First Macro Test

Foundations of Economics

An economy is operating at a point inside its 

production possibilities curve (PPC). Which of 

the following will most likely cause the economy 

to move toward the current PPC in the short run? 

(A) A decrease in government spending 

(B) A decrease in inflation 

(C) An increase in human capital 

(D) An increase in employment 

(E) An increase in imports 

(D) An increase in employment

 An increase in which of the following will most 

likely promote economic growth? 

(A) Taxes on investment 

(B) The price level 

(C) Human capital 

(D) Consumption of nondurable goods 

(E) Interest rates

(C) Human capital

Which of the following will cause aggregate 

supply to increase in Country X? 

(A) An increase in personal income taxes 

(B) The discovery of low-cost alternative sources of energy 

(C) A decrease in labor productivity with no change in nominal wages 

(D) Depreciation of country X’s currency on the foreign exchange market 

(E) An increase in the price level 

(B) The discovery of low-cost alternative sources of energy 

The graph above shows the production possibilities curve for Factory X and Factory Y. If Factory X uses the same amount of resources to produce skateboards and bikes as Factory Y uses, which of the following is true? 

(A) Factory X has an absolute advantage in producing bikes. 

(B) Factory X has an absolute advantage in producing skateboards. 

(C) Factory X has a comparative advantage in producing skateboards. 

(D) Factory Y has a comparative advantage in producing skateboards. 

(E) Factory Y has an absolute advantage in producing skateboards. 

(C) Factory X has a comparative advantage in producing skateboards.

An increase in the price of oil, an important 

input to production, will result in which of the 

following in the short run? 

(A) A decrease in the price level 

(B) A decrease in short-run aggregate supply 

(C) A decrease in unemployment 

(D) An increase in real wages 

(E) An increase in aggregate demand

(B) A decrease in short-run aggregate supply

An economy is currently operating at the 

full-employment level of output. Which of the 

following would result in a recessionary gap in 

the short run? 

(A) An increase in the costs of production 

(B) An improvement in the productivity of labor 

(C) An increase in money supply 

(D) A positive supply shock 

(E) A decrease in income tax rates

(A) An increase in the costs of production

Thailand and Malaysia are trading partners. If 

the price level in Thailand decreases relative to 

the price level in Malaysia, what will happen to 

Thailand’s exports to Malaysia and Thailand’s 

aggregate demand? 

Thailand’s Exports        Thailand’s Aggregate Demand

(A) Increase                  Decrease 

(B) Increase                  Increase

(C) Increase                  Indeterminate

(D) Decrease                Decrease 

(E) Decrease                 Increase 

(B) Increase                  Increase

Which of the following is a fiscal policy action 

aimed at reducing unemployment? 

(A) Decreasing government expenditures 

(B) Decreasing income taxes 

(C) Decreasing tax credits 

(D) Increasing nominal interest rates 

(E) Increasing required reserves 

(B) Decreasing income taxes

 Increases in human capital can be achieved by 

which of the following? 

(A) Building more factories 

(B) Reducing immigration of skilled workers 

(C) Improving the quality of job-training programs 

(D) Increasing the physical capital per worker 

(E) Increasing government spending on infrastructure

(C) Improving the quality of job-training programs

 Assume the economy is currently in long-run 

equilibrium. An increase in the money supply 

will affect unemployment in the short run and 

in the long run in which of the following ways? 

Short Run                                     Long Run 

(A) Falls                                        Falls 

(B) Rises                                       Rises 

(C) No change                              Remains at the natural rate 

(D) Rises above the natural rate   Falls back to the natural rate 

(E) Falls below the natural rate     Rises back to the natural rate 

(E) Falls below the natural rate     Rises back to the natural rate

According to the business cycle represented in the diagram above, the actual rate of unemployment equals the natural rate of unemployment when the economy is 

(A) in expansion 

(B) in contraction 

(C) at the peak 

(D) at the trough 

(E) on the potential line

(E) on the potential line

A fiscal policy action to reduce inflationary 

pressure would be to increase which of the 

following? 

(A) The required reserve ratio 

(B) The discount rate 

(C) Transfer payments 

(D) Government spending 

(E) Income tax rates 

(E) Income tax rates 

 Economic growth is shown by a rightward shift in

(A) the aggregate demand curve

(B) the long-run Phillips curve

(C) the production possibilities curve

(D) the short-run aggregate supply curve

(E) the money supply curve

(C) the production possibilities curve

If businesses become optimistic about the profitability of investments in an economy, which

of the following will happen in the loanable funds market in the short run?

(A) The supply and demand for loanable funds

will increase.

(B) The supply and demand for loanable funds

will decrease.

(C) The demand for loanable funds by the private

sector will decrease.

(D) The real interest rate will increase.

(E) The real interest rate will decrease.

(D) The real interest rate will increase.

The table above shows the quantity of motorcycles and automobiles produced by two countries that use the same amount of resources. Which of the following is true? 

(A) Country X has an absolute and comparative advantage in the production of motorcycles. 

(B) Country X has an absolute and comparative advantage in the production of both goods. 

(C) Neither country has a comparative advantage in the production of motorcycles. 

(D) Country Y has an absolute and comparative advantage in the production of automobiles. 

(E) Country Y has an absolute and comparative advantage in the production of motorcycles.

(E) Country Y has an absolute and comparative advantage in the production of motorcycles.

Assume a country’s government increases taxes and its central bank decreases the money supply. The actions will result in an increase in which of the following in the short run? 

(A) Aggregate demand 

(B) Aggregate supply 

(C) Investment spending 

(D) Unemployment 

(E) Inflation 

(D) Unemployment

When there is excess demand in the loanable funds market, which of the following will occur?

(A) National savings will exceed investment

spending.

(B) The economy will remain at full

employment.

(C) Real interest rates will increase.

(D) An inflationary gap will exist.

(E) The money supply will increase.

(C) Real interest rates will increase.

The measured unemployment rate is often 

criticized for understating the level of joblessness 

because 

(A) individuals working in the underground 

economy are counted as employed 

(B) individuals working more than one job 

are counted more than once 

(C) discouraged workers are counted as 

unemployed 

(D) discouraged workers are not counted in the 

labor force 

(E) part-time workers are counted as unemployed

(D) discouraged workers are not counted in the 

labor force

The table shows the production possibilities for 

Country X in producing shirts and chairs when it 

uses all its available resources. The opportunity 

cost of producing one additional chair is 

(A) zero 

(B) constant 

(C) increasing 

(D) decreasing 

(E) indeterminate 

(B) constant 

An increase in which of the following will most 

likely cause an increase in aggregate demand and 

inflation in the short run? 

(A) Income tax rates 

(B) Input prices

(C) Government spending

(D) Real interest rates 

(E) Savings 

(C) Government spending

Country X’s government increases its spending 

without raising taxes. Which of the following is 

true about the effect on Country X’s real interest 

rates and its subsequent effect on Country X’s net 

exports? 

(A) Real interest rates increase and net exports 

increase. 

(B) Real interest rates increase and net exports 

decrease. 

(C) Real interest rates increase with no change in 

net exports. 

(D) Real interest rates decrease and net exports 

increase. 

(E) Real interest rates decrease and net exports 

decrease.

(B) Real interest rates increase and net exports 

decrease. 

Which of the following shifts the money demand 

curve to the right? 

(A) An increase in the price level 

(B) A decrease in the price level 

(C) An increase in interest rates 

(D) A decrease in interest rates 

(E) A decrease in the nominal gross domestic 

product 

(A) An increase in the price level

Which of the following is an example of frictional 

unemployment? 

(A) A former mayor doing volunteer work 

(B) A factory worker who loses her job because 

of recession 

(C) A college student working part-time at the 

campus bookstore 

(D) A college graduate interviewing for two 

available positions 

(E) An architect whose job is replaced by 

computer software that designs buildings

(D) A college graduate interviewing for two 

available positions

Assuming no government policies, which of the 

following will occur in the long run if the actual 

unemployment rate exceeds the natural rate of 

unemployment? 

(A) Prices will increase. 

(B) Unemployment will increase. 

(C) Wages will fall. 

(D) Aggregate demand will increase. 

(E) Long-run aggregate supply will decrease. 

(C) Wages will fall. 

Assume that the market for bottled water is in 

equilibrium. If both the supply of and the demand 

for bottled water decrease, what will be the effect 

on equilibrium price and quantity? 

       Price                                               Quantity

(A) Decrease                                        Decrease 

(B) Decrease                                         Increase 

(C) Increase                                          Decrease 

(D) Increase                                        Indeterminate 

(E) Indeterminate                                   Decrease

(E) Indeterminate                                   Decrease

An increase in government spending that is 

financed by an equal increase in taxes results 

in which of the following changes in aggregate 

demand (AD) and short-run aggregate supply 

(SRAS) curves? 

        AD Curve                           SRAS Curve 

(A) Shifts to the right              Shifts to the right 

(B) Shifts to the left                Shifts to the left 

(C) Shifts to the right                 No change 

(D) Shifts to the left                    No change 

(C) Shifts to the right                 No change