Quiz: Introductory Macroeconomics (Each question is worth 10 points)

Date: 3/2/06

Name:

For Problems 1 and 2, use the chart below:

Aggregate Demand / Aggregate Demand / Aggregate Supply
when I = $600 / when I = $550 / Price
Level
$3650 / $3150 / $2900 / 50
3500 / 3000 / 3000 / 70
3350 / 2850 / 3100 / 90
3200 / 2700 / 3200 / 110
3050 / 2550 / 3300 / 130
2900 / 2400 / 3400 / 150

Suppose that the economy starts in the situation where I = $600 and equilibrium output is $3200 at a price level of 110. Now suppose that investment falls to $550.

1) What does equilibrium output change to initially, before the price changes?

a. / $3000
b. / $2850
c. / $2700
d. / $2550

2) After the price changes, what is equilibrium output now?

a. / $3000 / $3000
b. / $2850 / $3100
c. / $2700 / $3200
d. / $2550 / $3300

3) As a result of the war in Afghanistan, the population of Afghanistan as well as their capital stock was reduced. This can be illustrated by aggregate supply curve

a. / shifting outward.
b. / becoming flatter.
c. / shifting inward.
d. / becoming more elastic.

4) Educational reforms that result in improved reading and math skills of high school graduates as they enter the labor force would do what to the aggregate supply curve?

a. / Shift it outward.
b. / Shift it inward.
c. / Move the economy up along the curve.
d. / Move the economy down along the curve.

5) How are aggregate supply and stagflation related?

a. / Stagflation usually causes an adverse shift in aggregate supply.
b. / An adverse supply shift usually causes stagflation.
c. / Stagflation only follows inflation, with no relation to aggregate supply.
d. / There is no relationship between the two.

6) Assume an economy with an upward-sloping aggregate supply curve and an MPC of .80. In the medium run, an increase in investment spending of $50 billion will increase total income by

a. / $200 billion.
b. / $40 billion.
c. / more than $200 billion.
d. / more than $50 billion but less than $250 billion.

7) During the period from 2001 to 2006, there were be several major cuts in personal income tax rates. What effect did they have on the value of the multiplier?

a. / They decreased the value of the multiplier.
b. / They had no effect on the multiplier.
c. / They increased the value of the multiplier.
d. / The effect is uncertain.

8) How does an increase in government transfer payments affect aggregate demand? An example of an increase in transfer payments is an increase in Social Security payments, which increases the disposable income of the person who receives it.

a. / It has the same effect as a tax increase, which lowers AD with a larger multiplier than a spending decrease.
b. / It has the same effect as a tax cut, which increases AD but with a smaller multiplier than a change in spending.
c. / It has the same effect as a spending increase, which increases AD with a larger multiplier than a tax cut.
d. / It has the same effect as a spending decrease, which increases AD with a larger multiplier than a spending decrease.

9) Which graph in Figure 11-2 best reflects a supply-sider's view of the impact of an increase in the personal income tax rate?

a. / 1
b. / 2
c. / 3
d. / 4

10) In Figure 11-3, which line represents the change in the consumption schedule caused by a cut in the personal income tax as advocated by President George W. Bush in 2001?

a. / C1 in graph (a)
b. / C2 in graph (a)
c. / C1 in graph (b)
d. / C2 in graph (b)