging a financial security for money.
b. Allows savers to spread their money among many financial investments.
c. Collects and communicates information about borrowers to savers
6. Long-run growth in GDP is determined by capital, labor productivity, and technology.
7. Technological progress is affected by entrepreneurship, investment in capital, private property rights, and
new software developments.
8. Potential GDP increases over time as the labor force grows and increases over time as technological change
occurs.
9. Which of the following contribute(s) to shorter recessions, longer expansions, and less severe fluctuations in
real GDP? Unemployment insurance, monetary policy, a service-based economy
10. real GDP per person is the best measure of the standard of living of the typical person in a country.
11. The computation of the average annual growth rate of real GDP is more complex when examining data for a
long period of time than when examining data for only a few years.
12. What is the best use of the rule of 70?
a. to judge how rapidly real GDP per capita is growing over long time periods
13. an increase in the number of workers does not cause an increase in the quantity of goods and services that
can be produced by one worker, or in one hour of work?
14. technological change will ensure that an economy experiences sustained economic growth.
15. Potential GDP is sometimes greater, sometimes less, and sometimes equal to actual real GDP.
16. Bonds are financial securities that represent promises to repay a fixed amount of funds.
17. guaranteeing savers high rates of return is not a service that the financial system provides for savers
and borrower.
18. Government tax revenue minus the sum of government purchases and transfer payments to households
equals the amount of public saving.
19. A government that collects more in taxes than it spends experiences a budget surplus.
20. In determining whether to borrow funds, firms compare the rate of return they expect to make on an
investment with the interest rate they must pay to borrow the necessary funds.
21. the willingness of households and governments to save is a factor that determines the supply of
loanable funds.
22. Holding all else constant, a federal government budget deficit will decrease the supply of loanable funds and
increase the equilibrium real interest rate.
23. From a trough to a peak, the economy goes through the expansionary phase of the business cycle.
24. Typically, when will the National Bureau of Economic Research (NBER) announce that the economy is in
a recession?
a. a year or more after the recession has begun.
25. As the economy nears the end of an expansion, which of the following typically occurs?
a. The profits of firms will be falling.
b. Interest rates are usually rising.
c. Wages are usually rising faster than prices.
26. Purchases of durable goods are business cycles most likely to affect.
27. Recessions cause the inflation rate to decrease, and the unemployment rate to increase.
28. continually falling oil prices is not a reason that the economy is considered to have been more stable in the
1950–2007 period than in other periods.
29. During the last half of the twentieth century, the U.S. economy experienced long expansions, interrupted by
relatively short recessions.
Chapter 15
1. According to the dynamic AD-AS model, what is the most common cause of inflation?
a. Total spending increases faster than total production.
b. AD increases by more than LRAS.
2. The wealth effect refers to the fact that when the price level falls, the real value of household wealth rises,
and so will consumption.
3. The interest rate effect refers to the fact that a higher price level results in higher interest rates and lower
investment.
4. The international-trade effect refers to the fact that an increase in the price level will result in a decrease in
exports and an increase in imports.
5. If the price level increases, then there will be a movement up along a stationary aggregate demand curve.
6. a change in the price level does not cause the aggregate demand curve to shift
7. increasing government purchases is one of government policies that shift the aggregate demand curve to
the right.
8. In the long run, changes in the price level do not affect the level of real GDP. True
9. Which of the following factors will cause the long-run aggregate supply curve to shift to the right?
a. an increase in the number of workers in the economy
b. technological change
c. the accumulation of more machinery and equipment
10. Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping
aggregate supply curve?
 a. because firms are often slow to adjust wages
b. because contracts between workers and firms make some wages and prices "sticky"
c. because menu costs make some prices "sticky"
11. Why does the short-run aggregate supply curve slope upward?
a. Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they
pay for inputs
12. a positive technological change causes the short-run aggregate supply curve to shift to the right.
13. a movement up along a stationary curve is the effect of an increase in the price level on the short-run
aggregate supply curve
14. an increase in the expected price of an important natural resource the short-run aggregate supply curve to
shift to the left.
15. If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes a
recession in the short run and a decline in the price level in the long run.
16. If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes an
increase in real GDP in the short run and an increase in the price level in the long run.
17. a supply shock as a result of an unexpected increase in the price of a natural resource is usually the cause
of stagflation.
18. How does the dynamic model of aggregate supply and aggregate demand explain inflation?
a. by showing that if total spending in the economy grows faster than total production, prices will rise
19. The 2007-2009 recession was a clear example of the effect that a decrease in aggregate demand can have on
the economy.
20. Milton Friedman argued that the Federal Reserve should adopt a monetary growth rule to reduce
fluctuations in real GDP, employment, and inflation.
21. They are views new classical macroeconomists hold:
a. Wage and price stickiness is not important for explaining fluctuations in real GDP
b. The economy will normally be at potential real GDP
c. Workers and firms have rational expectations
22. The real business cycle model focuses on changes in the quantity of money to explain fluctuations in real
GDP. False
23. The Austrian school is best known for arguing the superiority of government economic planning over the
market system. False
24. The dynamic AD-AS model assumes potential GDP increases continually, while the AD-AS model assumes
the LRAS does not change.
25.

26.

27.
28.

29.

30.
Chapter 16
1. A double coincidence of wants refers to the fact that for a barter trade to take place between two people,
each person must want what the other one has.
2. Money serves as a unit of account when prices of goods and services are stated in terms of money.
3. Money serves as a standard of deferred payment when payments agreed to today but made in the future are
in terms of money.
4. Which of the following conditions make a good suitable for use as a medium of exchange?
a. The good must be acceptable to (that is, usable by) most buyers and sellers.
b. The good should be of standardized quality, so that any two units are identical.
c. The good should be durable, valuable relative to its weight, and divisible.
5. What is fiat money?
a. money that is authorized by a central bank and that does not have to be exchanged for gold or some
other commodity money.
6. The M1 measure of the money supply includes which of the following components?
a. checking account deposits in banks
b. currency in circulation
c. holdings of traveler's checks (included as part of checking account deposits since 2019)
7. Savings account balances, small-denomination time deposits, and noninstitutional money market fund
shares are included only in M2.
8. Jill makes a deposit into her savings account at the local bank with $100 in cash. As a result of
this transaction, both M1 and M2 will increase by $100, and M2 will increase by $100.
9. In the definition of the money supply, where do credit cards belong?
a. Credit cards are not included in the definition of the money supply.
10. Which of the following is the largest liability of a typical bank? Deposits
11. Which of the following refers to the minimum fraction of deposits banks that are required by law to keep
as reserves?
a. the required reserve ratio
12. Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10
percent. In this situation, American Bank has $50 in required reserves.
13. The simple deposit multiplier equals
a. the inverse, or reciprocal, of the required reserve ratio.
b. the formula used to calculate the total increase in checking account deposits from an increase in bank
reserves.
 c. the ratio of the amount of deposits created by banks to the amount of new reserves.
14. A higher required reserve ratio decreases the value of the simple deposit multiplier.
15. An increase in the amount of excess reserves that banks keep decreasing the value of the real-world deposit
multiplier.
16. Whenever banks gain reserves and make new loans, the money supply expands; and whenever banks
lose reserves, and reduce their loans, the money supply contracts.
17. There are 7 members of the Board of Governors, who the President of the United States appoints to 14-year
nonrenewable terms. One of the Board members is appointed Chairman for a 4-year renewable term.
18. To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of
New York, to buy U.S. Treasury securities from the public.
19. By raising the discount rate, the Fed leads banks to make fewer loans to households and firms, which will
decrease checking account deposits and the money supply.
20. The process of securitization involves creating a secondary market in which loans that have been bundled
together can be bought and sold in financial markets.
21. Which of the following is not a factor that helped lead to the financial crisis of 2007–2009?
a. deposit insurance for commercial banks
22. Suppose that velocity is 3 and the money supply is $600 million. According to the quantity theory of money,
nominal output equals 1.8 billion.
M
23. Velocity is defined as v= .
P ×Y
24. If Irving Fisher was correct in his prediction about the value of velocity, then the quantity equation can be
written to solve for the inflation rate as follows: Inflation rate = Growth rate of the money supply – Growth
rate of real output.
25. There is a strong link between changes in the money supply and inflation in the long run.
26. Hyperinflation is caused by central banks increasing the money supply at a rate far in excess of the growth
rate of real GDP.
27. Evaluate the following statement: Banks use deposits to make consumer loans to households and
commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.
a. False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.
28. According to the quantity theory of money inflation results from which of the following?
a. The money supply grows faster than real GDP.
29. The use of money eliminates the double coincidence of wants, reduces the transaction costs of exchange,
and allows for greater specialization.
30. The M2 definition of the money supply includes M1, savings accounts, small time deposits, and money
markets.
31. the following are monetary policy tools used by the Federal Reserve Bank:
a. Decreasing the rate at which banks can borrow money from the Federal Reserve.
b. Buying $500 million worth of government securities, such as Treasury bills.
c. Increasing the reserve requirement from 10 percent to 12.5 percent.
32. an initial decrease in a bank’s reserves will decrease checkable deposits by an amount greater than the
decrease in reserves.
33. In addition to the Federal Reserve Bank, households, firms, and banks are other economic factors that
influence the money supply.
34. Acceptability is not a function of money.
35. They are all true with respect to hyperinflation:
a.
It is caused by central banks increasing the money supply at a rate much greater than the growth rate
of real GDP.
b. It can be hundreds—even thousands—of percentage points per year.
c. In the presence of hyperinflation, firms and households avoid holding money.

Chapter 17
1. a high foreign exchange rate of the U.S. dollar relative to other currencies and low prices is not one of the
monetary policy goals of the Federal Reserve ("the Fed").
2. the money supply and the interest rate are the main monetary policy targets of the Fed.
3. When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding
money is low, so the quantity of money demanded will be high.
4. If real GDP increases, the money demand curve shifts to the right.
5. If the price level decreases, the money demand curve shifts to the left.
6. If the Federal Open Market Committee (FOMC) decides to increase the money supply, it orders the trading
desk at the Federal Reserve Bank of New York to buy U.S. Treasury securities.
7. If the FOMC orders the trading desk to sell Treasury securities, the money supply curve will shift to the left,
and the equilibrium interest rate will rise.
8. Suppose that when the Fed decreases the money supply, households and firms initially hold less money than
they want to, relative to other financial assets. As a result, households and firms will sell Treasury bills and
other financial assets, thereby decreasing their prices, and increasing their interest rates.
9. When the Fed conducts monetary policy, the most relevant interest rate is the short-term nominal interest
rate.
10. To affect economic variables such as real GDP or the price level, the monetary policy target the Federal
Reserve has generally focused on is the federal funds rate.
11. The interest rate that banks charge each other for overnight loans is called the federal funds rate.
12. The following statements is correct:
a. A majority of economists support the Fed's choice of the interest rate as its monetary policy target,
but some economists believe the Fed should concentrate on the money supply instead.
b. Changes in the federal funds rate usually will result in changes in both short-term and long-term
interest rates on financial assets.
c. The effect of a change in the federal funds rate on long-term interest rates is usually smaller than it is
on short-term interest rates.
13. With a repurchase agreement, the Fed buys a security from a financial firm, which promises to buy it back
from the Fed the next day.
14. As interest rates decline, stocks become a more attractive investment relative to bonds, which causes the
demand for stocks and their prices to rise.
15. The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP
is called expansionary monetary policy.
16. Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?
a. The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP.
17. If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the
economy begins to recover, then inflation will be higher than if the Fed had not acted.
18. A countercyclical policy is one that is used to attempt to stabilize the economy.
19. For the Fed to succeed in reducing the severity of business cycles, it must act precisely when a recession or
an acceleration of inflation can be seen in the economic data.
False
20. With an expansionary monetary policy, investment, consumption, and net exports all increase, which results
in the aggregate demand curve shifting to the right, increasing real GDP and the price level.
21. If the Fed decides to carry out an expansionary monetary policy because it believes aggregate demand will
not increase enough to keep the economy at potential GDP, the inflation rate will most likely be lower than
it would have been without the policy.
False
22. During 2005, the FOMC was concerned that the inflation rate would begin to accelerate due to the
continued boom in the housing market, so the Fed started decreasing the target for the federal funds rate.
False
23. If the economy moves into recession, monetarists argue that the Fed should keep the money supply growing
at a constant rate.
24. Which of the following statements is true about the Fed's monetary policy targets?
a. The Fed is forced to choose between the interest rate and the money supply as its monetary policy
target.
25. The Taylor rule for federal funds rate targeting does which of the following?
a. It links the Fed's target for the federal funds rate to economic variables.
26. According to the Taylor Rule, if the Fed reduces its target for the inflation rate, the result will be a higher
target federal funds rate.
27. When the central bank commits to conducting policy in a manner that achieves the goal of holding inflation
to a publicly announced level, it is using inflation targeting.
28. the collapse of a housing bubble was an important cause of the 2007–2009 recession.
29. Two government-sponsored enterprises that stand between investors and banks that grant mortgages are the
Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
True
30. The decline in housing prices that began in 2006 led to rising defaults among which borrowers?
a. borrowers who had made only small down payments
b. alt-A and subprime borrowers
c. borrowers with adjustable-rate mortgages
31. Which of the following is a monetary policy response to the economic recession of 2007–2009 and the
accompanying financial crisis?
a. The Fed purchased large amounts of mortgage-backed securities.
b. The Fed provided loans directly to corporations by purchasing commercial paper.
c. The Fed expanded the eligibility for discount loans to firms other than commercial banks.
32. What two institutions did Congress create in order to increase the availability of mortgages in a
secondary market?
a. "Fannie Mae" and "Freddie Mac"
33. Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest
rates and, as a result, impacts aggregate demand?
a. Business investment projects
b. The value of the dollar
c. Consumption of durable goods
34. inflation targeting is Committing the central bank to achieve an announced level of inflation.
35. How do investment banks differ from commercial banks?
a. Investment banks generally do not lend to households.
b. Investment banks do not take deposits.
36. The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except high
unemployment.

37.

38.
39.

40.
41.

42.

43.
44.

45.

46.
Chapter 18
1. Economists use the term fiscal policy to refer to changes in taxing and spending policies only by the federal
government.
2. Changes in taxes and spending that happen without actions by the government are called automatic
stabilizers.
3. Which of the following are categories of federal government expenditures?
a. interest on the national debt
b. transfer payments
c. grants to state and local governments
4. The largest and fastest-growing category of federal expenditures is transfer payments.
5. Spending on these types of activities make up less than 10 percent of federal government expenditures.
6. If the government cuts taxes in order to increase aggregate demand, the action is called a discretionary fiscal
policy.
7. The goal of expansionary fiscal policy is to increase aggregate demand.
8. An attempt to reduce inflation requires contractionary fiscal policy, which causes real GDP to fall and the
price level to fall.
9. Over time, potential GDP increases, which is shown by the long-run aggregate supply curve shifting to the
right.
10. The higher the tax rate, the larger the multiplier effect. . False
11. The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be
less than the simple multiplier effect indicates.
True
12. Expansionary fiscal policy has a positive multiplier effect on equilibrium real GDP, and contractionary
fiscal policy has a negative multiplier effect on equilibrium real GDP.
13. Crowding out refers to the decline in private expenditures that result from an increase in government
purchases.
14. According to the crowding-out effect, if the federal government increases spending, the demand for money
and the equilibrium interest rate will decrease, which will cause consumption, investment, and net exports
to increases.
15. What is the long-run effect of a permanent increase in government spending?
a. The decline in investment, consumption, and net exports exactly offsets the increase in
government spending; therefore, real GDP remains unchanged.
16. The national debt is best measured as the total value of U.S. Treasury securities outstanding.
17. About two-thirds of the American Recovery and Reinvestment Act stimulus package took the form of
increases in government expenditures, and about one-third took the form of tax cuts.
18. Between the beginning of 2009 and the end of 2010, real GDP increased by 4.0 percent, while
employment declined by 3.3 million.
19. Budget deficits automatically increases during recessions and decrease during expansions.
20. The cyclically adjusted budget deficit is measured as if the economy were at potential real GDP.
21. Few economists believe the federal government should attempt to balance its budget every year.
True
22. “If the debt becomes very large relative to the economy, then the government may have to raise taxes to
high levels or reduce other types of spending to make the interest payments on the debt.” Is a correct
statement about the federal debt.
23. The long-run growth rate of real GDP depends primarily on
a. the growth rate of labor productivity as measured by the growth in real GDP per hour worked.
b. the growth in the number of hours worked.
24. Economists believe that the smaller the tax wedge for any economic activity, such as working,
saving, investing, or starting a business, the more of that economic activity that will occur.
25. A simplified tax code would reduce economic efficiency by increasing the number of decisions households
and firms make solely to reduce their tax payments.
False
26. The effect on the economy of tax reduction and simplification is an increase in the quantity of real GDP
supplied at every price level, and a shift in the long-run aggregate supply curve.
27. If a tax cut has supply-side effects, then it will affect both aggregate demand and aggregate supply.
28. Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and
start a business, by reducing the is called supply-side economics.
29. Each year that the federal government runs a deficit, the federal debt grows. Each year that the federal
government runs a surplus, the federal debt shrinks.
30. According to the multiplier effect, an initial increase in government purchases increases real GDP by more
than the initial increase in government purchases.
31. In the long run, increases in government purchases result in complete crowding out.
32. One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a
permanent tax cut because one-time tax rebates increase current income.
33. After September 11, 2001, the federal government increased military spending on wars in Iraq and
Afghanistan. Is this increase in spending considered fiscal policy?
a. No. The increase in defense spending after that date was designed to achieve homeland security
objectives.
34. Does government spending ever reduce private spending?
a. Yes, due to crowding out
35. The multiplier effect is only a consideration for increases in government purchases. False
36. When is it considered "good policy" for the government to run a budget deficit?
a. When borrowing is used for long-lived capital goods.
37. What is the difference between federal government purchases (spending) and federal
government expenditures?
a. Government purchases are included in government expenditures.
38. What are the gains to be had from simplifying the tax code?
a. Increased efficiency of households and firms.
b. Greater clarity of the decisions made by households and firms.
c. Resources from the tax preparation industry freed up for other endeavors.
39. The higher the tax rate, the smaller the multiplier effect.

40.
41.

42.

43.